Since Craig Dubow took over as Gannett's CEO in 2005, Gannettblog reports that employment at the company has dropped from 52,600 to 32, 600. So 20,000 employees, or nearly 1 in 3, have disappeared.
- 2006 – 49,675 down 6%
- 2007 – 46,100 down 7%
- 2008 – 41,500 down 10%
- 2009 – 35,000 down 16%
- 2010 – 32,600 down 7%
Doesn't this look like dismantling the company? It is undoubtedly true that people are reading fewer newspapers than they did in 2000. But that fact does not mean Gannett has to head toward the whirlpool of failure, slowly cutting itself into a less relevant organization. There are a plethora of opportunities today – from creating a vital on-line news organization such as Huffington Post to moving into on-line news dissemination like Marketwatch.com to digital publishing like Amazon and its Kindle, to wholesale news distribution like the Apple iPad to on-line merchandising and ad distribution like Groupon, to —- well, let's just say that there are a lot of opportunities today to grow. To it's credit, Gannett owns 51% of CareerBuilder.com (who's employees are all included in the above numbers). But that one investment has been, as shown, insufficient to keep Gannett a vital, growing organization. At this rate, when will Gannett have to stop printing those hotel newspapers?
Yet, the CEO was paid $4.7M in 2009, including a cash bonus of $1.45M for implementing cost cuts. And that's what's quite wrong with CEO compensation America. And the problem, compensating CEOs for shrinking the company, has an enormous impact on American economic (and jobs) growth.
It is NOT hard to cut jobs. In fact, it is probably the easiest thing any executive can do. CEOs can simply order across the board cuts, or they can hand out downsizing requirements by function or business line. It's the one thing any executive can do that is guaranteed to give an improvement to the bottom line. Any newly minted 20-something MBA can dissect a P&L and identify headcount reductions. Anyone can fire salespeople, engineers, accountants or admins and declare that a victory. There are lots of ways to cut headcount costs, and the immediate revenue impact is rarely obvious. So, why would we pay a bonus for such behavior?
You can imagine the presentation the CEO gives the Board of Directors. "Our industry is doing poorly in this economy. Revenues have declined. But I moved quickly, and slashed xx,xxx jobs in order to save the P&L. As a result we preserved earnings for the next 2 years. Because of revenue declines our stock has been punished, so I recommend we take 50% (or more) of the cash saved from the headcount reductions and buy our own company stock in order to prop up the price/earnings multiple. That way we can protect ourselves from raiders in the short term, and continue to report higher earnings per share next year (there will be fewer shares – so even if earnings wane we keep up EPS), despite the terrible industry conditions."
Oh, by the way, because the CEO's compensation is tied to profits and EPS, he is now entitled to a big, fat bonus for this behavior. And, as Brenda Barnes did at Sara Lee, this can happen for several years in a row, leading to the company's collapse. As the company becomes smaller and smaller, its overall value declines, even if the EPS remains protected, until some vulture – either another company, private equity firm or hedge fund- buys the thing. The investors lose as value goes nowhere, employees lose as bonuses, benefits, pay and jobs are slashed, and vendors lose as revenues decline and price concessions become merciless. The community, state and nation lose as jobs and taxes disappear in the revenue decline. The only winner? The CEO – and any other top executives who are compensated on profits and EPS.
When a company grows, compensating profits is not a bad thing. But when a company isn't growing, well, as seen at Gannett, the incentives create perverse behavior. CEOs take the easy, and personally rewarding route of cutting costs, escalating the downward spiral. Without growth, you got nothing. So why isn't there a simple binary switch; if the CEO didn't grow revenues, the CEO doesn't get any bonus? Regardless.
"What about industry conditions?" you might ask. Well, isn't it the CEO's job to be foresightful about industry conditions and move the company into growth industries, rather than staying too long in poorly performing industries? CEOs aren't supposed to manage a slow death. Aren't they are supposed to lead vibrant, vital, growing companies that increase returns for investors, employees and suppliers?
