By Alyce Lomax | More Articles September 1, 2010 | Comments (2)
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Since our ugly economic maelstrom begun, the companies responsible for shedding the largest numbers of workers have the highest-paid CEOs at their helms. Clearly, there's something wrong with this picture.
This unpleasant finding headlined the Institute for Policy Studies' (IPS) report, CEO Pay and the Great Recession. Shareholders need to think about whether incentivizing management brutality is really the best path toward bettering corporations' long-term prospects.
When leaders aren't heroesThe IPS report shows that corporate America's "layoff leaders" are making out like bandits. CEOs who presided over the worst mass layoffs earned almost $12 million on average last year, 42% more than the CEO pay average of the S&P 500 firms as a whole. Furthermore, 72% announced their job reductions while reporting positive earnings.
Here are a few highlights (or lowlights) of the IPS report:
It's time to question the conventional wisdomEven in these economically tough times, there's no reason to throw a pity party for the American executive. CEO pay has continued its trajectory into the stratosphere. IPS pointed out that executive pay is double the 1990s average, quadruple that in the 1980s, and eight times that of executives in the mid-20th century. In 2009, major corporations paid their CEOs an average of 263 times the average compensation of regular U.S. workers.
Shareholders shouldn't celebrate brutal axe-wielding CEOs, but rather question whether things went terribly wrong on their watches. Did the CEO encourage too much hiring before business went sour or profitability was threatened? Did the CEO misjudge the economic or competitive climate? Do some CEOs conduct mass firings to trick shareholders into thinking they're "boosting profitability" in the short term, when they should actually be creating better plans for action and innovation?
If anything, job-slashing, highly compensated chief executives might actually be destroying their companies' long-term prospects. According to the American Management Association, 88% of businesses executing layoffs report declining employee morale. Anybody who's been through such a situation probably knows that ominous fear that the axe might next fall on you.
A University of Colorado survey seems to contradict the conventional wisdom that "downsizing boosts long-term growth." The survey, covering 1982 through 2000, actually yielded no evidence that downsizing boosts return on assets. Instead, "stable employers," with less than 5% annual turnover, tended to outperform most layoff-happy companies.
Well-known management consultant Peter Drucker once said that CEO/worker pay ratios in excess of 20 to 1 endanger morale and productivity. It sounds like simple psychology and common sense, but as Voltaire said, common sense is not so common.
Do good stewards really carry a machete?The old, "when in doubt, lay off a bunch of workers and make shareholders and Wall Street analysts happy for now" routine may actually signal a substandard, unimaginative leader who can't innovate or navigate changing times. And if these individuals happily collect oversized paychecks for such painful and unimaginative profit-boosting measures, they might just be greedy, too.
The IPS report suggests this may be a bigger problem than realized. Shareholders should question whether such companies really do have their best interests at heart. After all, how well would these highly paid execs run their businesses without any employees to back them up? My guess: Not so well.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.
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Absolute numbers are rather meaningless here. It would make more sense instead to use a percentage of the company's workforce instead.
Otherwise you have an issue where larger companies = larger layoffs which has nothing to do with the fact that larger companies tend to have higher paid CEOs.
I think a big part of the problem is the intense focus on short-term profits. The stocks of great companies with excellent long-term prospects invariably get decimated if quarterly profits are not deemed sufficient by the "experts". As an investor that can be a good thing, providing some fantastic buying opportunities. The problem is that it tends to lead to the wrong sort of people being hired as CEO's and encourages ill-advised, short-term thinking from all CEO's.
Massive job cuts do reflect poor planning and do entail long-term negative consequences for the companies that implement them, but as long as they continue to lead to short-term rewards from investors, they're certain to continue. The only antidote I can envision is shareholders becoming more sophisticated in their evaluation of CEO performance. Unfortunately, even if some gains are being made on that front, short-term traders make up a fairly large percentage of shareholders and they have no reason to care about a company's long-term prospects.
I suspect there are many talented potential CEO's out there who would be willing to work for less stratospheric salaries than are the current norm, but few companies are going to be willing to accept a huge hit to their stock price in order to implement a strategy that focuses on long-term performance.
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