Are the American taxpayers bankrolling executive salaries and bonuses?
Every day we see notification of layoffs and less frequently but quite regularly we see news of top executives making super-sized bonuses. Are these stewards of industry using the American unemployment safety-net to make their bonus targets or fatten their performance stats?
Finding good statistics about bonuses and layoffs in the same firms covering the same periods proved difficult. Almost a sure sign someone doesn’t want the information in the public spotlight.
Most companies have complex formulas for “executive compensation”. These formulas are often generated by “independent” compensation consultants that are handsomely payed by … guess who … the company. These consultants are chosen or appointed by the Chief Executive of Human Resources, who normally is appointed by the CEO. The “executive compensation program” is then voted on by the Board Of Directors, The CEO, the Chief Executive of Human Resources and the Board of Directors are almost always covered by the same executive compensation plan. Pretty cozy, isn’t it?
Executive compensation can be dependent on many different factors and if you look at a typical compensation plan, you get the impression that they are purposely made very complicated so that the average stockholder won’t read all the way through without falling asleep. The real basics of the compensation plan are revenue, growth and profit but often buried down on the 2 nd or 3 rd layer are metrics dealing with productivity, revenue or profit per employee, revenue or profit vs. operating expense. These metrics also will effect the stock and stock option prices further enriching executive compensation.
When overall revenue, growth and profits are stagnant, by reducing headcount almost all metrics that commonly show up in executive compensations plans improve. This is especially true in industries where the executive compensation plan extends far down the corporate structure. The simplest way to look at this is, if you can’t make the cake bigger, reduce the number of people at the party and everyone gets a bigger piece of the cake if 10% of the guests are sent home before the cake is cut.
So top level executives have incentives to run “lean and mean”. Improved productivity metrics, inflating their bonus pool and less people in the bonus pool. There is little downside because, after all who is going to complain about overtime when the guy or gal at the next desk just got laid off.
The normal argument against this reasoning is that adding new employees when there are growth opportunities (another important bonus metric) is expensive. Adding, equipping and training a new employee can often cost 20 – 100% of annual compensation. This penalty does not kick in when companies can lay off workers during small downturns and rehire many of the same, already trained workers at the slightest hint of an upturn.
For example, recently a large Wall Street firm, which is still in business only because of the 2008 bailout, announced they might be cutting around 1,000 employees. These employees are averaging over $100,000 a year for a $1+ billion operating savings. If the bonus pool were evenly divided (highly improbably) that would result in a bonus increase of 3% per remaining employee. We can only surmise how much bigger the bonuses to the top executives become.
Now let’s look at what this maneuver is going to cost the taxpayer. Let’s assume that the 1000 laid off employees came from NY, NJ and Connecticut. We’re going to take into account the maximum unemployment for those three states and round to $500 a week. If we assume an average length of unemployment of 6 month, well under the current national average, that is $13 million. We should also assume a loss of approximately 12+% SSI & SDI for the 1000 which comes to $12+ million. Now we assume the saved $1+ billion becomes either retained earnings or is transferred wholly or in part to employees taxed at approximately 10% lower rates than the laid-off workers. This could also include the laid-off workers who have dropped far down the tax table. That’s about $100+ million government revenue loss for a total loss of government revenues of at least $125 million.
We can’t make the point that the only reason for cutting $1+ billion from operating costs is purely motivated by maximizing the executive compensation payout but then neither can one argue that compensation rules don’t play some part in the executive decision making. There is virtually no downside for the executives in aggressively reducing payrolls when the cost of restaffing at the next upturn is so low.
We understand the human dislocation of 1000 finance workers that lose their $100,000 jobs with little prospects in this market for finding similar work soon. Some of us may be sympathetic and others not but few of us are aware that this is costing every employed taxpayer and the Social Security system. We can’t be against productivity or cost cutting when corporate survival is at stake but we need to start thinking about a way to encourage employee retention when companies are still profitable.
This worker dumping isn’t only happening in companies trying to maximize profits but in companies that have had years of good to excellent profits. Instead of dipping into their corporate cash they immediately dump workers onto the American taxpayer. If private citizens are expected to put aside one years income for a rainy day, shouldn’t we expect the corporations to do the same.