Fixing Executive Compensation

I have a simple question.  Why are profitable companies laying off people ?  I can see if a company’s survival is at stake.  If payroll can’t be met. If debt can’t be paid. Then layoffs are a necessary evil. Even if companies have created cash flow deficits through their own mistakes, that’s the nature of business. Mistakes are made.  What I have a problem with is that discussion of executive pay never includes whether or not the executive has been good enough to pre empt or prevent layoffs.

Executives are not stupid. Usually. They recognize that killing off employees can juice a stock price. Even in this market. Which in turn can juice the value of their options and compensation.  At the companies I run, we have cut raises, put a freeze on hiring, done what we need to do, but we have done all we can to avoid layoffs. Why ? Because its the right thing to do. Its the patriotic thing to do. I’m selfish enough and arrogant enough to think that maybe if I pay attention to the big picture that I can impact the big picture.

As a shareholder, where possible, I would prefer that the companies I own shares in do the same thing.

I own stock in some firms whose backs are up against the wall because of debt. Unfortunately, they don’t have a choice but to cut jobs in order to save jobs. I understand this reality. It’s unfortunate, but a fact of life.  I also own stock in firms that are profitable.  Put a freeze on hiring. Put a freeze on all raises to employees of all levels, including yours.  You don’t have to try to squeeze every nickel to the bottom line. I realize these are extrodinary times.  I’m happy to accept a P/E ratio that is 20pct or 50pct higher (lower earnings vs the current price) . I want you to manage for the long term benefit of the company rather than manage to the stock price.

I don’t have data, but  I’m willing to bet that private companies are far less likely to lay off people than public companies.

As the discussion on executive pay continues, my message is simple.  Give credit to those executives who bust their asses to avoid layoffs except in cases where its an absolute necessity. Pay ’em a premium vs those who cut jobs in profitable companies.  Look to private companies as guides to what a well managed company can accomplish, and how executives are compensated.

Capitalism isn’t about having the biggest bottom line for the current quarter.  Capitalism is about individuals busting their asses to maximize value for shareholders.  Sometimes you have to look at the bigger picture in order to reap the biggest returns. Not all rewards are short term.

My 2 Cents on CEO Pay

There is a game played by CEOs with the corporate issuance of lottery tickets. Otherwise known as stock. Stock can be issued in any number of ways, shapes or forms. Warrants, options, restricted or unrestricted stock. No matter what you call it, every CEO hired, is asking for equity knowing that their only goal is to hit the jackpot and create a pool of wealth that puts them in the “fuck you” wealth category. Thats enough money to buy or rent just about anything you can think of and put you in position to never have to work again. You just live off the cash in the bank.

Put another way, every hired CEO is looking to be in a position to look in the mirror , smile and tell themselves they have made it. They are living the American dream. The only way to do that is to grab as much equity equivalents as you can and do everything you can to get that stock price up as high as you can while periodically liquidating the stock and stuffing the cash in your bank account.

There is absolutely nothing wrong with doing so. Any CEO who doesnt take advantage of this golden ticket opportunity is an idiot. In fact, although I don’t have actual numbers, I would hazard a guess that more than 95pct of CEOs hired to run companies with a billion dollar plus public market caps probably do get themselves to the position of having more than 10mm dollars in equity very quickly. While those who manage to hold on to their jobs a while and not screw up too bad, can relatively quickly get past the 25mm dollar in equity mark and reach the 50mm dollar mark with in 10 years. Its actually pretty tough to screw up and not get there if you have any brains at all.

Why ?

Because you have the entire Mutual Fund, Hedge Fun and Brokerage industry doing everything they can to get you there. Think about it.

You can’t turn on CNBC or Fox Business without them cheerleading the market to go up. Every man, woman, child, fund, index or interested party who buys the stock is doing everything they can to get the stock of the company to go higher. They don’t really care how you run the company and they care less about the results of the company than they do about the performance of the stock. Heck, even if they did care, shareholders dont really own anything and have zero say in the company. If you really dig into it, its the ultimate in social networking. Everyone who owns the stock belongs to the fan page or group for the stock and they are telling everyone they can how wonderful the company is and why the stock will go up, all while praying it does so.

Its the American way and it works ! Hundreds of millions of dollars are spent every year by brokerages telling every American that the stock market over time will go up 7pct per year. All you have to do is diversify and hold onto your stock long enough. For better or worse, everyone believes it.

With all of that social networking power, call it stocksourcing behind stocks, how can CEOs not get rich ?

The problem with all of this is that there is a huge disconnect between the CEO and shareholders doing well and those who work for the company doing well

Yes, its true, particularly in markets like we are experiencing now, stocks can hit 52 week, or even multi-year lows.(although more often than not, in spite of low stock prices, market caps have increased).

Yes, its true that CEOs see the value of their holdings shrink. However, unlike lottery tickets whose value goes to zero when you dont hit the number, the CEO equity positions retain their upside and history has shown us that if they go far enough underwater, they will get repriced and /or reissued. All in the name of keeping the CEO happy. So while CEOs may get “less rich” for awhile, the game is stacked so that a downturn gets them happy real fast when the upturn comes.

The disconnect is that there is a big difference between not making Wall Street happy and not making money.

The pressure from Wall Street is to grow earnings forever. Not matter what it takes. This isnt a problem when a company is doing well. EVeryone is happy. But when the economy hits a bump like it has now, when the market is hitting a bump and stock prices are declining, like it is now, the pressure comes. Everyone owning the stock reacts and whats to know what the CEO will do to get the price back up. This, as they say “is where the CEO earns their pay” Unfortunately, what this really means is that everyone who works for that company is at risk. At risk of losing their jobs, benefits, raises, you name it. Its at risk.

