> Nobody wants to try to turn around a bankrupt company at their old salary (with their old RSU's and options now worthless).
Why not? These executives are paid considerably more than rank-and-file employees under normal circumstances, yet still manage to get bonuses when things turn sour. In contrast, that rank-and-file will be expected to take a pay cut, work more, or lose their livelihood. It flies in the face of the traditional reasons given for the high pay of executives: this has nothing to do with how much value any given person contributes, since everyone is expected to contribute more while a certain population is expected to receive a smaller share; this has nothing to do with the burden of risk, since the people taking the greater risk are the ones who are paid least (in terms of employees) or are taking the brunt of the losses (in terms of investors).
I've actually helped manage a company in financial distress. Here's reality:
- First, most executives have little impact on the specific event that put the firm under. (I was a senior marketing person; the building burned down. Fire safety was most assuredly NOT within my purview or even something I could ask about)
- Running a business in financial distress basically sucks. Take your job and make it 10 X harder. You're basically running a startup, except your credit is officially shot, your employees know layoffs are coming, your competitors and customers know you're vulnerable, and key personnel with families are saying to hell with this, I want to be sure my kid is going to college (and bailing out).
- I'll go one better, speaking from experience. Most key executives can take part of the business with them. So when they leave, part of what little is left of the company leaves with them (customers, technology, capabilities). What are you going to do, sue? bwahahah. Good luck, your lawyers are already swamped...
- Most executives are actually reasonable talented people. They have value on the open market. Often significant and freed of any golden handcuffs they once wore.
- Oh yeah... there is a high probability of failure or other drastic changes. So promises are worthless. Our leadership structure changed three times in five months. You have no guarantees that the person who made a promise will be in a position to honor it (or even be around). Turnarounds are a cash-only game.
So unless you like working for free - in hell... the current system is the only way to get decent talent to stay.
There is no denying that it takes skill and hard work to keep a business afloat in these times, or that it is stressful, or that it is easier to walk away than deal with the situation.
On the other hand, very few businesses are the product of a small subset of its people. In many businesses, such as some of the businesses mentioned in this article, it isn't a question of whether those other people can afford to send their children to college. They already knew the answer to that question: they cannot. Instead, it is a question of whether they provide their family with the bare essentials.
I am not suggesting that executives should sacrifice themselves for the benefit of the company or other employees. What I am suggesting is that it is immoral to take more when others are given less. If you disagree with that, that's fine. Consider it an ideological difference. Yet it is also important to realize that there are people who would disagree with both of us, that those who have more also have an obligation to sacrifice more in a time of crisis.
"very few businesses are the product of a small subset of its people"
Hate to break it to you but that is EXACTLY what is going on here. Some people have EXPONENTIALLY more impact on saving a business than everyone else in the building. Real world examples:
- Two sales people who knew every high profit customer in our local market, which was the core of our turnaround plan
- My product engineer, with "the specs in her head". We could have never rebooted the business without her.
- The last manufacturing engineer standing, who we needed in the event we could secure a new facility for operations.
- My boss, the master deal maker who knew every major retail chain on our side of the country. Our secret to rebuilding the critical mass required for survival.
- One commercial manager (there were two of us), who was tasked with re-balancing the entire business on the fly to deal with massive swings in costs and competitor activity. Our pre-fire business model was completely shot and the banks cut us off, so we needed to reorganize around the new reality and find a way to generate positive cash flow to survive.
Without those five people / groups, the game was over - there would be no recovery plan, no road back to sustainable operations. Everyone else is irrelevant, potential cost savings when we needed them. You are playing a very high stakes short term game for the humble prize of survival...
Finance's job was basically to keep the tie fighters off our back, keep the lawyers, bankers, and insurance people away from folks doing the actual work. Customer Service was there to gently wind down relationships with non-critical accounts, in the vague hopes we could come back someday. We were able to give a few people some runway on those teams, moving anyone who wasn't able to hit the street immediately onto those lists to give them a little more time.
And your key people are irreplaceable in that world. There's no way someone of equivalent expertise is walking into that mess for what you're able to pay them.
At an individual level? We had to invoke our worst endgame due to other issues (deal fell apart); four of the critical five are no longer with the company. Each of them landed with a promotion and a fairly substantial raise elsewhere, often with instructions to "go take their business back". (at that point, it was open season for those accounts; our prior employer was unable to service them) The typical job search for that level of talent is hours / days rather than weeks or months (there is a very specific set of people who will hire them immediately if given the chance) .
