Why do companies typically choose to implement layoffs affecting numerous employees rather than considering salary reductions for top executives like the CEO?
In: Economics
Companies are run, and the decision is made, by top executives, like the CEO, rather than numerous layoff susceptible employees.
Because desciding to lay people off starts with the CEO and board of directors, they are not going to fire themselves
Because a reduction in the salary of top executives may cause those executives to depart the company which *may* worsen operating results as executives tend to be more difficult to replace in a timely fashion.
Also, replacing an executive generally does not save money as qualified executives tend to command premium compensation packages.
Shareholders talk to the board of directors; who hire executives to, well, execute business plans. Without executives, the BOD wouldn’t be able to run the business without turning into executives themselves.
The simple answer is because the executives are the ones doing the layoffs and are unlikely to give themselves a paycut in the process.
There are situations where CEOs will accept effectively zero pay for their work but this is mostly a publicity stunt.
Steve Jobs took a salary of $1 every year from 1997 to 2011. However, during this time his stocks increased from $17.5 million to $2.2 Billion showing that his executive salary was a joke by comparison…
Executive salaries and total compensation is usually attached to the stock price, by laying people off the stock price will likely rise giving the executives effectively a bonus. This can seem cruel (and it is to the employees) but it’s considered the right thing to do for the shareholders and shows off one of the majors flaws in the Corporate system.
It’s also important to note that while laying off workers usually increases the stock price, firing a CEO or top level executive lowers the stock price.
Asking executives to take a pay cut will often cause them to leave or be forced to be paid out golden parachutes. Since Executive salaries are high across the industry you also will struggle to hire quality replacements at a lower salary.
The executive salaries are also not that significant in the grand scheme of things.
HP for example laid off upwards of 6,000 workers recently. If we assume the average salary was 50k on the low end that’s $300,000,000 in salary let alone associated benefits, training, etc.
Where-as the CEO of HP has a listed salary of $20 million, which while still the equivalent pay to 400 low level employees it’s still a kick in the bucket compared to the layoffs.
Because – more often than not – a pay reduction for the C-suite wouldn’t realistically be enough to cover the money saved by the layoffs anyway. This obviously depends drastically on what industry the company in question is involved in, but no matter what it’s important to point out that someone’s pay is NOT THE SAME as the cost associated with keeping them employed.
When you consider things like administrative overhead, benefits, workplace safety stuff, even relatively ‘cheap’ labor can get expensive fast.
A million dollars sounds like a lot – and to an individual it is. But if a 50k USD employee costs an additional 50k to keep employed (not to mention any admin staff) then a 1 million dollar paycut for the CEO could let 10 people keep their jobs – but even…for how long? And will those 10 retained employees be worth it relative to the increased value they generate/revenue they bring in?
Do the math. Take the CEO’s pay and divide it by the pay of those laid-off. I think they make less than you think.
Most top executive have many years experience in the industry and probably know how their particular company works, understands the broad market and know how to develop mid to long term strategies. They are quite vital for the future of a company and are generally very hard to replace. It costs a company a lot of money and resources to train and retain their knowledge.
It makes a lot of sense (financially and for the future) to reduce cost by laying off the more easily replaced employees – those that do more routine tasks and don’t require as much training and don’t have skills necessarily critical for success.
And costs tend to scale with numbers. So it isn’t simply the salaries that can be saved when many people are laid off. For the US, broadly, for each $1 of salary, the company pays an additional 20-40% in taxes and benefits for lower level employees. Then there is the cost of rent, utilities, computers, furniture and support staff (HR, finance,…). So the savings multiply. There are generally not that many high level executives so these savings are not as significant.
CEOs are only ever thinking about their compensation, and how to increase it. Typically after a round of layoffs, the company will have saved enough money that quarter that the CEO can reward themselves with a bonus.
That’s the type of short-term thinking that causes 100-year-old businesses to fail.
In an altruistic world, the CEO would truly steer the ship; accept only the pay they felt was justified, and take a paycut whenever it would benefit the business or their employees.
Typically, corporations are treated like giant piggybanks that the CEO can reach into and pull out cars, houses, boats, planes, or just cash whenever they feel like it. Then the business has no capital to tap into, and they rush out to get loans to keep the business afloat.
When the loans run out, the business folds, and the parasitic CEO scans the horizon for their next “opportunity.”
This is why a CEO doesn’t take a paycut, because they aren’t looking out for the business, they are looking out for #1.
Because the CEO is the one making this decision so why would he decide to cut his own pay?
There also some logistical issues. As absurd as CEO salaries are, they tend to be a drop in the bucket in terms of a large corporations revenue. If you lay off 5,000 employees making 50,000 a year, that’s $250,000,000 in payroll.
Say you have 10,000 employees and they earn $50,000 a year. And say you cut 10% of them. That’s 1,000 x 50,000, so 50m in “savings”. That is waaaaay more than you could get by trimming salaries of executives.
Not saying it’s right. Especially if they take no hit at all. The best examples of leadership usually have a ceo say they’ll reduce their pay by x% when they reduce salaries or work time or whatever it is for however long.
But in terms of what shifts the bottom line the fastest, it’s an order of magnitude greater the largest the company is to cut labour. If you think of why the company lost revenue and needs to cut costs, maybe they lost a contract (so they don’t need to produce as much), maybe demand is down (so they don’t need to produce as much), maybe there’s a better tech allowing an individual worker to be much more productive (so they don’t need as many workers). Most reasons center around they don’t need as many works as before. They still need the executives and sales agents and so on. It’s the people producing the product who are most at risk cos that’s usually the main issue. They just don’t need to produce as much (or they don’t need as many people to maintain productive levels). A good sales agent can almost always sell more.
One good example I remember – I think from John Collins Good to Great – was that a large company lost a big contract worth around 20% of their revenue. They said they needed to cut costs by around 20% to survive the year. So the executives took a 20% cut first. This doesn’t move the needle. But they start there to show the workforce and lead by example kind of thing. And they reduced everyone’s hours by 20%. Rather than fire everyone. They figured better everyone suffer a little than 1/5 suffer a lot. Then the workers swapped shifts – so those who really needed the income would take extra shifts and those who could afford an extra day off would swap with them.
This was a more empathetic and transparent way and this company survived and came back stronger. Production increased in profitability by more than they lost over time because of that ‘team’ aspect now.
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