All of which is a long winded way of saying that employees live in the corporate cash zone, CEOs and the top few in management live in the equity/lottery ticket zone.

Those in the cash zone always take the first hit. People,places and things that consume cash are the first things to go because cash expenses immediately reduce earnings. If you or anyone like you consumes cash, unless someone upstairs thinks you generate a straight to the bottom line return on the cash expenditure, you are about to become a corporate ghost. Your person, place and thing will be memorialized as a cut to increase earnings mentioned in a press release that wall street will cheer and use to push up the stock price.

What makes me sad about all of this is that I really think that in this country if there truly was a connection between shareholders and management, that if given a choice by profitable companies, most of us would choose to hold on to our shares and accept an expanded PE for some period of time in exchange for people keeping their jobs.

I would love to receive an email from a company I own saying something to the effect of:

Dear Shareholder,
We are facing a very difficult decision that we would like your feedback on . Our earnings per share last quarter were 20 cents, and for the entire last year, 80 cents. Because of a downturn in business caused by XYZ factors, we face the choice of making 10 pct less, or cutting headcount and related expenses in order to maintain our earnings and possibly even grow our earnings a couple cents this year.

As a shareholder, we would like to ask you whether you would consider allowing us to retain these valued employees. We recognize that it would require you accepting a PE multiple 10 pct higher than the current market. We hope you would be willing to make this concession. We think that the jobs this will save will return far greater value to shareholders over the long run.

We look forward to your vote.

Personally, Im willing to give a higher multiple in exchange for saving people’s jobs. At least once.

Unfortunately, this of course is a fantasy that can’t happen in this country.

Which brings us back to CEO Pay.

As long as CEOs live in the equity/lottery ticket zone and employees in the cash zone, CEO pay is going to be outrageous relative to everyone else.

The only possible way to change this is to put CEOs in the cash zone. Make companies generate 100pct of their compensation in cash that is 100pct expensable in the quarter paid. Thats not to say they cant own stock. Hell yes they can own stock. But make them buy it either on the open market, or as part of the programs that make stock available to every company employee, on the same terms. They are getting paid enough in cash and if they believe in their ability to run the company, they can put their money where their mouth is. Eliminate all the free lottery tickets. Make them buy stock, options, warrants, whatever, on the same terms as everyone else can.

Shareholders tend to ignore how much stock is given to management, they don’t ignore cash. Companies will always be a lot more stringent with their cash, whether its paid to the CEO or anyone else. CEO cash compensation will go way up, but total compensation will come way down. More importantly , CEOs getting paid huge sums in
cash will stand out like a sore thumb when things arent going so well. They will be treated like everyone else in the cash zone and held far more accountable for their work.

Of course this is all just my opinion, but to me its a good thing for all involved. The rich can still get richer, but everyone shares in the risk.

66 thoughts on “Fixing Executive Compensation

  1. Too bad all company owners do not think like you do! All that you see the past few years is lay everybody off, sell assets & be paid more money. Greed is very rampant today & it hurts the people that made the companies profitable in the 1st place! The CEO’s & Presidents didn’t make the company work! Sure they made good decisions on the money most of the time, but they did not do the actual work that generated income! In the past this country was based on people making a living & working with other people trying to make a living. Now its just who wants to get rich quick by screwing the other person! Believe me I have been there & have enough knives sticking out of my back from the corporate world that I sprinkle my yard when I drink water! Oh I forgot, I lost my yard along with my house because of corporate greed & layoffs! Now I just sprinkle somebody elses yard! Mr. Cuban I have admired your spirit from the 1st time I read about you! Hire me for one of your companies if you please!

    Comment by Bill -

  2. The public market is like government: it is focused on short-term solutions to appease a group with an unfair interest in the outcome of those solutions. If businesses ran in a more “private” fashion (smaller groups of investors, like VC firms, instead of a market full of stakeholders) they would be free to focus on longer-term health and the well-being of their employees. Instead, they have to bow to the will of people who have only their investment at stake. People who only care about how much money you made them this month. Employees, and therefore families, children etc., suffer in this arrangement. It is no less “capitalistic” to run businesses in a more “private” manner (again, small groups of investors, increased stakeholding by employees) and the results are better over the long run.

    Comment by Matt -

  3. Why can’t there be a website called “Camode on legs” after Mr. John Thain’s renovated office. This would be a Morningstar like website that follows board of directors and compensation committees. FOr instance, why is the CEO of Dow Chemical on the board at Citigroup? Why did Lehman Brothers have a Broadway producer on it’s board of 9 with one board member having financial experience? How about Countrywide who had someone on the board who was paid to recruit other board members? Or the political appointments and two paid consultants (conflict of interest) on Enron’s board. This is the only way the public can be informed. I am sure there are some retired Lehman employees who may want to get in . Voting is controlled by the institutions. Those who own only 100 shares and are looking to buy the stock have no real knowledge of what is going on behind closed doors. Anyone interested?

    Comment by Michael Daly -

  4. Interesting thoughts. I wish more CEO’s had your ideals i.e. not laying off people. Think of the time and money spent in training them in the first place. How much will you have to spend hiring those to replace a group of highly trained and seasoned employees when the market turns up?