Any visions of nobility needs to balanced against your obligations to support your spouse and children. You're going to sacrifice your kids future for some random people they never met? Your spouse is cool with that? Get real. (Mine knew what was going to happen; I had "the talk" with her beforehand. We knew my job was going to be eliminated and I couldn't break ranks without screwing my people. But we've both done turnaround work before, so we had a plan to handle it. She's one in a million.)
So that's the shit-show you're trying to hold together.
Heck, I had a financial model sitting on my laptop to go buy one of my dying brands from the company, once it was very apparent that they weren't able to protect it. At that point, it was basically sitting by the side of the road waiting for someone to claim it...
This is the Pareto Principle at work. 20% of the people involved in an enterprise produce 80% of the value. It’s not that you don’t need the other 80% of the people, it’s that it doesn’t matter who they are.
If you remove the people in the high productivity group and replace them with people from the low productivity type then the organisation loses (roughly) 80% of its productivity. Replace people in the low productivity group and nothing happens.
Yes I agree it’s galling to see a few people compensated so highly in these situations, but as has been pointed out a) they individually most likely had little or nothing to do with bringing the problems about. b) What else are you going to do? The alternative is let the most critically essential personnel go and watch the whole organisation seize up for good.
How can you? One is taking about 80% of the work and the other is talking about half the work. You would need a distribution of the work impact across the employee population first.
The Pareto rule (at least my interpretation, due to its similarity with a power distribution) is recursive: 80% completeness from 20% work also implies 64% completeness from 4% work which in turn gives 51.2% completeness from 0.8% work (half of success is just showing up).
Accepting 51.2% as an approximation to half, the problem becomes 0.008 x = sqrt(x) which gives x = 125^2 = 15,625
I think there’s no avoiding paying people what is necessary to retain them. The alternative would be worse for the company and its other employees if essential talent was lost, or would be coercive and intrusive of the freedoms of these people if they were somehow compelled to continue working against their will and personal best interests.
I mean yeah but at this point you are basically admitting that keeping the company alive is more important to you than treating your employees equitably. Entirely possible for others to disagree with that stance, though your position does make sense if you take it.
Eh, you're not getting just how deep in the shit we were.
Sometimes you can't give everyone a pony.
There simply wasn't any money. That's the essence of running in financial distress. No banks, no loans, insurance support payments got swiped by other people we owed money to... You're running on the cash in the till.
We started with 500 jobs, most of which were union gigs with benefits. About 50 were still with us a week later, when this brutal end game went into full effect.
The cost of failure for this nasty little endgame for the 50 survivors, the quest for a sustainable business? We were an older union workforce, operating in an area with young non-union shops with sketchy labor policies. Our local employees were getting offers for $12 / hour with no benefits. Or a 40%+ drop in compensation for office staff due to age discrimination.
That's the difference between retiring for a nice middle class lifestyle and eating cat food for your golden years. Fifty lives fucked up, for loyal company soldiers.
So yeah, I wanted to keep the company alive to save jobs.
I'm a high end mercenary; I had an offer within a week of formally rolling off the program and plenty of consulting work to tide me over. My only prize here was moral satisfaction.
I think part of the question is: why try so hard to save the company at all? If 90% of the people working there ends up out on the street anyway, what's so special about the company itself that warrants showering money on the remaining 10% to try to keep it afloat? Why not let it fail, and those 50 people -- if they really are so high-performing -- will quickly find jobs with other firms. Some of them might even opt to start a new business instead of finding a new gig, taking with them knowledge and potential customers.
Instead of using the last of the money to keep the 10% around on a hail-mary, spread that money around to 100% of the company so their crash landing is a little softer.
- You're trying to retain 5, not the 50.. the other 45 are objectively not-critical to the enterprise (in the sense we could eliminate or replace those roles).
- A large fraction of the 45 are basically screwed in the job market; most of them were older, had decades of very specific experience, or had worked their way up in an organization that valued effort/loyalty over credentials. Milking another decade of work in their current role has life changing consequences for these workers and their families. Many of them were primary breadwinners in a bad area, so their job was the last line of defense between a respectable lower-middle class existence and the trailer park for them and their kids.
- Current reality was not reflective of long run potential. If we could stabilize the business, not only would the 50 jobs in question be preserved but there was an opportunity to rebuild and hire back. (feel good moment: this actually occurred. The team was able to restart key areas of the facility and we rehired some manufacturing people)
Young, highly educated people have no concept of the degree of privilege they enjoy in the labor markets. That degree opens doors and you don't get tossed out the instant some hiring manager sees a little grey hair. You don't have 30 years of experience which immediately becomes the leading reason NOT to hire you for a job because someone thinks you're incapable of learning anything new.
I'm not suggesting you can, I'm suggesting it's bad to give some people the boot and others a pony in the hope of saving an abstraction. The company doesn't exist outside of the people whose livelihoods it sustains.
