Like Nardelli, Blake, and other CEO's they hire the best consultants to make certain compensation packages have reachable goals or targets that will enrich executives. There is wide spread belief among academic researchers and business writers that CEO compensation should be aligned to corporate performance however, the counter argument is this will reward short term profitability. Consequently I found that current compensation practice results in short term bottom line results (like GM's) where CEO's push their employees to take short-term risks with little regard for the long-term effects. This view became particularly visible during the crisis of 2008 and led to a movement by business writers, politicians and others to suggest that CEO compensation should be changed to consist of restricted stock and other forms of long-term compensation designed avoid rewarding short-term performance. But compensation consultants have made sure that this was a "toothless tiger." According to Cooper, Gulen and Rau (2009) this proposed system of compensation implies a positive relationship between long-term incentive pay and future firm performance. In fact they discovered the higher the CEO long term compensation the lower the shareholder returns. In addition, there is ample evidence showing that the pay of a CEO has little or no relationship to how well a company does. As a matter of fact I are beginning to see studies suggesting there is an inverse relationship between CEO compensation and shareholder earnings, that is, the higher the CEO's long term compensation the less shareholder return. In agreement Bebchuk (2009) found that more a CEO's compensation increases the lower the company's future valuation and market valuation. Other research concluded that CEO's who average $24 million in annual compensation left their shareholders poorer by an average of $2.4 billion a year. This means that compensation consultants and their lawyers draft complex contracts containing an array of metrics to legitimize outrageous compensation with an eye towards sweeping it by a board of directors who are often "asleep at the wheel" and where conflicts of interest are rampant. A sure sign that something is amiss is when the boards give their CEO's guaranteed bonuses.
Terminate Employees and Get a Raise
There are some writers who believe there is some special form of psychopathology at play with a CEO who makes millions, if not billions, as they engage in massive layoffs. They believe that there are very few people in the world capable of engaging in this work and then sleeping well at night. I doubt it. What these writers lose sight of are the bonds that exist among members within the executive constellation and the powerful culture that has been created over time. Collectively their B-school education, corporate training and preparation, and the actual climb up the corporate ladder creates a condition where the practice of "management" takes on a specific function. The truth of the matter is no one knows how to manage a corporation and leadership cannot be taught. What I do know is the field of management is beset by "best practices" and whatever is in vogue (go to the business section of any bookstore). I also know that executives are copy cats and they carefully study what other top or celebrity executives do. So where did this present form of "management practice" come from where executives came to believe it is acceptable and even good management practice to obtain a raise while terminating employees?
In the early 1980's I witnessed two significant changes among those who ran America's major corporations. Terminations moved from becoming a decision of "last resort" to a decision of "first resort" (Kochan, 2006), and at the same time CEO pay packages began to dramatically increase. In agreement Hickok (2008) maintains that during the period between 1980 and 1995 record layoffs occurred, for example during 1980's layoffs accounted for 9 percent of the adult population in the U.S. At the same time senior executive salaries increased more than 1,000 times. Also in the early 1980's business strategy textbooks began to teach MBA's the benefits of "workforce reduction."
In the late 70's and into the 80's eight important strategies were promoted by business schools, and business writers.
1. The integration of layoffs as a strategy to boost earnings. In many cases, the use of terminations as a strategy went from being a CEO decision of last resort, to first resort (Uchitelle, 2006). It was given wording that neatly fit into managerial glossary, with the popularization of words and phrases like downsizing, restructuring, reorganizing, transformation, redesign, rightsizing, staff cuts, early retirement, cost reduction, managed redundancy, and lean and mean. It was in early 1980's that downsizing first appeared in Business Schools strategy textbooks and accepted as sound business practice. In the late 1980's Human Resource departments accepted the concept of "human capital accounting" where employees were now treated as a "resource" and HR more like finance.
2. The employer/employee compact ended. No longer could an employee expect the security of staying with a company for their career and to be taken care of after retirement. CEO's bought into the "lean and mean" metaphor, promoted by consultants and business writers. Strategies were put forth that suggested it was optimal to have a flexible workforce, expanding in good times, contracting in bad. Essentially, it meant one could reduce the work force and get those who remained behind to work harder, longer hours.
3. The reduction of the work force led to change in the hours work. It was during the 1970's that a trend toward a decline in work hours ended. From the early 1900's to the 1970's, (except during the Second World War), hours of work declined for most Americans. But around 1970, the share of employees working more than 50 hours per week began to increase. The increase in hours an employee worked began a steady increase, 25-to-64-year-olds who worked 50 or more hours per week rose from 14.7 percent in 1980 to 18.5 percent in 2001, and continued to climb. This has created a situation where employees work longer hours than any time since the industrial revolution. In 2007, employees worked a half a day more each week than they did in 2002, and a day more than they did a decade ago. In addition, one-third of American employees do not take their 10 days of paid vacation offered by their company, leading to a vacation deprived workforce (HR.com, 2006).
