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Should executives share the pain of pay cuts?

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Wednesday, October 01, 2008

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.                     


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