And in a financially constrained endgame, you have to make choices about who to keep and cut.
Cutting that senior sales executive will cost 20 other jobs due to lost business and downstream implications.
Cutting the factory worker costs zero other jobs.
The harsh reality is not everyone matters equally.
[and to be clear, I'm not talking about bullshit deals just because someone was "loyal" to the CEO. This is real talk, people who actually can deliver a path to group survival]
All I'm saying is that it's bad if you cut those people and use it to give your execs a golden parachute instead of more runway for the people left over.
In that event, most of the people in question will accept an offer from a competitor with greater assurances of financial security and return to loot and pillage what's left of the business on behalf of their new sponsors.
If you're lucky, they merely poach the stuff you cannot defend anymore. In most situations, they come after the crown jewels of the business, accounts which create the lions share of the revenue and profits which funds the business.
And then you're screwed. Shut it down, pink slips for everyone...
I don’t understand what you are proposing as an alternative. If the company dies who is going to take care of the employees? Lay off everyone because it would be wrong to only save some? If everyone makes that noble choice all we get to show for it is a depression.
If you can't keep everyone on in the first place it's pretty ugly to give the people at the top bonuses, they have less to lose from losing their job in the first place.
- If we do not keep the highly paid senior sales rep, we're going to have no customers and thus... everyone gets canned.
- They are objectively better off leaving for another firm, where they don't need to worry about impending doom. So we need to provide an appropriate incentive to prevent them from breaking ranks and screwing everyone else left behind.
- The humble factory worker or customer service person doesn't have that same kind of impact on the whole....
Any moral conversation ultimately becomes a discussion about why someone with objectively better and safer options should continue to work for a company that is paying them less than market. Unless everyone else is willing to work for reduced salary / benefits and promise not to quit, that's not a morally tenable position....
Personally, I'd love it if people acted for the greater good. That's not going to happen here, unless you want to restrict people from changing employers and force them to show up to work...
I guess the real answer here is I'm not cut out to be an exec and I don't understand the mindset of people who are because I'm fine getting payed $100k a year (modulo inflation) for the rest of my life and I've lived most of my career at $30k, and I would never fire anyone to increase my own salary. I would sooner go broke at a company I ran than hang people out to dry who depended on me for a livelihood.
> and I would never fire anyone to increase my own salary
How about this instead? Your company is overstaffed due to a massive drop in sales. You will run out of money and will have to fire everyone including yourself in one month. Your other choice is to cut 80% of the staff immediately and your business will make enough to pay everyone’s salary who remains.
The better choice for everyone is the surviving business, and that’s the one that puts more money in your pocket. Letting people go is a business decision and it’s very often the correct one. Good business decisions lead to making more money.
That's not what we're talking about, though. If you suddenly don't have the market you used to, then it makes sense to cut down your workforce to be the appropriate size for the market you do have.
But that doesn't mean it's ethical to then throw money at your executives just to keep them around. If the business is viable with the smaller market and smaller workforce, then the executives should either stick around based on the company's future prospects, or leave. If they want to leave, then perhaps executives of their caliber aren't required to run the company given its new reality. Getting them to stick around by showering them with more money just increases wage inequality.
“Showering them with more money” in these scenarios is “give them some more stock” to try to offset the 90% of their income they just lost due to the stock becoming near worthless.
And they also have less incentive to stay because these are supposedly people who could provide the same work for other companies in similar situations at the same or higher prices. I find myself in this situation right now: ill stay on at higher prices if the company wants to renew its contract, or i'll leave for another place (I have more people emailing me for work than I have before the pandemic and I'm not on any social media and don't have a personal website).
In an environment where businesses have been operating on massive leverage for years, there's a fight brewing over who is going to get cash-flows and who will not, this obviously extends to workers who have outsized impact on whether any given business will stay open or file chapter 7/11.
If I'm at a place where people will lose their jobs if I leave the company the answer is simple: I don't leave until that's either not the case or I personally can't afford it anymore.
I owe no loyalties to corporates, I have other interests that I would like to spend time on and pursue more than convincing stakeholders to make decisions that should have been made long ago to have them avoided being put in the position they are now.
If people insist on making choices that will continue to sink the ship, I don't have to go down with it.
>If people insist on making choices that will continue to sink the ship, I don't have to go down with it.
I think this calculus flips around when your commitment has entered a stage where other peoples' livelihoods depend on it, basically. That's all. Get out before it springs a leak in an org like that, is my advice.
My point is frequently your world descends into a flaming pile of shit unannounced.