    Comment by Scott Haley -

  5. Going back to BoscoH’s reference to the Clinton era tax reform that capped corporate deductions in executive salaries at $1 million, I’m reluctant to lay the blame on this measure since there appear to be so many benefits for executives to take compensation in the form of stock options beyond cap avoidance.

    However, the cap obviously needs to be adjusted for inflation (I’m talking 40-50% executive pay inflation, not 10-12% measly core inflation) and I’d be interested in seeing the responsiveness of executive compensation figures to a major increase in that deduction. Whatever the motivations behind that cap, it certainly hasn’t restrained executive compensation so it’s probably superfluous at this point.

    Comment by mbilinsky -

  6. I think executives should make money only if their company is making money. In essence, executives are the vision for their company and are the ultimate executive sales force. Most sales persons do not make money if they do not sales. Take for instance, GM. The CEO makes millions and the company is not selling. He should have a base salary, but be compensated on what he actually helps bring in from his vision.

    Comment by Chris -

  7. Executives should be compensated “if” they do a good job. Otherwise we are going to move towards a communist society. The problem is that no one controls the CEO of public companies. There’s not accountability in this cases.

    Comment by Karen -

  8. I’m a 70-year-old man who believes Mark Cuban is a genius. Never met the boy.

    Comment by Mike -

  9. The real truth is most companies aren’t profitable and rely on credit and debt just to make ends meet. In the last 8 years, the realiance on credit and debt instruments by companies in order to just keep operating has grown astronomically. I have no data to back it up but at least 50% of all companies in America are insolvent. You had companies of all sizes relying on the credit/debt markets in order to just pay salaries every two weeks. With an insolvent banking system that has squandered much of the cash even good companies claim to have, its a waste of time to talk about solving the symptoms of a banking crisis before addressing the insolvent banking system first. Right now, more banks are being turned into zombies similar to Japan in the 1990s and this will affect any recovery for years if not a decade.

    Comment by Shake -

  10. About a month ago I sent over 1000 letters to government and media. I agree with most all Mark has to say. Stock options are definitely WEAPONS OF WEALTH DESTRUCTION. Don’t be fooled by CEO’s accepting less pay now. As soon as the heat is off they will set new records in pay. The trend is crystal clear. Their pay takes 10 steps forward and 1 step back. They trumpet and call attention to the 1 step back, everybody gets off their case and then, BOOM, new record pay. The runaway problem became more acute when they started using options in the mid 70’s. OPTIONS MUST BE TERMINATED AS A FORM OF COMPENSATION. Reasons, to numerous to list. To name just a couple: (1)Options create RISK MANAGEMENT VERTIGO where decision makers seek out risky deals. (2) Options destroy executive impartiality regarding dividends,creating huge conflicts when setting policy because it affects their options.

    Steve Hartnett

    Comment by Steve Hartnett -

  11. Mark,

    I like the thinking going on here, but obviously this should be something that every company needs to take as advice, and not something as enforced by regulatory law where CEOs can’t be GIVEN stock/options, though I’m sure you agree with me. There is a conundrum here, where the CEO plays Milli Vanilli as opposed to actually creating real value in the company. This should be up to the board of directors, and not the government. Ultimately for large market cap companies they may be in positions where they must make short term fan boy decisions for growth, and vice versa.

    The main factor in market irrationality and irrationality in large corporations isn’t so much of the nature of executive pay but more of how the government can spend us into a deficit and loot our tax dollars. Then the market sinks because the market does not agree with this interference therefore the roles of CEOs change to fan boys instead of focusing on growing the value of the company, then employees lose their jobs to raise earnings. Though there are more variables than mentioned here, a major variable is government intervention. Then naturally executive compensation is targeted as the prime evil, and the musical chair game of moral shutup continues.

    The goal is the death of the individual and we can’t let these regulation aka fascist mongers go unchecked.

    Comment by Clayton -

  12. There are SO many problems with executive compensation. How is it justifiable to pay a CEO $25 million dollars when you are laying people off? This is ESPECIALLY true when HE/SHE was the one that got you there. The problem is both the shareholders AND the board of directors. The shareholders (mostly mutual funds, hedge funds, other institutions) don’t get rid of the board when it doesn’t have the shareholders best interests. The board members of company XYZ are usually from companies that the CEO of XYZ himself is on the board of! The boards pay CEOs based on what other CEOs make in the same industry or of companies of similar size, in what is essentially a system that keeps ALL CEO pay increasing by double digit percents per year.

    Of course CEOs want to cut jobs. They cut jobs and it boosts the numbers that their oversized bonuses are based on.

    The way to fix CEO pay is to have large shareholders elect board members that have the shareholders best interest at heart. Then pay the CEO in stock that can be redeemed YEARS after it is issued. Make the amount something smaller regardless. End ALL perks. Pay for your own damn health club membership. Imagine if you won the lottery and still had to go to work. Would you REALLY care if you were fired? That is what happened. CEOs have won the lottery and have made so much money all they are pl;ing for is pride and ego.

    Comment by bill ross -

  13. Ah, should make it clearer that the quote is from Team John L in the comments not from Mark’s column.

    Comment by jafi -

  14. Quote “This isn’t going anywhere people. Labor is getting cheaper to higher and fire, and more and more jobs are approaching commodity status. The cost of labor is always going to be influenced through a supply/demand model, don’t lament this; adapt.”

