Executive Compensation And Unemployment | Mark Cuban’s Proposition

As this month’s unemployment figures were breaking (8.5%), Mark Cuban weighed in on fixing executive compensation. The ideas are related.

As the discussion on executive pay continues, my message is simple.  Give credit to those executives who bust their asses to avoid layoffs except in cases where its an absolute necessity. Pay ‘em a premium vs those who cut jobs in profitable companies.  Look to private companies as guides to what a well managed company can accomplish, and how executives are compensated. Blogmaveric.com - Mark Cuban

His post is a great reminder that in many ways layoffs are an admission of failure by executive management – the investment in human capital they made has not paid off and must now be written off.  This devastating blow to the emotional health of a firm and its knowledge base is not improved by an impression that the executive ranks are rewarded for causing so much pain.

I’m not calling for the CEO to put his head in the sand, truth is, sometimes to survive a company has to lay off people, close plants, sell off pieces of itself. Being a survivor of such culling can be as emotionally stressful as actually being let go. That’s why it is important to remember that employee sweat and knowledge is your primary asset against this downturn and to structure rewards accordingly.

UPDATE 4/3/09: Well, this is timely.  Wall Street Journal reported today that CEO pay shrank in 2008. Nice to see that some of those compensation boards weren’t completely asleep at the wheel.

UPDATE 4/5/09: Another interesting look (including a great graph) at this over at Baseline.com.

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4 Responses to Executive Compensation And Unemployment | Mark Cuban’s Proposition

  1. Andrew says:

    Fred,

    Mr. Cuban’s idea is an interesting thought, and few would dispute: (a) the requirement for companies to continue to invest in their most important resource (human capital) in order to survive in a challenging economic environment; or (b) the positive social impact, at least in the short term, associated with the avoidance of redundancies.

    That said, the unfortunate reality is that many firms are experiencing a reduction in the demand for their output, and a consequential decrease in the workload required to produce the level of output which is warranted by the reduced levels of demand.

    In this environment, a leaner workforce is appropriate in many instances, and I would not feel that it is right to punish executives simply because their firms make what they feel are appropriate adjustments to the size of their workforce.

    Andrew’s last blog post..What I learned from almost being mugged

  2. @ Andrew – I agree completely that many if not most force reductions are appropriate, especially in this economic climate. What struck me about the Cuban post was his belief that CEO’s resort to layoffs first because their reward structure is such that it pays off for them personally faster. Having been exposed to workplaces where there seemed to be a never ending cycle of hiring followed by layoffs followed by hiring, I just wonder if some revision of the reward/judgement scheme might avoid the situation of being overstaffed to begin with, even during downturns.

  3. Andrew says:

    Fred,

    Interesting observation – I didn’t really pick up on that point, but I could understand that sadly, in the short term, it is often the case that layoffs are rewarded in financial markets, which of course have the potential to impact upon any performance bonuses to which management is entitled.

    Certainly, whilst management should not be afraid to make appropriate re-adjustments in terms of staffing levels during challenging periods, it would be a great pity, both from the point of view of the long term health of the enterprise, and from a viewpoint of the broader social good, if layoffs are considered to be a first resort, rather than a last resort.

    Andrew’s last blog post..What I learned from almost being mugged

  4. @ Andrew, I like your balanced perspective here. I am probably bringing more of my own biases to interpreting what Cuban wrote than I should and heaven knows many companies are struggling to keep the doors open. If the company doesn’t survive the current financial crises it certainly won’t matter whether it hangs on to its people for a few extra months. Thanks for commenting!