Go ask the career restaurant workers how the year is going. Go ask the tourism guides and travel agents. Go ask their bosses how they intend to keep the doors open with an 80% decline in revenue.
I don’t understand what your point is. You think I don’t get this? This is a thread about giving executives bonuses when the company is going bankrupt.
No, it’s a thread about rewarding executives for managing to keep any semblance of a company alive. A company that comes out of bankruptcy is much more valuable than one that doesn’t. The shareholders have to compensate the execs enough to entice them to go through that rather than leave for greener pastures where their shares won’t be worthless and they won’t have to fire people.
That seems to be the "common sense knowledge", but I see little evidence to back that up. Yes, certainly for a specific company, coming out of bankruptcy is more valuable than not, but I'm not convinced it's always a net positive for society as a whole, especially if doing so requires things like exacerbating our already messed up wage inequality situation.
> I think this calculus flips around when your commitment has entered a stage where other peoples' livelihoods depend on it, basically.
For you, not for others.
> Get out before it springs a leak in an org like that, is my advice.
I'll be fine for a long time even if the company goes under, others may not though, I've seen it happen way too many times to not be prepared for stuff like this. And I can just accept an offer from another place rather than outright reject them.
>I'll be fine for a long time even if the company goes under, others may not though, I've seen it happen way too many times to not be prepared for stuff like this.
Yeah, and it's their problem up until the point at which the situation is unrecoverable without you, and even then it's still mostly theirs, but I would have a lot of hangups about acting in a situation like that.
> Yeah, and it's their problem up until the point at which the situation is unrecoverable without you, and even then it's still mostly theirs, but I would have a lot of hangups about acting in a situation like that.
It's business, things fail. The problem is that people have come to accept that things shouldn't fail has made it so that it has built up to the point where it is today. Id call this environment Dirac-delta solvency.
I mean, some things shouldn't fail. I would have less qualms about all of this stuff with a strong social safety net, but we don't have that in the US.
This is just asking for rude awakenings. History is full of these kinds of events of where people thought things shouldn't fail, never prepared for them, and they did.
> I would have less qualms about all of this stuff with a strong social safety net, but we don't have that in the US.
No one lives in an environment where one can miss-allocate resources indefinitely or under assumptions that somethings can never change.
> This is just asking for rude awakenings. History is full of these kinds of events of where people thought things shouldn't fail, never prepared for them, and they did.
When I say some things shouldn’t fail, I mean our collective ability to keep each other alive and well. Whatever business of the day can go fuck itself, I don’t care.
> No one lives in an environment where one can miss-allocate resources indefinitely or under assumptions that somethings can never change.
What assumptions are you talking about? I’m talking about welfare.
> What assumptions are you talking about? I’m talking about welfare.
Welfare takes resources, takes people agreeing on what resources are acceptable for welfare and what is not, resources people have to produce and distrubute at some cost, takes people who may be better at managing such costs or inflating them to outsized proportions… any country that has deficits growing larger and larger every year can not continue to provide welfare indefinitely without making hard decisions that not all people will be ok with.
Some people may decide to leave for countries that are willing to make those hard decisions, rather than stay in those that want to punt on it until they face an analogous dynamic that Chinua Achebe has described pretty well.
I actually liked the company I just left. I liked the people and thought that the people in management up to and including management were all good people. I am usually far more cynical.
Post Covid, they decided to give everyone a pay cut instead of laying off people. This was morally the right thing to do in my opinion. It is a small company and I didn’t feel we had any dead weight.
I knew that in my position, the company would struggle a little bit. But what was I suppose to do? Stay out of loyalty or accept an offer that was a 60% increase in total comp at a more stable company?
Take care of who? From the parent's tale, it sounds like 90% of the company got laid off anyway. They didn't get taken care of. Even if they did get some kind of severance package, they could have gotten more if the executives weren't paid retention bonuses and the company was just allowed to fail.
The bottom line is that most of the people who got hurt by a company's decline get zero say in how things go during that period, and obviously the people with the power are going to try to save the thing that signs their paychecks, even at the expense of the replaceable workers.
If he had either Avie Tevanian or Bertrand Serlet, the rest could be replaced. I was originally going to say he’d need both, but in reality one would do at a pinch.
And yet 1 - those people were also there when the disaster happened.
And yet 2 - good luck getting the business back up to a reasonable operating volume with just those people.
And yet 3 - in many failures the people at that level are directly responsible for the failure.
Force majeure lightning-strike failures are very much a minority. Many businesses fail because of avoidable mistakes made by poor management. Please explain why management should be rewarded for that.
