Tuesday, August 27, 2013

How a CEO Screws Over Workers

How do you set up and foster an orderly run society? There are social and cultural aspects. We live in the age of the almighty dollar. As we walk further down the neo-feudal path, it is probably good to look at how a select few or even just one executive can allocate resources that contribute to America's growing income inequality. The age old question of would you cheat if you knew you would never be caught would be a great indicator for how one would act in this realm. It comes down to incentives and aligning interests with different pools of individuals. The other factor at play is consequences.

StanCorp Financial Group is an insurance firm that was a mutual company up until the late 1990s when it became a publicly traded corporation. Anytime a company switches from a private or mutual set up to a publicly traded firm the company already compromises who its interests are aligned with as shareholders suddenly become a customer. Any firm that switches to publicly traded suddenly sends its CEO, COO, CFO or all of them out to Vanguard, Franklin Templeton, Fidelity, state pension investment corporations, etc. to sell their firm to those investment companies. It's not for index mutual funds but for the active firms. You pick a pitch: value or growth, and start selling. On top of shareholders, one becomes beholden to the people who rate your company as a buy or sell. In our FIRE economy, you become a piece that the investment firms add to the mix for their proprietary trading. Executives start playing to that crowd.

Executives start seeing their compensation packages involve options. They have an incentive to juice the stock to exercise options. Bonuses tied to company performance can still exist, but the stock options are tied to how the stock does, so asset inflation is part of the game. Management teams still have to answer to the board of directors, which is why severing the tie between the CEO and Chairman of the Board duties is a great way to exert some control over CEO machinations. If not, you can have what happened at StanCorp happen at your firm. A lot of good people work there, but they are just cogs in the machine compared to CEO J. Gregory Ness.

In 2011, Standard outsourced IT and chopped off 130 jobs. In 2013, they laid off 100 employees, and that number is even higher due to force outs and resignations in their distribution network. StanCorp admitted that the business climate was tough and earnings were poor. Their primary business is employee benefits insurance, and when the economy is not adding jobs and not handing out raises their book of premium isn't growing. Even worse for StanCorp is that their book of business is heavy on municipal, state and education groups. If you work for a state or local government west of the Rockies, you most likely have life or disability insurance with Standard. Their block is running so-so, and we still have not seen the end of municipal cuts. When funding gets bad, how much more block erosion will they see? It is a rough outlook, and their operating income has taken a hit since 2011. They have to cut back but not everywhere.

As a publicly traded firm, you can see their executive compensation. Since 2010, it has nearly doubled. In January of 2013, they said they had to lay off 100 employees because of the business environment. They simultaneously had increased executive compensation by $6 million from 2011 to 2012. Over $4 million went to their CEO Mr. Ness alone. How many employees does that buy back? Looks almost 1 for 1 doesn't it? A wash. He had a large non-equity (stock) bonus in 2012. This was in a supposed down year. If he has an equity based bonus this year, well good for him that the stock has jumped 50% year to date. His compensation package and agreement were likely hammered out when he took the job or in previous years. This is a common excuse.

It is also a sham. CEOs like him can get away with it because they are also the Chairman of the Board. He is not going to discipline himself. There are no consequences. The incentive is for him to loot while he can. If expenses need to be cut amongst the little people, and that is who they let go, to maintain the proper net income despite him jacking up his pay, so be it. A lay off signals to Wall St analysts that you're serious, so the stock goes up (good for you) and that stock rise might be a target in your comp plan triggering a bonus (good for you). The human capital can be replaced easily in your eyes. When Charles Murray writes about Belmont and Fishtown having such separation that there is no common tie, this is a consequence of that unraveling. The stratification of American society and financialization of the American economy create the conditions for these decisions. Thousands feel the effects of one man's greed.


PRCD said...

It's a wonder more corporate officers aren't killed or kidnapped and tortured. Most of them live without security and drive to work with the complete expectation of safety. I wonder how long they'd last in a place like Brazil?

Portlander said...

Separating Chairman and CEO might sound nice in theory, but in practice it's a difference w/o a distinction. Corporate boards are made up of executive officer and other connected insiders. It's all one big club of mutual back scratchers.

BTW, have you seen/heard of Michael O. Church? He has done a number of great posts on VC-istan and it's mafia-like operation in start-ups. The point being, the entire country has become all one big contest to loot the other guy.

Son of Brock Landers said...

PRCD - I've wondered similar things. Why no one ever goes beserk? The Brazilians live with armed guards in condo/prison high rises.

Portlander - This is where I see the value of activist mega-investors like Icahn. Usually they skew company goals towards paying off shareholders but at least it isnt pure misallocation to redirect revenues like this. I will look at the Church stuff. In defense of VC investors, they got their faces ripped off in the late '90s/early 2000s that they have never returned in their old numbers. The short termism is a product of financialization and earning money on money thowards which our FIRE economy refocused all of us.