    True – but let’s examine the other side of this coin – the cost of becoming skilled labor. It takes a bachelors degree college education – maybe a graduate degree – and X number years of experience. I’ve been involved in a serious discussion with a cousin over whether he’s better off becoming an electrician, engine mechanic, or a degree-ed engineer. He’s leaning towards the skilled tradesman track, in part because of the downward pressure on engineering salaries from India/China and the upward escalation of college costs. And I’m hard pressed to make a case for the traditional computer/ee track given the number of competent mid-career engineers I know that are stuck in the labor vise (I’m aware of a couple of IBM’ers that have been offered their job – in India they’d have to relocate there and work for the local wage).

    The cost of living isn’t decreasing – so are we creating large classes of working poor by designating more categories of jobs as not being deserving of a wage that covers the opportunity cost (of attending college), the actual cost of a degree, and allows a middle class (not privileged, but not debt financed for the basics) standard of living?

    So lets play theoretical – I want to adapt – I have a 4 year degree, good skills. I have college loans, a mortgage on a house that’s lost value (can’t sell for what’s owed and lets say I bought what I could actually afford with 20% down), and 2 kids in public school. Food costs are up, utility costs are up, medical costs are up. We’ve quit eating out, taking vacations, buying unneeded things, given up cable, reduced the cell phone plan. Salaries and benefits are down, no 401k match, no yearly bonus opportunity, increased medical insurance and deductibles. Mandated unpaid furloughs, and salary decrease though the workload increases (meaning no moonlighting to make up lost wages).

    So the family expenses have soared, stuck in the house, and earnings have decreased below what discretionary spending can absorb. Other than allowing the house to go into foreclosure, how does a family in this circumstance “adapt” and what happens to the future of the US when the earnings and utility of a college degree isn’t there for families that aren’t wealthy enough to absorb the cost up front?

    It isn’t as much if what you say is correct, as is the future implications for the country and our economy as a whole.
    Something to think about.

    Comment by jafi -

  15. Understand your point and it makes sense from the standpoint that the best mgrs will have to continually work to bring up the bottom 20% of the workforce (if profitable and you keep everyone). Jack Welch might argue that you constantly terminate the bottom 20% of performers. I’m sure you know his argument as well as I do. It can’t be discounted.

    Comment by Mark -

  16. Pingback: Executive Compensation And Unemployment | Mark Cuban’s Proposition – Frog Blog

  17. This is a great statement. I wish it wasn’t dated April 1st since that may confuse some compensation committees.

    @CJ – great comment. Of course your use of my name got me to thinking where I put all those untold millions. In Hollywood your value is re-assessed after every release. Good box office and your next paycheck goes up. One or two bad releases in a row and you might have trouble finding work. Executive compensation seems to want the big numbers but avoid that rather brutal assessment system.

    Comment by Fred H Schlegel -

  18. A lot of companies do have more employees than they really need. Now is a good time to lay off the extra people. Since everybody else is doing it, it won’t look as bad. It’s also a good time for growing companies, which can afford to and need to hire more employees, as the public’s opinion towards them will be really good.

    Of course some companies are laying off people only to help their stock price in the short term. I don’t know if this is really a widespread problem though. Some companies can’t really afford to lay off anybody, but can’t afford to pay them either.

    In Finland many companies are forcing employees to take unpaid leave(lomautus) rather than laying them off. The companies know that after the recession they will need the same amount of workforce and see the unpaid leave as a better alternative to layoffs. It is in effect a temporary pay-cut. However, unlike a temporary paycut, it’s less likely to become permanent.

    Comment by antti -

  19. I think the problem lies more in the fact that under our current systems of bonuses, incentive-based contracts for executives, and pay for performance sales jobs future growth is never in the forefront anymore, it is all now-based. If you are in a relative boom of the economy and making x number of dollars as profit, you can’t expect to have the same when sales decline (naturally) during a bust period. Holding on, and making what you can while shoring up for the next big wave has been replaced with cleaning house. After all, the people you lay off today are the same people you’re going to be hiring back in a years time when the economy has improved and no one is worse off for it…. except for the guy who was jobless for a year because you wanted the bonus now. Once it occurs to people that rehiring people during booms cripples your business (and the total you make long-term) way more than you gain by downsizing during the busts.

    As Mark said, this is only applicable for companies still treading water. If you’re going under, it’s a bit more understandable.

    Comment by Sir Struggle -

  20. “Golden parachutes” are what motivate CEOs to take enormous risk. Why? Because if they succeed they make huge profits and if they fail they’re still compensated handsomely.

    Comment by darryl -

  21. “…what’s absolutely unforgivable is the financial benefit top management people get for laying off people. There is no excuse for it. No justification. This is morally and socially unforgivable, and we will pay a heavy price for it.” — A cantankerous interview with Peter Drucker, Wired (August 1996)

    Excerpt from Warren Buffet’s Berkshire Hathaway Letter, 2005 (

    Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay.

    The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.

    Take, for instance, ten year, fixed-price options (and who wouldn’t?). If Fred Futile, CEO of Stagnant, Inc., receives a bundle of these – let’s say enough to give him an option on 1% of the company – his self-interest is clear: He should skip dividends entirely and instead use all of the company’s earnings to repurchase stock.

    Let’s assume that under Fred’s leadership Stagnant lives up to its name. In each of the ten years after the option grant, it earns $1 billion on $10 billion of net worth, which initially comes to $10 per share on the 100 million shares then outstanding. Fred eschews dividends and regularly uses all earnings to repurchase shares. If the stock constantly sells at ten times earnings per share, it will have appreciated 158% by the end of the option period. That’s because repurchases would reduce the number of shares to 38.7 million by that time, and earnings per share would thereby increase to $25.80. Simply by withholding earnings from owners, Fred gets very rich, making a cool $158 million, despite the business itself improving not at all. Astonishingly, Fred could have made more than $100 million if Stagnant’s earnings had declined by 20% during the ten-year period.