Luck plays into business so much now than people assume. Incomplete information and unpredictable black swan events mean you're not making decisions with certainty. You make the best decision with the information you have, try not to spend more time once you get to diminishing returns, and you hope things work out. Executive talent will not ensure success, but it can raise the odds. But on the other side, a dearth of executive talent can still ensure defeat.
This idea that success is all about, mostly about, or largely about luck is intellectually lazy, is extremely misleading, and stokes envy. None of that benefits society.
To benefit from luck, you have to put yourself in position to get lucky, which does not happen by accident. There is all the difference in the world between good timing and dumb luck. Yes, we can all think of anecdotes where someone did buffoonishly stumble into good fortune, but insisting that this is a fair representative of all cases is the fallacy of composition.
Do you make minimum wage? Do you give any excess over minimum wage that you earn to charity? The vast majority of us posting here “make more when others are making less”. Even in your own company you probably make 10x more than the lowest paid contract worker who cleans your office after hours.
That’s the deal you make as a contract worker. Yes, I’ve been a contract worker. Heck, I have even left a full time job for contract to perm role before knowing that there was a chance I would be let go if the project I was hired to lead wasn’t successful even if through no fault of my own. I negotiated a premium because of that risk.
On the other hand, half the issue with being a contractor is that we as a country decided to tie health insurance, workers comp, and unemployment insurance to the company instead of making them universal and state run like every other industrialized country on earth.
"Not many would complain about an exec getting a bonus during this time if it was actually reasonable in the first place."
This right here. If the CEO made, let's say, five times what I do - or some reasonable multiple during normal times, I wouldn't object to some retention bonus to maintain as much stability at the top as possible.
I acknowledge that 1) C-level and VP-level gigs come with responsibilities I would not want and 2) a good exec is hard to find. So I don't mind if company execs make much more than I do.
I do mind bullshit like this where they make in a year or two what I can expect to make over more than a decade, maybe even a lifetime, and then when times are hard get showered with more money while we get laid off or end up doing twice as much to cover for people laid off or hiring freezes.
Yep, being an exec of a company that's bankrupt probably sucks. Guess what? Being a average employee sucks then too. Everybody should have to suck it up, not just the run of the mill people.
Sure they would. These "time of crisis" instincts are very primitive, as are most emotional reactions of this kind. To makes sense of them just imagine an extended family operating, c. 100k years ago.
The idea is this: in a time of crisis (say, very low food) how immoral it would be for the father (, etc.) to take much more than the mother (etc.).
And these feels very plausible. It is in the nature of a family to expect sacrifce.
It is these small-scale familial impulses that ideologues often rationalise (on both left and right).
What economics as a (rough) science is meant to provide us with is a way of transcending these impulses. These microeconomic explanations should persuade us that they are being misapplied in this case, and "familial-crisis" thinking cannot plausibly apply to a buisness.
However most people cannot really critically relate to their own emotional instincts, and so often explaining the microeconomics is shouting into the wind.
I think this is your point but helping spell it out. The father in this case is probably the best shot at obtaining more food for the starving family and needs energy to do so.
you've made a lot of assumptions to reach that conclusion.
for counterbalance, women burn less energy per mass on average and are less massive on average, which means they'd last longer in the search, raising the likelihood of finding food.
I'm not educated on which sex would have truly had a better chance, and not totally concerned with it. Mostly concerned with illustrating more clearly the parent posters point.
My assumption is men did more hunting and women gathering, and that in a starvation scenario, known gathering food sources would have been exhausted.
Sorry for any Paleolithic women I may have offended with my post!
> You mean like how America takes more than the rest of the world?
It is interesting how these discussions about "inequality" play out within America. I've traveled a small amount outside of the US/EU and have many close friends from poor countries and it strikes me that a real move towards equality would likely result in a step downward for nearly all Americans, even those who consider themselves poor and disadvantaged by American standards.
I'm not saying this isn't something to pursue within a country on its own merit, but some of the absolutist moralistic rhetoric used in these discussions definitely betrays living in a bubble.
I don’t see how it’s obtuse. The morality of paying an executive disproportionately more is the same morality as paying a worker in the US disproportionately more than a worker in a poorer country.
At the end of the day, everyone is looking out for themselves and their immediate tribes first, and everyone takes what they can get. However, society is more harmonious when the delta is not too great. The US simply also had the luxury of having a delta of two oceans and huge amounts of space.
> First, most executives have little impact on the specific event that put the firm under. (I was a senior marketing person; the building burned down. Fire safety was most assuredly NOT within my purview or even something I could ask about)
That's perhaps reasonable for you, but business succession planning and disaster contingency planning is the job of the board and executive team. They made a choice to discount the possibility of a building fire taking out the business, and that's a failure they should be accountable for. Or, worse, they didn't make a choice, and didn't even think of that risk. And yet now they're being "rewarded" with a bonus so they'll stick around to fix their mistake after it's too late?
