In the current economic and stock market environment, where questions have been raised around business ethics, salaries and layoffs, and tarnished images of once revered American brands like Citigroup (NYSE:C), AIG, Ford (NYSE:F), GM, Countrywide, Lehman Brothers (OTC:LEHMQ), Bank of America (NYSE:BAC), WaMu, Bear Stearns and many more flash across our eyes in one negative context after another, it is good to know that a few good men still remain standing tall, with their integrity intact.
Indeed, American brands like Southwest (NYSE:LUV), FedEx (NYSE:FDX), Aflac (NYSE:AFL) and Nucor (NYSE:NUE) claim not to have laid off a single person from their staff in over 3 decades? Of course the definition of a lay-off may vary from one company to another, but if this is true, then I truly wonder what these guys are doing right in terms of long-term planning, retention and headcount that they can sustain the right productivity and avoid handing their employees the pink-slip in tough economic conditions. Why can't more of Corporate America be like them?
Nucor has had some serious ups and downs with economic climate shifts over the last 30 years but has yet to let that impact their workforce. How is it that Southwest is able to remain the only decent airline, with consistently lower fares, good customer service, and keep their workforce while their competitors like United (UAUA) and Delta (NYSE:DAL) keep changing their tune?
Part of this is greed. The other is mis-management. Citigroup will have laid off 72,000 people from 2008 through 2009, yet their CEO and top brass will probably make more than their fair share. So let me briefly focus on one way Corporate America can win back some of the public trust that they seem to have lost. How about putting a ceiling on executive salaries? How about tying their bonuses to long-term stock performance. Now I am a big supporter of capitalism and I believe negotiated salaries should be paid out as per the contract, however, people who agree to paying such salaries (such as the Board of Directors) need to be held accountable. They should not be allowed to gift this money away. Money that belongs to the stakeholders like the investors, the employees and other business partners that get dragged down in the throes of this greed.
Warren Buffett himself has talked about this issue of excessive CEO compensation in his various annual newsletters to Berkshire (NYSE:BRK.A) shareholders:
"At only one company was I assigned to comp committee duty, and then I was promptly outvoted on the most crucial decision that we faced. My ostracism has been peculiar, considering that I certainly haven't lacked experience in setting CEO pay. At Berkshire, after all, I am a one-man compensation committee who determines the salaries and incentives for the CEOs of around 40 significant operating businesses."
"CEO perks at one company are quickly copied elsewhere. 'All the other kids have one' may seem a thought too juvenile to use as a rationale in the boardroom. But consultants employ precisely this argument, phrased more elegantly of course, when they make recommendations to comp committees."
"Irrational and excessive comp practices will not be materially changed by disclosure or by an independent comp committee. Indeed, I think it's likely that the reason I was rejected for service on so many comp committees was that I was regarded as too independent. Compensation reform will only occur if the largest institutional shareholders - it will only take a few - demand a fresh look at the whole system. The consultants' present drill of deftly selecting "peer" companies to compare with their clients will only perpetuate present excesses."
"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."
Now I don't know what Warren Buffett pays his CEOs, but I know that he pays himself very little. So he has certain credibility on this matter. One of the things our President-elect Barack Obama should look into is to limit executive compensation and tie it to long-term stock performance. Boards of Directors should be held accountable as well, after all, they are the ones that approve compensation. The millions paid out to executives that sometimes run the company into the ground would be better spent on retaining employees and improving benefits through harsh economic times.
Let me make one thing clear. I am not saying that executives don't deserve what they earn. Not for the most part anyway. I am simply suggesting that executive pay needs to be managed better than it has in the past and it is about time employees and shareholders had a voice in the matter.