    Fred can also get a splendid result for himself by paying no dividends and deploying the earnings he withholds from shareholders into a variety of disappointing projects and acquisitions. Even if these initiatives deliver a paltry 5% return, Fred will still make a bundle. Specifically – with Stagnant’s p/e ratio remaining unchanged at ten – Fred’s option will deliver him $63 million. Meanwhile, his shareholders will
    wonder what happened to the “alignment of interests” that was supposed to occur when Fred was issued options.

    A “normal” dividend policy, of course – one-third of earnings paid out, for example – produces less extreme results but still can provide lush rewards for managers who achieve nothing.

    CEOs understand this math and know that every dime paid out in dividends reduces the value of all outstanding options. I’ve never, however, seen this manager-owner conflict referenced in proxy materials that request approval of a fixed-priced option plan. Though CEOs invariably preach internally that capital comes at a cost, they somehow forget to tell shareholders that fixed-price options give them capital that is free.

    It doesn’t have to be this way: It’s child’s play for a board to design options that give effect to the automatic build-up in value that occurs when earnings are retained. But – surprise, surprise – options of that kind are almost never issued. Indeed, the very thought of options with strike prices that are adjusted
    for retained earnings seems foreign to compensation “experts,” who are nevertheless encyclopedic about every management-friendly plan that exists. (“Whose bread I eat, his song I sing.”)

    Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.

    Huge severance payments, lavish perks and outsized payments for ho-hum performance often occur because comp committees have become slaves to comparative data. The drill is simple: Three or so directors – not chosen by chance – are bombarded for a few hours before a board meeting with pay statistics that perpetually ratchet upwards. Additionally, the committee is told about new perks that other managers are receiving. In this manner, outlandish “goodies” are showered upon CEOs simply because of
    a corporate version of the argument we all used when children: “But, Mom, all the other kids have one.” When comp committees follow this “logic,” yesterday’s most egregious excess becomes today’s baseline.

    Comp committees should adopt the attitude of Hank Greenberg, the Detroit slugger and a boyhood hero of mine. Hank’s son, Steve, at one time was a player’s agent. Representing an outfielder in
    negotiations with a major league club, Steve sounded out his dad about the size of the signing bonus he should ask for. Hank, a true pay-for-performance guy, got straight to the point, “What did he hit last year?” When Steve answered “.246,” Hank’s comeback was immediate: “Ask for a uniform.”

    Comment by CJ -

  22. GOOD QUESTION……why are profitable companies laying off employees. MAYBE BECAUSE this is their chance to put the employees out the door… to FINALLY justify letting go of employees wanting to get rid of but perhaps employees holding something on company.

    a perfect analogy is : husband has wife who has videos of him and will never sign divorce…..then husband gets aids or hiv and tells wife he wants her to have a good marital relationship with someone else.

    Comment by Nancy Morales -

  23. p.s. I’m a huge Cuban fan. Passion in business and life (and sports) it too frequently underappreciated!

    Comment by Pantelakis -

  24. Capitalism is based on each inividual pursuing his/her own rational self interest. This applies to executives, too. As you point out, it is in executives’ self interest to manage their company for the short-term, as their compenstion (regular paycheck, performance bonus, options, stock grants/warrants, etc.) is genreally tied to some short-run metric(s). Thus, we frequently see examples of executives managing for the short-run even when it is contrary to what may be best for the company in the long-run (and, one could argue, for society as a whole). My belief is not that this is a problem with the executives, rather it’s an issue with the Board of these public companies. Too often Board appointments are political. Too often directors over-incentivize executives to manage the stock price rather than the business. It’s a sad byproduct of public companies! Not always a bad thing for traders and short-term equity investors, but a real issue for long-term investors in public companies. Arguably, this impacts the coutry as a whole, too, as managing a our companies for the long-term is critical to building wealth and stability. Anyhow, that’s my two cents…

    Comment by Pantelakis -

  25. Pingback: It’s Business Time. « Logic

  26. My answer to your question “Why are profitable companies laying off people?” is because they can. Maybe your question should be refined, but I think employee churn is a key dynamic that you fail to acknowledge. When was the last time you saw the abundance of talent available as you see today? I agree that businesses need to look at the bigger picture and that not all benefits are short term. Thus, I find it in the interest of the shareholders for management to cut the fat and attain the talent that previously was either not available or would have come at a much more substantial cost.

    Do you think it is “captilistic” to keep employees on board because the work hard? or “bust their a$$es”? Sometimes working hard isn’t enough and productivity/value added needs to be evaluated. As a shareholder, it seems to me that taking advantage of opportunity is in your best interest. With a more talented staff, your long term upside will be more quickly achieved.

    Agreed, “sometimes you have to look at the bigger picture in order to reap the biggest returns” and now is the time to do just that. Cut the fat, hire the talent. I think we all can agree that a lean and mean company will pull through a downturn like this faster and stronger than an inefficient, bloated company that is afraid to make changes because management wants to do “the right thing” or “the patriotic thing”.

    Rather than an “opportunity to layoff” this is an opportunity to replace. I think it’s patriotic to hire and we’re still keeping our eyes focused on the long-term success of the company (and it’s shareholders).