At the end of the day you have a company full of people, and you're going to lay most of them off. Given the financial distress the company is in, they're not going to get much of a severance package, especially since you "need" to throw much of the remaining money at the executive team to keep them around. And for what, really? So a bunch of high-paid executives can pat themselves on the back that they "heroically" brought a company back from the brink? That's little comfort to the people who got laid off and struggled to find a new job before their severance ran out.
a) the risk can be neatly packaged and mitigated
b) the cost of appropriately mitigating that risk wouldn't preclude running the business.
Long tail risks exist in every business, that rare event that takes the whole thing down. There are tons of them.
Each of which has a .00001% chance of happening.
The consumer brand version of this having one of your employees say some stupid shit in at bar (on video) or the summer intern like the wrong tweet, at which point a woke mob descends upon your brand with pitchforks at the ready....
There is no practical way to mitigate this. You can do the basics (don't hire assholes) but it's open season from there.
I've always thought the most thankless job in the world is running HR or PR at a massive retail company like Wal-mart or Macdonalds. You're one redneck idiot away from being on the national news (for doing or saying something most reasonable humans would never dream of) and you have literally hundreds of thousands of these people showing up for work each day.
At which point, you get the soul crushing task of getting on national television to explain the conduct of the moron in question and explain how it doesn't represent some embedded policy of the company to encourage <bad thing>. Better yet - you get do this every couple of months, since you have hundreds of thousands of these morons. Statistically, it becomes a predictable process.
> Each of which has a .00001% chance of happening.
More to the point, you're in a dog eat dog world, and for most of those dogs this 0.00001% chance won't happen in the lifetime of the firm. So they don't spend money on mitigating it, which gives them a competitive advantage over every dog that does spend the money.
Spend money on enough 0.00001% things, and they will grind you into the dust. Locally the way out is legislation that evens that playing field by forcing everybody to spend that money. But you can't control low cost overseas producers in that way.
So what you're trying to say is that execs getting these kind of bonuses in a financially distressed company is not unlike vultures feeding on a carcass, except that in this case the vultures were nurtured by the same "person" that's now the carcass, for years and probably decades, AND, it's part of the job of the vulture to keep the "person" from becoming the carcass.
Note-to-self: Stay away from vulture-minded execs.
Note-to-investors: Keep an eye on and go the extra mile in rooting out the vulture-minded execs in your companies, before shit hits the fan.
Investors would probably do well to find executives to run their companies who know about market value/comps, know that $X is greater than $X/2 for all positive values of $X, and make decisions based on that knowledge.
If their market value elsewhere and their replacement’s demand here is $X and the company’s current projected comp is $X/2, that’s only tenable for a very short time.
Complete tangent to your interesting post, but in companies that build a good safety culture, fire safety is within everyone's purview and something anyone can ask about. In the organisation I work at, the marketing manager could totally raise safety issues.
It's surprising until you start to think about it, at a certain size, many companies are very much at existential risk from a building fire.
>- First, most executives have little impact on the specific event that put the firm under. (I was a senior marketing person; the building burned down.
without stats I gotta think your case is an outlier, and in many other companies having financial difficulties a senior marketing person might have more impact (although I think impact is generally supposed to be at a higher level than senior marketing)
Also - fire contingency planning is quite literally the executives' job. They may have perceived that as a small risk, or it may not have been on their radar, but that was their decision. Why do they get rewarded first?
ALL key employees needed to keep things going through the bankruptcy process are paid more.
You are under the impression that companies love throwing money at executives, but just like regular employees, companies only pay the minimum they NEED to pay them to keep them around. Why on earth would shareholders accept throwing money away to executives???? you position isn't logical.
If they were paid less to do more, they'd just quit, and operations would grind to a halt - destroying any prospect of restructuring.
The article focuses on executives, but these pay bonuses are not limited to executives.
Also remember that Stock options given to employees vest over 4 years, which means that all non-junior employees have just lost multiple years of income (this actually hits executives the hardest who's income is mostly in the form of stock options). ... so the only way to stop people from going elsewhere is to give them proportional bonuses.
"You are under the impression that companies love throwing money at executives, but just like regular employees, companies only pay the minimum they NEED to pay them to keep them around."
Only because we have a system where every company - you know, controlled by execs, and a board made up of execs or former execs from other companies - tell this tale.
We have to stop pretending C-level and VP-level people are special rare unicorns that are the only people who could possibly do this very difficult work. That's bullshit.
It's a self-perpetuating club that keeps voting itself the majority of the pie and keeps telling the myth that, by golly, that's the way it has to be or they just can't keep good talent.