4. An increased emphasis on mathematical and statistical modeling entered business school curriculum. During the early 1970's, business schools deans, in their zeal to build their schools and seek favor among the science community, rushed to hire Nobel Laureates and in doing so added applied mathematical modeling to an ever increasing array of financial and business problems. Decision analysis and decision modeling became widespread, assisted by sophisticated computer technology. The days of preparing a manager to be responsible and compassionate ended.
5. Critical thought and diagnosis was virtually removed from the curriculum in favor of an approach that emphasized formulation and implementation in the so-called decision science's which found a strong place in business school curriculum.
6. Professors of economics and finance climbed to central positions in business schools and substituted the words of "self interest" and "incentive to profit" for "greed." The Ronald Regan concept of "trickle down" economics prevailed, and promoted the belief that allowing the wealthy to "have more" would be good for the economy, and if the rich got richer, their wealth would benefit the lower classes. In the face of such odds, more of the nation's pool of talented students decided there was no point in becoming a doctor or an engineer, when one could be a banker. During the heyday of business school growth, 1970 to 1990 Harvard graduates who entered finance career jumped from 5 to 15 percent while those going into law and medicine fell from 39 to 30 percent (Goldin and Katz, 1999).
7. Increasingly university presidents are turning over their business schools to millionaire equity investment executives. Kenneth Freeman was offered the deanship of Boston University's B-School. He is from KKR, and his job was to oversee all of the firm's private equity investments around the world including serving as director of hospital operator HCA, medical device maker Accellent, and building products manufacturer Masonite. In addition to his deanship Freeman will continue his affiliation with KKR as a senior advisor. In another example Pace University's president appointed Neil Braun as their dean effective July 1, 2010. Braun, a lawyer, has 30 years experience in media management positions most recently as president of the NBC Television Network and CEO of Viacom Entertainment. B-schools seek these finance moguls to serve as celebrities who will increase the schools visibility and of course bring in "big bucks." They want produce a David Tepper who made $4 billion in 2009 or a billionaire celebrity politician like Mitt Romney. They were the student's heroes and B-schools and their faculty made their conquests into case studies.
8. It was no longer considered good management practice to balance the interests of the shareholder-management-employee triangle. Executives were taught to focus on a single objective, the shareholder. They were motivated to maximize profit, and the "bottom line" became a popular metaphor. According to CEO Thomas Wilson, Allstate's corporate mission is clear: "our obligation is to earn a return for our shareholders." (DiCello, 2008). Employees and insured's (customers) are not mentioned. The new celebrity CEO's were called "neutron Jack" and "Chainsaw Al", those who cut cost (terminated employees) and made their stockholders happy and in turn were aptly rewarded for a job well done.
Rennie (2006) was the first to investigate CEO's benefiting as they terminated their employees. She compared CEO's who terminated employees and those who did not. She discovered CEO's who terminated employees obtained greater increases in compensation then those who did not terminate employees. She studied 229 firms that terminated employees at least once between 1993 and 1999, and found that in the year after layoffs occurred CEOs of these firms received 22.8 percent more in total pay than CEOs of firms that did not have layoffs. Rennie (2006) also discovered that the year layoffs occurred CEOs of layoff firms received 19.6 percent more stock-based compensation than CEOs of non-layoff firms. This stock based enrichment increased significantly over the years following layoffs. One year after layoffs, CEOs of firms that terminated employees received 42.6 percent more stock-based compensation than CEOs of non-layoff firms. Two years after layoffs, that percentage rose to only 44.9, but jumped to 77.4 percent after three years. Research by the Policy Studies Institute confirms this, suggesting in 1996, that CEO's who laid off between 2,800 and 49,000 employees received an average salary increase of 67 percent (Leondar-Wright & Cavanaugh, 1997) . The average increase for all CEO's in 1996 was 39 percent (the average increase for all workers was 3 percent). This trend is confirmed by the Institute for Policy Studies (2010), they found that the CEOs who terminated the most employees during the recession were also the CEOs who took home the biggest pay checks. They found that the CEOs of the 50 U.S. firms that slashed the most jobs between November 2008 and April 2010 took in 42 percent more than the average CEO at an S&P 500 firm. They also found that 36 of the 50 layoff leaders "announced their mass layoffs at a time of positive earnings reports," suggesting a trend of "squeezing workers to boost profits to maintain high CEO pay."
They do this knowing that cutting workers will only boost short-term profits but this practice appeals to Wall Street moguls. But they also do this knowing that over the long haul downsizing doesn't always lead to increased profitability, or even lower costs. When companies terminate employees or force employees to take buyouts they often lose their best workers and those who remain are demoralized and cynical. And as was witnessed with GM, spending on R&D drops limiting opportunities future revenue and growth potential. But they do not care.
In 2008 America entered an economic recession, with some referring to it as the worse since the great depression and 1.9 million American's lost their jobs. However, this did not stop CEO's from lining their pockets. In 2008 only 20 percent of all the corporations who terminated employees were led by a CEO who took a reduction in compensation and a whopping 80 percent either received a raise or their pay stayed the same. How did they do it? or How did they get away with it?