    Comment by Multiple Miggs -

  27. Yes, let’s have the government more involved in the day to day decisions of business. Every business is different from the other, with varying levels of talent (even CEOs). It makes no sense to limit pay to $1 million, $400k or some other arbitrary number. What one deems “reasonable” is not so in the eyes of other individuals. A top down, one size fits all approach fails in a diverse and vibrant community. The market exists for a reason. In this case to “price” CEO pay. It would be better to remove the government interventions in CEO pay. Only then can the boards and shareholders of the various companies fashion pay in whatever form it deems necessary to attract the best talent.

    Comment by mike -

  28. What a great post. It’s really refreshing to see a responsible attitude expressed rather than the short-sighted blather I see and hear in the media. I was amazed by the lack of general media coverage for Fred Smith’s great decision to lower executive pay at Fedex-Kinkos, so that they could avoid lay-off’s. The only coverage I heard was a month later when NPR found a disgruntled executive and an academic to argue that the shared sacrifice of taking a hit on wages created bad blood in the executive pool and was potentially deflationary! (Like firing people so they are unable to pay their bills isn’t?)

    way to go. This should be on the front page of every newspaper -um – portal in the world.

    Comment by michael jacobs -

  29. What’s going on at HP right now is a perfect case in point. 1.9B in Q1 profit, in a horrible economy, nets the rank and file a pay cut and layoffs. All under the guise of “difficult economic times”. Many companies would kill for that kind of “difficulty”.

    So while the average employee has suffered wage freezes, erosion of benefits, and loss of overtime and bonuses over the last three years (coinciding with Mark Hurd’s arrival, strangely enough), the CEO took a ~40-60% increase in compensation between 2007 ($23.9M) and 2008 ($42.5M) and the top six executives at HP account for $142,774,325 in compensation all by themselves.

    Nothing out of whack there. But I’m sure Mr. Hurd will move on to another company after he’s finished plundering HP and the economy picks up enough to see all the quality people, who are afraid to quit right now, leave in droves for other opportunities leaving HP a shell if its former self. But, of course, nobody cares about the long term impact of alienating the workforce and treating them like adversaries. They only care about the quarter to quarter numbers and the short term return.

    Here’s a very good article on the details of the situation. With 712 comments and counting, it looks like there’s a lot of bad blood at HP right now. That CAN’T be good for their long term future.

    Comment by J -

  30. In many cases layoffs become a domino effect, company A will layoff x number of workers who now can’t afford to buy products from other companies. So some of those companies will have a dip in sales so they start layoffs. Eventually this will effect company A’s sales so they will layoff more.
    How about laying off 10 highly compensated VP’s rather then 2500 line workers.
    10 people spending less is better then 2500.
    As Mark stated, CEO’s should do everything they can to avoid layoffs Once layoffs begin it can start an ugly spiral.
    One other thing, after the savings that come from the layoffs are reported, it is funny that many companies don’t show the complete amount in the bottom line. Check out the increase in executive compensation. So the CEO needed the savings so they could increase their own pay

    Comment by Schubie -

  31. This is a timely post.

    “Why are profitable companies laying off people ?”

    Short sighted incentives that do not take into account mid to long term health of the business.

    Here is what executives say, “How am I going to get a bonus this year?” instead of “How do we manage the business so that we are dominating our industry/market in 5 years?”

    The people my company laid off last month will be hired back (or people just like them) next year and probably at higher rates. It is a terribly short sighted way to run a very profitable business.

    Comment by Joe -

  32. I agree with the premise – make CEO’s compensation subject to the same risks as the other workers.

    Two thoughts.

    ONE: A corporation by definition is a creation of the state – it give certain rights and limits liabilities to shareholders, management etc. Rights and liabilities that are not present in other organizational structures (like partnerships). So since the state has given these protections, it’s not at all out of line for the state to restrict how CEO’s and others in the company get paid. If the government were to enforce that all pay is “100pct expensable in the quarter paid” it would not be socialist, communist, or fascist. It would simply be putting restrictions on the rights and privileges given.

    TWO: I would be in favor of limiting compensation for CEOs (and all management) to a reasonable cash value (say $1M per year) plus stock as long as two criteria were met. A) the stock was restricted so it couldn’t be sold for 5 years. This would give the management a long term interest that would more easily fit with the interests of shareholders and society as a whole. B) the stock was give quarterly, or on some other date decided in advance, and at full market value of the stock on that date, and 100pct expensable in the quarter paid.

    Comment by John Seiffer -

  33. If options are used to create a sense of ownership in the company they work for, then why not restrict the amount of stock a company’s exec’s can sell in a year by the amount of the cash salary paid in that year. So, if the percent is say 100% and the CEO makes $100,000 then the he/she could only sell enough stock that has a cash value of $100,000. That may prevent a CEO from dumping a stock. Or, stockholders and press could be notified once the CEO files intent to sell part of their position in their company.

    Comment by JColeman -

  34. I know a number of people working at large companies. A LOT of the big companies are using the economy as an excuse to “trim the fat”.

    Comment by Geoffrey -

  35. Mark, I think a lot of us are stockholders… however, I just care about the return on my investment (meaning stock price).. If cutting a job will make that price go up. Then so be it. I didnt invest in particular stocks for the “patriotic thing to do”. or so employees could have cushy jobs. I just want my return. thats all.

    That being said. I am not an investor in private companies, and I do admire them for some of their efforts.