If the majority of companies stop showering these assholes with bonuses they'll fucking stay put and be happy to have a job like the rest of us when times are hard.
The executives don't set their own pay, and didn't necessarily ask for a bonus. What, you would decline the bonus and step down to restore your honor in their position? Doubtful. Meanwhile, the shareholders are giving bonuses which likely result in lower overall comps for these executives, after taking into account that the RSU's and options in their comp packages become nearly worthless. This is done to keep the company operating smoothly during restructuring.
Also, read the rest of the thread to get a better understanding of the mechanics before casting judgment. At every step of this process, the relevant decision makers made the rational and moral choice to arrive at this situation, as dictated by the US corporate bankruptcy system.
While technically the board of directors sets executive compensation, one must remember that those board members are largely executives at other companies and the executives are often board members elsewhere. So in practice it’s a circlejerk and executives do set their own compensation via implicit quid pro quo.
Also, you appear to be confusing morality with legality. Screwing over line employees up to and including looting the pension funds to pay executive bonuses is legal (see Hostess bankruptcy for an example), but it’s also immoral.
It's possible to have an immoral result without any individual doing an egregiously immoral thing. In fact it seems like a lot of law and corporate structure encourages these situations. Some examples that come to mind are paying low level employees such that they need government assistance, or situations where a corporation can break a law and profit more than whatever fine they might receive.
Corporations are legal and social entities. It's reasonable to consider what our laws and customs allow or encourage in an effort to nudge society towards a more just future.
> Some examples that come to mind are paying low level employees such that they need government assistance
In many cases the alternative to paying that amount is outsourcing or automating the job. If the job can be automated for $8/hour then you can't pay $10, or your competitors will automate for $8 and put you out of business. But you can pay $7.25.
And where does this leave the employee? If they were willing to take a $7.25/hour job then presumably a higher paying job isn't available or they'd have taken it to begin with, so their alternative is unemployment, which is even more of a drain on public resources. (Recall that minimum wage was originally instituted as a racist policy to keep minorities unemployed.)
Meanwhile even for the subset of employers who can just pay more without reducing their domestic labor force, wage controls are still being paid for by other citizens in one way or another, e.g. through higher prices. So then the question is not whether other citizens are to subsidize the wages of workers who can't command a living wage in the market on their own, but rather which citizens pay for it. Do you want to put the cost on low income retail customers who then have to pay more for necessities through a minimum wage, or on wealthy taxpayers through a UBI or raising the EITC?
> or situations where a corporation can break a law and profit more than whatever fine they might receive.
This too is sometimes a reasonable outcome. Sometimes a fine exists because it costs society some amount if you do something.
Suppose there is a noise ordinance which imposes a $500 fine if you make too much noise and disturb your neighbors. A company has some equipment which doesn't make that much noise when it's operating but makes a loud racket which violates the ordinance if you hit the emergency stop. Then some idiot drops a bag of screws into the machine and the only way to stop it from destroying a million dollars in equipment is to hit the emergency stop and suffer the fine.
Then they should do it and pay the fine. The neighbors might be annoyed for a minute, but not so annoyed that it isn't overcome by them having to pay $500 less in taxes on net, which is the whole idea.
On the other hand, if the fine was only $5/day and as a result the company was operating a machine that continuously violated the noise ordinance 24/7, that would be a problem -- but the real problem then is that the fine is smaller than the harm, which is a failing of the government rather than the business.
> It's possible to have an immoral result without any individual doing an egregiously immoral thing.
I disagree. Better terms might be structural failure or misallocation of resources. Is death by aging immoral? No, it's just the consequences of many moving parts.
We should still improve the system where possible, but calling something like this immoral implies that a witch-hunt is in order.
Executive XYZ (say a CMO) commands $X00k in the open market. His/her comp is 25% cash / 75% equity. At bk, the existing equity holders get wiped out given the fulcrum security is lower in the capital structure.
The options the company (the debtor, in this case) to emerge (aka retain jobs via an 11 vs wind down via a 7) are: 1)
- do nothing. Exec leaves. Hiring new exec costs $X00k x (1+Y%) as its MUCH harder to recruit in BK.
2)- do nothing. Exec leaves. No new CMO. Company dies.
3)- pay incumbent exec something.
So nominally it optically looks terrible. The executive above looks like he/she is double dipping PLUS they seem to be getting a wage increase when there’s a down turn, etc.
I'd like to describe, without advocating, an alternative model, not claiming it's better than the 'exec pay is at the market value' model but maybe worth thinking about. Even though it's clearly wrong in lots of ways, I think under the surface it drives a lot of people's thinking.
