OCTOBER 2008: BIZ LIFE, EXECUTIVE COMPENSATION
Should executives share the pain of pay cuts?
If corporate ethicist David Layzell had his way, all public
companies would institute performance-based executive pay
programs like Monaco Coach recently did.
In response to lagging sales, the Coburg-based luxury RV maker
announced this summer they were laying off workers and
shuttering manufacturing operations in Indiana. The company
also decided to reduce the pay of its top executives.
The program cuts the pay of top managers by 15% to 50%, though
portions of their compensation can be earned back if they
reduce company inventory by $58 million over the next 12
months, according to Securities and Exchange Commission
filings.
As the economy slows, top-level executive pay is bound to be an
issue with investors as overall business suffers. Layzell,
associate director at the Portland State University Center for
Professional Integrity and Accountability, says reducing
executive pay when times are bad is what any “reasonable
company” should do.
But premium executive talent can be tough to find and to keep.
A company must also consider the consequences of a skilled and
experienced executive leaving for a more desirable job if they
take a pay cut. A company must ask, “Can we consciously
pay below market value,” Layzell says. After all,
“If you pay below market value, you get below market
quality,” he says.
Aside from finances, a favorable company image is also at
stake. By reconsidering the compensation of a struggling
company’s top decision-makers, it addresses the question
of “sharing the pain,” says Layzell.
Monaco CEO Kay Toolson’s pay was slashed by 50% and
president John Nepute’s compensation was cut by 30%. This
should save the company about a million dollars over the year,
says Craig Wanichek, Monaco’s director of investor
relations.
“It’s about tying the objective of the company with
the management team,” Wanichek says. Executive
pay-reduction initiatives are relatively new in corporate
governance. Layzell, who also held a number of senior finance
roles at Intel for 26 years, says such programs were born from
the excesses of the 1990s. In recent years, exorbitant
executive compensation has encountered a firestorm of scrutiny
as investors and employees demand management be held
accountable, not rewarded, for a failing company.
Saving money by reducing your own pay, though, is just a small
part of it. It’s also a statement of solidarity, says
Layzell. When employees see that their bosses are willing to
cut their own pay, it boosts workplace
morale.
JASON SHUFFLER
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