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The More Jobs You Cut, the Higher Your Pay

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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 heroes
The 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:

  • Johnson & Johnson's (NYSE: JNJ  ) high-profile drug recalls and FDA scrutiny don't suggest a particularly well-run company. However, CEO William Weldon still made $25.6 million in 2009, more than three times the S&P 500 CEO average pay, even while he cut 9,000 jobs from the company's payroll.
  • American Express (NYSE: AXP  ) received $3.39 billion in bailout funds under TARP and slashed 4,000 jobs, but CEO Kenneth Chenault still managed to make bank. He collected $16.8 million in compensation in 2009, including a whopping $5 million cash bonus.
  • Hewlett-Packard's (NYSE: HPQ  ) Mark Hurd is history, but he's been richly rewarded despite his job cutting and public resignation. He has axed 31,000 jobs since September 2008. (The report notes that company founders William Hewlett and David Packard had a no-layoff policy.) Although so many Hewlett-Packard employees lost their jobs in recent years, Hurd's own departure is hardly a painful hardship: He'll get $28.2 million in cash and stock for his ousting.
  • AT&T (NYSE: T  ) , Verizon (NYSE: VZ  ) , and Sprint Nextel (NYSE: S  ) have cut nearly 44,000 lost jobs in total, but despite the huge and growing competitive challenges they face, their CEOs still made the list of highly compensated job slashers.

It's time to question the conventional wisdom
Even 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 every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

American Express, Google, and Sprint Nextel are Motley Fool Inside Value picks. Google is a Motley Fool Rule Breakers recommendation. Johnson & Johnson is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 01, 2010, at 3:34 PM, Retired31B5M wrote:

    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.

  • Report this Comment On September 01, 2010, at 3:52 PM, CMFStan8331 wrote:

    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.

  • Report this Comment On September 01, 2010, at 5:31 PM, chukarlady wrote:

    Why isn't CEO pay considered a cost like everyone else's pay? What did I miss when I took accounting?

  • Report this Comment On September 01, 2010, at 6:21 PM, dgmennie wrote:

    CEOs and their hangers-on have been grossly overpaid for decades. The trend seems to defy the laws of physics, the laws of gravity, the laws of common sense. We have seen article after article describing how "failed" CEOs walk away with millions from whatever they have presided over, often train wrecks. Makes one wonder if this level of management has any connection with reality, or is instead some kind of very private fraternity whereby the annointed few have but one mission in life: personal enrichment.

    "Oh," you say, "there are some very good CEOs out there, what about X, Y, and Z. Chaming gentlemen who run great companies and give a fortune to charity." To which I reply, "Yes, and there are some very nice bank robbers out there too, who never actually shoot anybody, love their children, and don't kick their dogs." SO WHAT?

  • Report this Comment On September 01, 2010, at 7:12 PM, Marshalldedr wrote:

    Yes, let's just dislike all CEO's. You know, one bad apple spolis the whole bunch right? This illogical fascination with a few "jerks" giving fodder to vent frustration that has nothing to do with CEO's but most likely has to do with one's own choices in life is a waste of time. These people do not owe anyone an explanation at the end of the day. As stock holders we have the ability to invest where we see fit and that is all we should be worried about. If anyone feels that executive salaries are excessive and may hurt the companies bottom line then bail.

  • Report this Comment On September 01, 2010, at 10:31 PM, xetn wrote:

    If the company lays off everyone, does that mean the CEO can have 100% of the pay? (Not serious).

    I agree that most CEOs do not earn the massive salaries they receive. While I am certain that is true, it is a contractual agreement negotiated between the CEO and the BOD (or compensation committee). Don't blame the CEO for trying to maximize his/her earnings. And, if you disagree with these actions, vote with your feet and don't invest. What do you suppose the effect would be on a company whose CEO took a 100% pay cut? Would it make a difference in the bottom line? Probably not.

    Supposedly, you invest in a company because of its earnings, dividends, etc. If that isn't enough, or your feel the need to rant, go for it. But please, leave me out of it.

  • Report this Comment On September 02, 2010, at 9:45 AM, Seering wrote:

    One possible solution is to raise the tax rate on short term gains significantly and decrease the tax on long term gains significantly, and have a very low tax rate (3% or so) on gains held for 5 years or more. This will force investors to view companies in terms of full business cycles instead of quarterly profits. This shift in focus will change they way investors look at top management and how CEOs are paid. Hopefully something like that would force a change in CEO compensation to longer term outlooks.

    Also, a CEO not being the head of the board and buddy, buddy with half the members of the compensation committee should also help.

  • Report this Comment On September 02, 2010, at 12:02 PM, Knightmare535 wrote:

    This is a silly article, looking at just two statistics on a very limited sample size. What were the conditions and context when the decisions were made? What were the better alternatives? Even given hindsight, what does the author suggest would have been the better route? Where, exactly, are the CEO's responsibilties?

    Speaking for the Housing industry, with which I am very familiar, we had signs of a recovery in the first half of 2010. Housing was starting to head up. Then, about 10 minutes after the tax incentives ended, so did the demand. This led to hiring in the first half, lay-offs in the second half. What should have been done? Miss the business in the first half and not hire new people? Keep everyone when it dropped, but only operate 20 hours a week and have the whole staff be under-employed? Or keep everyone on payroll, doing 20 hours of work in a 40 hour week, and have already struggling construction-related companies go deeper into the red, or under completely?

    In this example, company CEOs and other leaders are reacting to a government policy that pulled demand up 6 months, and left the second half dry. Even if they knew exactly what was coming, I'm not sure what the author would have suggested as proper actions. I would agree that it is in a company's best interest to treat their employees with respect. However, I'm also not sure when it became a company's responsibility to add or maintain jobs for the sake of the overall economy. There seems to be more bitterness than analysis here.

    BTW, I do like Seering's thoughts on the tax laws and BOD memberships. Those are the types of approaches that drive the right actions. Unfortunately, the people that make the rules are on the same time schedule as Wallstreet. Whether you are looking to the next quarterly statement or next election, you get the same perspective.

  • Report this Comment On September 02, 2010, at 2:00 PM, ddeleo wrote:

    If you are talking about the IT world your perspecitive is right on the button ( I was going to say money but only a CEO has any). I work for supporting infrastructures in the insurance industry and in the middle of the night when Applications melt down as they use these infrastructures, it takes long long troubleshooting sessions, unavailability of services to customers, just because the department owners of these critical key corporate applications have let so many people, who know the app inside out, go that nobody can figure out how the app works in order to solve why it is not working. Major industries are hurt by so much down time of their servers and the drain of support people who struggle to keep the pieces together but only end up doing quilt work making it things even worse and causing more meltdowns, in an infinite loop.

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