"What about divestitures? What if the CEO sold a business at a huge multiple making an enormous profit?" Good move! Making the most of value is a good thing! But, once the sale is complete, isn't the critical question "What are you going to do with that money now?" If the CEO can't demonstrate the ability to invest in additional, replacement revenues that have a higher growth rate then shouldn't that money all be given to investors so they can invest it in something that will grow (rather than in buying company stock, for example, which just gets us back to the smaller company but higher EPS discussion above)? CEOs aren't investment bankers, who earn a bonus based upon buying and selling assets at a profit. Investment bankers can earn a bonus on transactions, but that's not the CEOs role, is it? Isn't the CEO is chartered with building a growing, profitable company.
Look at the CEOs of the Dow Jones Industrial companies. How many of them are compensated only if their company grows? As growth in these companies has floundered the last decade, how many CEOs continued to receive multi-million dollar compensation payouts?
If we want to grow the economy, we have to grow the companies in the economy. And if we want to grow companies, we have to align compensation. Rewarding shrinkage seems to have an obvious problem.
Whenever this subject comes up, I always remember “Chainsaw Al” on the Financial News Network crowing about how he created a billion dollars in shareholder value by firing thousands of workers.
These people, and the boards who appoint them, are a disgrace. If they had any real talent or vision, they would focus on increasing revenue and finding new markets. Anyone with three brain cells can cut costs.
Whenever workers are laid off, it should be considered a CEO’s failure to produce revenue and bonuses should be cut.
The oracle of Omaha has two rules for his CEOs:
No. 1: Preserve the capital
No. 2: In case of doubt see No. 1
His results are obvious. Apart from sustained growth, a business can take few other roads to apply these rules well. Growth is the antidote to decline and death.
Growth has a long history of abandonment as a principle. In many parts of the world, robust demographic foundations were properly harnessed to deliver growth, and then the foundations were cut out. Demographic decline in some of the world’s leading economies have left people in serious doubt about the future.
In business, every few years a new set of tools seizes the imagination of leadership: TQM, Lean, Six-sigma etcetera. What has followed is the usurpation of the first goal of a business by a tool. The business forgets that its origins and success lay in spotting and successfully utilizing a market opportunity. The business forgets that markets are not static, or even worse cultivates the delusion that they are. The business loses the desire for growth, and develops an appetite for life-support machines (read tools and techniques.)
The word principle derives from the Latin “principium” meaning that which comes first. Growth is the principle, growth is also the evidence, of vitality. Rewarding CEOs, for slaughtering the goose that lays the golden egg, is one element of a culture that has lost sight of first principles.
First I want to thank you for writing this article, Adam. It cuts to the root of the problem. But I don’t think it goes far enough.
Within business units you will see this same behavior. When one company owns subordinate businesses there is a raft of management layers chock full of managers steeped in the same line of thinking. Each is afraid to behave outside of the norm (read innovate).
Even the shareholders don’t get it. So it’s not just the CEO. Shareholders buy into a company based on a particular company product or service strength. Deviation from the original product brings pressure from everywhere.
The old system works (somewhat) well if businesses acquire innovation through acquisitions.
I don’t see a CEO getting hired over others because they express a willingness to abandon existing lines as quickly as they show weakness.
What you’re really onto with your thinking is a whole reeducation program. Getting your thought process into universities is where you need to focus your energy. Reeducating the unwilling to change folks is a dead end.
To integrate your process into current university educated managers I believe is impossible, and I’m a huge fan of yours and of innovation.
Your observations are dead on. And most enjoyable for intrapreneurs/entrepreneurs like myself. I see opportunity when I open my eyes and even when I close them. I don’t see my type haunting the wood paneled walls of enterprise establishments in my lifetime.
This is why small companies run circles around large ones. Aside from the occasional Apple or Cisco, investors and CEO’s will continue to reap the results from the processes and managers they sow.
Yes I too remember Chainsaw Al. He eventually went to jail, and had to pay millions in fines, for behaviors which destroyed shareholder value. Too bad it took so long, and so few pay this sort penalty.
Wren, it is far too true that Boards allow the CEO to cook the goose, and then reward him for a good meal, leaving everyone else to starve as they realize there are no more eggs!
And I agree with you Matt that it will take a long time to train a new crop of management in the skills needed to succeed today. Unfortunately I can say most universities are more locked-in than managers! Professors have a way of teaching the old ways, as if the world has changed little since their dissertations (and the dissertations of their advisory committees!) It’s a slog to get people to recognize what it takes to succeed, as most would rather do the same thing over and over – and fail – without addressing the need to do things differently!
Thanks for your comments!