    Comment by savednoteguy -

  36. Hey Mark, Can someone explain to me the reason Sunoco is laying off 750 people while making a 204 million dollar profit in the fourth quarter of 2008? I mean rationally explain the reasons? Im truly baffled. Anyone that has stock in Sunoco is just exaserbating the problem going on with the economy. They government should step in and somehow either tax the living shit out of the profits or have them keep people working. Thanks for the thoughts.

    Comment by Frankie from Lawnside -

  37. Not to defend layoffs, but in public companies, often management is lazy. No matter how well you interview someone, you’re going to often bring in people who don’t fit well with the culture of your organization, or other employees that just get lazy as their number of years with the company increases. At best, those people aren’t productive, but they often bring down the productivity of others.

    During the ‘good’ times, management rarely does anything about those people. They will segregate those people so they minimally affect productivity, they’ll complain to their fellow managers about those people, but they don’t fire them, they don’t give them bad reviews, etc.

    So, often when a company lays off people, in my opinion, they are using the economy as an excuse to do what they should have done all along: remove the employees who are under-performing.

    Comment by Dan -

  38. The assumption in all of this is that we have a proper definition of shareholder value. Value today equates to quarterly earnings and it’s impact on stock price. The classic theory of shareholder value takes a much longer term look at valuation. Unfortunately, stock prices and CEOs aren’t rewarded for longer term thinking by Wall Street, its analysts or investors. So a CEO who takes a longer term view, in many instances, will be one who has to make decisions that adversely affect quarterly earnings…and will soon be an unemployed CEO.

    Are CEOs broken or is our determination of shareholder value?

    Comment by slim papi -

  39. I have been yelling about this myself. My favorite line is, “Company X reports profits are down 10% from previous year.” Profit is down but they’re making a profit. Keyword: profit, not loss. Ugh

    Comment by Scott Plocharczyk -

  40. In my experience, most business get ‘fat’ with top end execs and lower end staff when business is booming. When business settles, as it did for us seasonly, we were stuck with good people we had to let go. That’s what good businesses do to stay healthy. Normally, execs at the very top end are unaware of this phenomenon and are just now in 2009 looking at what makes businesses work at peak…

    Comment by Vince Spence -

  41. How many companies are using the poor economy as an “opportunity” to lay off its poor performers?

    Comment by Chris H. -

  42. Right on the money MC!

    Comment by Craigermike -

  43. The most outrageous examples of exec comp. are for traders… who don’t hire or fire … they just move money. if they do well, or their desk does well, then they get big bonuses, even if their company is in the shitter. so they all look out for number one, and number one only, regardless of what it means to the rest of the company.
    i have a friend who worked on wall street and was sounding the alarm about credit default swaps and AIG a year and a half ago. he painted a doomsday scenario (which has of course come to pass).
    but there was nothing motivating him, or anyone at his company, to do anything about it bc they were all making $$$ … salaries ‘only’ at $175k and bonuses at $1mil and up. even last year … when the parent co loses billions and takes tarp.

    Comment by denexile -

  44. Mark, Do you think PE will just simply go up if E goes down? Respectfully, that’s not how it works. Shareholders should be asked if they would be willing to see the stock price go down, not the PE ratio to go up.

    Also, I know of profitable privately held companies that are laying off. Why?: Things might get even worse and there are no cash reserves and the bank loan might not be renewed and therefore the company could go under. These companies still have shareholders (fewer, yes) that want a return on their investment. It’s an opportunity to clean house.

    Comment by dave -

  45. Monkey – I saw that and was going to touch on it, but what I was commenting on was the ‘keeping people around’ part. If both companies were similar, did the exact same work, etc. then Company A is out of line, sure.

    However, if Company B is very small and turning down specialty jobs worth say $10K, and Company A normally does mass-produced $10mm.+ jobs it is a completely different story.

    Comment by JG -

  46. Simple, Greed. This was shown this past year when Oil prices got so high. Its is being shown right now that oil is under $50 a barrel and but gas is still at $2. There are just some people in the world that have no morals. They think about only themselves and how they can better themselves the way they want.

    Comment by BG -

  47. I have often wondered when it was that employees no longer were considered stakeholders in a company. Mark’s posting and some of the comments have helped me put a timeline on it. What has happened in corporate America over the last 15 years, where employees are now all too often treated no better than a machine that can be put off line and out of use with no ramifications to the human world, is an absolute travesty. Unfortunately, it seems as if too many graduates of some of our country’s leading business schools seem only smart enough to graduate; they don’t actually utilize that education to generate products and create jobs. Many only use their sheepskin to attain a CEO position and manipulate the system to line their own pockets. Sad.

    Comment by dave o -

  48. Too many companies and their respective leaders are making their decisions to impact tomorrow’s share price, instead of investing in the future. This shortsighted approach by weak leadership is going to do more harm than good to our economy and culture in general.

    Comment by Mike -

  49. The simple truth, and something that Mark touched on, is that corporate CEOs generally aren’t tied to the long term health and viability of their firms. Moreover, they’re slaves to quick profit for the benefit of Wall Street. The rest of us, the ones that draw cash salaries, are seen as liabilities to be replaced, downsized, outsourced, laid off, etc. in every way possible.

    Moreover, in regards to JG’s comment to Justin, he said that the company wouldn’t make a big enough profit on the new contracts, which implies that they’d make a profit, just not a big one.

