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The More Jobs You Cut, the Higher Your Pay

By Alyce Lomax - Updated Apr 6, 2017 at 11:49AM

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CEOs collecting fat paychecks for big layoffs might actually be damaging their companies.

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 Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

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Stocks Mentioned

HP Inc. Stock Quote
HP Inc.
HPQ
$33.16 (-1.35%) $0.46
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$50.49 (-0.88%) $0.45
AT&T Inc. Stock Quote
AT&T Inc.
T
$20.83 (-0.57%) $0.12
Sprint Corporation Stock Quote
Sprint Corporation
S
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$175.59 (-0.79%) $-1.40
American Express Company Stock Quote
American Express Company
AXP
$135.26 (-2.66%) $-3.69

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