You might call-it a lottery-winner model. If you took the view that company executives are jumped-up middle managers who find themselves in a position to screw the shareholders and other employees and drive their compensation into the stratosphere, then a given exec is like a lottery-winner, and not necessarily possessing employable skills that translate on the open market. Their pay would be structured something like {10% more than the layer below them, for the added senior responsibility} + {enormous multiples more, because they're in a position to take it}.
Of course, skilled executives can and do find other similarly-well-paid positions. But this model works on the thinking of observers, and other people in the distressed organisation, in two ways. (1) Thinking of a company in distress as no longer being able to fund lottery-winners. (2) Thinking that such jobs could be filled on promoted-middle-manager sort of pay. As in, why wouldn't the financial controller take on the CFO role for a 10% or 20% (or 100%) pay rise? Why wouldn't an operations manager become CEO for 10% or 20% or 100% more?
My take on this is that (1) is false, executive compensation is a small part of company finances and would particularly be small beans compared to the impact of turning a distressed company around. And (2) is... somewhat based in truth? I do think that growth in executive pay is in some sense wrestling value away that belongs to the owners of the capital. But shareholders and boards of companies in distress will always be looking for a miracle, it's a lousy time to be seen as settling for second-best or dealing with people at the top jumping ship.
If's funny. Exec compensation is often equity-heavy under the belief that, since their comp is tied to company performance, they'll be incentivized to do things that make the company perform.
But then when the company fails to perform and the equity is wiped out, we've decided that the exec should get a bunch of money to compensate for the equity loss, even when that equity loss happens completely as a part of the design of the compensation structure in the first place!
By the time the company goes bankrupt, the exec has already lost 75% of their comp for several years, since vesting schedules are four years long.
The bonuses they get at bankruptcy do not amount to that lost comp. They are only meant to convert what their expected normal comp was - ie replacing stock options with salary.
> It flies in the face of the traditional reasons given for the high pay of executives
Without intervening regulations, there’s only ever two reasons any persons remuneration is whatever it happens to be.
1) The employer was willing to pay that amount for whatever value it is they see in that employee
2) The employee was willing to accept that amount for the job the employer offered them
All employees try to get paid as much as possible, and all employees try to pay as little as possible. A persons pay is just the equilibrium price for their labor, and determined exclusively by supply and demand.
Unless I missed your sarcasm, this post is an excellent example of how economists and pooiticians can set the rules for how many people think in decades to come. They'll really start to behave in the ways prescribed by theories of toy models if you don't tell them anything else!
Ah of course. Supply and demand must just be some tyrannical social construct, imposed upon us by an invisible oppressor.
All it is is the price agreed upon by a party who wants to sell something, and another party who wants to buy it. The incentive of each party in the transaction is very obvious, and supply and demand is simply what occurs when people are allowed to choose how much they want to sell something for, and other people are allowed to choose how much they want to pay for it. Because there is no such thing as an objective measure of value, the only way you can ever measure it is via the value agreed upon by a buyer and a seller.
Supply and demand are the most fundamental forces at play in any economy (even centrally planned ones). Trying to get rid of it is as feasible as it would be to try and get rid of gravity.
> It flies in the face of the traditional reasons given for the high pay of executives
The factors that influence pay include, on one side, every single characteristic an employer could potentially be looking for in an employee, how many people there are in the labor market who have those characteristics, and how much they’re willing to pay. On the other side it’s every single characteristic an employee could potentially be looking for in an employer, how many jobs are available in the market, and how much pay they’re willing to accept.
If a job pays highly, it’s not because of one single characteristic attributed to an employee, or that the characteristics of that employee have more intrinsic value, or that there’s something about that employee that just makes them more deserving of money than the janitor is. It’s simply because the demand for whatever labour it is that that employee is providing, exceeds the supply available in the market.
Talking about pay in this manner is only talking about averages in any case. Unless they work in a union shop, an employee has the ability the negotiate pay based on they value they personally provide to the organisation. There’s plenty of reasons why one person in particular may be more valuable to an organisation than any other person with equivalent skills would be.
Why not? These executives are paid considerably more than rank-and-file employees under normal circumstances, yet still manage to get bonuses when things turn sour. In contrast, that rank-and-file will be expected to take a pay cut, work more, or lose their livelihood. It flies in the face of the traditional reasons given for the high pay of executives: this has nothing to do with how much value any given person contributes, since everyone is expected to contribute more while a certain population is expected to receive a smaller share; this has nothing to do with the burden of risk, since the people taking the greater risk are the ones who are paid least (in terms of employees) or are taking the brunt of the losses (in terms of investors).
So yes, it is immoral.