    Personally, I think CEOs should have their salaries reduced to a maximum of $400,000 (the salary of the President of the United States), and their stock held in escrow for a period of five to ten years. That way, compensation is tied directly to long-term performance, rather than short term gains. For an example, a CEO is hired by Company Z. Company Z places all the stock from the CEOs hiring package in escrow. Company Z does well. More stock is added to escrow. Company Z does badly. Less stock is added to escrow. After five years, the accumulated stock is released to the CEO to do with as he pleases. If the CEO is fired, whatever stock is in escrow is returned to the company. If the CEO leaves for another company, all the stock in escrow is returned to the company. If he retires, the stock can be given out at the company’s discretion.

    Comment by monkeybusinessiu -

  50. Company A could have taken the contracts to just keep those employees around till the hard times are over but they decided to screw their people since they are greedy! It’s total BS! Talk about lack of respect for the people that work day in day out for you.


    Comment by Justin

    Justin – these people are running a business. They have to deliver profits to their equity and bondholders; if a company has a lack of work for these employees, they may have (huge) problems at hand. Just “keeping those employees around” until the economy gets better is a gamble at best, and a horrible business strategy at worst.

    Comment by JG -

  51. I think too few of the CEOs and Board Members either didn’t take Business Ethics in school, or forgot what they learned. They also don’t remember the long term costs of having to retrain employees that they are going to need once their fear subsides and they realize they can use the people.

    Mark, thanks for doing the right thing!

    Comment by Tyler -

  52. The fundamental problem of the last decade has been greed. Greed included many obvious things, including over hiring. How many people in a company really need an admin? How many analysts do you really need working in a given department? Etc. etc. While obviously many good people are losing work and many current workers are handling more tasks, I’m willing to bet more than a few were filling out three chairs to do the work of one.

    I would rather take a long look at employees’ production, cut the people who are unneccessary and give raises to those who are workign hard. Freezing pay will just build up resentment over time, and when the economy recovers those people would be the first to go; the people who remain will be those who should have been laid off in the first place.

    (Complete generalization: I am not referring to any person or company, let alone industry, in particular)

    Comment by JG -

  53. @Todd, how about if we give Clinton a mulligan and make it George W. Bush’s fault?!? I wasn’t trying to make a partisan argument, because all the parties and politicians are flaming bags of dog manure (yes, including Obama and Ron Paul). But the point is that the current situation with executive pay tied to short term performance is a direct result of a change to the tax code that was intended to shame companies from paying “excessive” salaries to executives. The $1 million threshold hasn’t been adjusted for inflation in 15 years either. Mark makes an excellent suggestion about compensating in cash, but at public companies, it is problematic because of tax rules.

    The point is that populist reactions just dig the hole deeper. It doesn’t matter if the populists put an R or a D after their names.

    Comment by BoscoH -

  54. Commenter John L is dead on: “This isn’t going anywhere people. Labor is getting cheaper to higher and fire, and more and more jobs are approaching commodity status. The cost of labor is always going to be influenced through a supply/demand model, don’t lament this; adapt.”

    Solution: stay out of the cash zone.

    Comment by Kevin -

  55. One of my roommates works at a helicopter company — lets call it Company A. They are laying people off (not him) because of the lack of work.

    My roommate knows a smaller company — lets call it Company B — that have sent contracts to Company A because they are to busy. Company A didn’t think they would make a big enough profit so they declined the jobs.

    Company A could have taken the contracts to just keep those employees around till the hard times are over but they decided to screw their people since they are greedy! It’s total BS! Talk about lack of respect for the people that work day in day out for you.


    Comment by Justin -

  56. Wow, it’s Bill Clintons fault, now.

    Comment by Todd -

  57. I like the Japanese method of dealing with CEO’s of failed companies.

    Comment by Todd -

  58. Right you are Mark about paying CEOs with cash. However, you can thank Bill Clinton for the lavish CEO stock treatment. Early in his administration, a per-exec limit of $1 million was put on most public companies’ tax deductibility for executive salaries. A few public companies bit the bullet and continued to compensate with base salaries exceeding $1 million. Most were shamed into offering options and bonuses. Taking a double tax hit for a CEO’s salary isn’t criminal, but many reasonable people would see it that way.

    Comment by BoscoH -

  59. This isn’t going anywhere people. Labor is getting cheaper to higher and fire, and more and more jobs are approaching commodity status. The cost of labor is always going to be influenced through a supply/demand model, don’t lament this; adapt.

    The only way to change the careless of very large companies is to design a better corporation, which I worry, is beyond even Mr. Cuban.

    Comment by Team John L -

  60. Last year, my division had a record breaking year in sales, margin, and cash. Soon after, layoffs were instituted to “right size” the company. You can view this as a proactive step to reign in future costs, or the realization that the job market is tight, and why not just dump the extra work on the remaining employees, since they probably aren’t going anywhere.

    Comment by Corporate Barbarian -

  61. In today’s world, employees are an important asset and you cannot simply layoff a percentage of your employees and expect to cure your problems. Your staff is the answer to those problems – engage them and put their brainpower to work to come up with ways to save their jobs or improve productivity. I think most employers would be surprised to actually measure the collective talents in their employee pools.

    Comment by Rick Restell -

  62. Folks interested in learning more about the history should give this book a look:

    Comment by Michael F. Martin -

  63. “Why are profitable companies laying off people ? I can see if a company’s survival is at stake.”

    There is an answer to this to be found in the history of accounting:

    In a nutshell, things got ugly when labor started being valued as an asset/liability rather than as equity.

    Comment by Michael F. Martin -

  64. That is a great quote.

    Comment by Matt -

  65. Pingback: Quote of the Day - Capitalism Edition

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