Why do companies typically choose to implement layoffs affecting numerous employees rather than considering salary reductions for top executives like the CEO?
In: Economics
As uppity as people will get reading this CEO’s Often do not make a salary that could possibly make a difference to anything.
Most of their wealth *usually* comes from benefits packages and preferred shares.
Bezos back when he was still CEO for example got paid 80k a year. Divided equally is a couple pennies per employee going to make a difference?
Of course he had wealth through other means, but personal finances are not company finances. Where would you draw the line? Expecting him to cover wages out of pocket would essentially be asking him to sell his company so that the company he no longer owns is better. What kind of incentive is that?
They have *wealth*. They don’t have actual cash to pay millions of paychecks bi weekly or something.
One point I haven’t seen mentioned is that layoffs are also a way for companies to get rid of lower performing (or poorly positioned politically) employees without going through the rigorous and lengthy HR processes necessary to do so normally. A performance improvement plan takes a ton of work, coordination, and documentation to protect the company from a wrongful termination lawsuit where layoffs avoid all of that.
There is a bit of a misconception about recent layoffs. The layoffs you’ve seen in the news aren’t the same as layoffs in the past.
About three years ago, there was a massive shift in where people work. Tons of people retired early, and tons more changed careers.
Two years ago, entirely new departments and businesses were created around the shift in the economy. There was mass hirings to fill all those new roles. It was hard to find qualified workers, so companies were willing to over hire.
Last year, executives saw that many of those new hires and new departments weren’t really needed. And some of the new hires weren’t very good.
So now, some companies announce “layoffs”. They’re really not that big, only like 5% of the workforce. In terms of a large company that could just be normal attrition and cutting low performers.
So now layoffs are in the news. And that gives permission to other companies to do layoffs and blame it on the same thing. Even though the company was actually too large in the first place.
Layoffs are typically a combination of reducing costs and dropping the bottom 5-10% of talent. Some companies let go of their bottom 5% every year.
When they need to save money, they will fire the roles deemed least important. Sometimes directors and VP are let go – Meta recently cleared out much of middle management. Executives will likely cost a similar amount to replace, so unless they are doing a reorg where the company is “flatter” (less management) then they wouldn’t let go of people at the top.
Also they are the ones making the decision lol.
This question ignores the cost scale of a large workforce.
Let’s say you have 1 million workers earning an average salary of $50,000. Your payroll is $50 billion. But, that’s not the end of the costs.
You likely have another $10,000 in benefits and $3,825-$5,000 in taxes. In addition, you’re probably carrying $1,000-$3,000 in expenses just for employing them.
Now you’re looking at $68 billion in payroll, benefits, and other variable costs.
Now let’s assume you have a CEO that makes $10 million/year.
Assume for a minute that they’d work for free or you could just fire them.
You could raise everyone’s pay by $10/year, or $0.38 per pay period.
Keep in mind that I’m not making a justification of the $10 million.
Now, let’s say executive compensation is compressed like it is in the federal government.
Outside of a few federal agencies that can pay higher wages, this is what your pay could be:
– Non-supervisory GS-14: $172,075
– Supervisory GS-15: $183,500
– Career Senior Executive Service: $141,022-$195,000/$212,100
Go on federal employee subs and you’ll find that many people actually don’t want the responsibility of the GS-15 or SES role for that little additional money.
Now there’s a couple questions that we need to ask.
– How much more pay is worth it to the worker?
– How much more does the employer have to pay to get the right people to take those senior roles without constantly looking for their next role?
– How much pay is too much pay?
They usually do both. Top executive pay often is largely bonuses and stock incentives, and often a company doing poorly means their compensation automatically goes down in a major way.
That usually doesn’t fully solve the problem though, and even though a CEO may have a large salary, there’s lots of employees so cutting lower level jobs often saves more than cutting CEO salary.
Finally, sometimes jobs are eliminated. Maybe a store or branch or department is losing money, so it makes sense to close it and stop losing money.
Why does congress only vote for salary raises and never salary decreases? The decision makers never want to make decisions that impact themselves.
1) If the Executives leave, that will hurt the companies operations. It is extremely difficult to find replacements for senior execs of F500 companies, even more so if the compensation is low. There are literally only a few thousands of people in the world with that kind of experience.
2) Layoffs aren’t only about reducing labor cost, they are often also about streamlining the business e.g., discontinuing low profitability products, closing poorly performing factories, outsourcing operations to more specialized contractor companies, etc. if you make those kinds of changes, you simply don’t need as many workers.
Because laying off employees saves more money than payouts to executives. Furthermore, it‘s these who can turn around a company, not some clerks an a counter
Cutting the top management’s salaries doesn’t really save all that much money. Laying off 1000 people does. Also management is in charge of layoffs.
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