Monday, December 10, 2007

Continuous cuts should be explained more clearly

I joined the Huge Company as a result of a series of acquisitions. While I realize that cutting costs, usually in the form of people and benefits, is what Wall Street means when they use the word "synergy," it seems incongruous that on one day I can receive a memo celebrating being number one in our industry, and the next day a memo outlining yet another cut in employee pay or benefits, citing "industry benchmarking" as the reason for making the cuts. Did we become industry leaders by hiring mediocre people and expecting them to deliver mediocre results? How can we be expected to aim for the top when our compensation and benefits are constantly being reset to aim for the middle?

This is a great question, and in order to answer it I had to dig through the file of important memos (that are sent to people like me in order to make us feel important even though we had no hand in the decision) until I found the one about our "people strategy."

The Huge Company people strategy is based on the classic three pillar model of retention, development, and rewards & recognition (with a hidden fourth pillar of executive compensation). The details of the strategy are as follows:

1. Retention: our organization has a long track record of retaining employees and valuing contributions from all levels of the organization. Going forward, our strategy will be to gradually eliminate these loyal staff and spread this work across the remaining employees. Preference for elimination will be given to those with the most experience and will be done through layoffs, early retirements, or the cutting of benefits such that "it's no longer worth it to stick around."

Any new hires that cannot be avoided or further delayed will be made in Asia or other low-cost geography, preferably those without labor laws or unions. In order to maximize productivity, domestic employees will start each workday with conference calls to Europe and, after those whose families have not left them put their kids to bed for the night, end each day with conference calls to Asia. Retention will be further enhanced by offering employees working vacations in such world-class resort cities as Singapore, Frankfurt, and Houston. Those who remain will also be encouraged to stick around to reap the benefits of a rising stock price even though stock options have not been granted to non-executives for several years.

2. Development: Employees will be encouraged to broaden their horizons and develop new skills in order to prepare themselves for increased levels of responsibility at the same pay. A rich database of online classes that were last updated before the group tasked with creating said classes was eliminated are available to employees for a nominal fee that can be conveniently deducted from your paycheck. Seminars, university classes, and other external training opportunities are highly encouraged as well. Check with your tax adviser regarding potential tax deductibility of these activities. Employees completing management or other training may have the opportunity to be promoted all the way to middle management. All executive positions will be filled with external candidates.

3. Rewards & Recognition: The company founders had a philosophy of sharing the wealth in good times by rewarding everyone with a share of the company's profits. While this strategy worked well for the first several decades of our existence, the world has changed considerably. The formula of revenue minus cost equal profit has grown significantly more complex, thus necessitating a new breed of senior leader with the advanced analytical skills necessary to complicate this apparently simple arithmetic. While the previous formula, due to legal requirements, will still be used to report our quarterly and annual results, a new formula will be used for calculating bonuses and other rewards to rank and file employees.

This new formula is not disclosed to anyone and is subject to change at any time up to the day on which bonus award notifications are distributed. Rank and file employees will be eligible for a bonus after executive bonus plans are fully funded, and the bonus amount will be between 0.15% and 20% of the percent of salary that executives are awarded as their bonuses. Since executive base salaries are typically between 200% and 1200% of the average salary of their subordinates, this means that actual bonuses paid will be equal to between 0.0125% and 10% of the bonuses paid to executives.

In addition to annual bonuses, managers have a discretionary fund equal to 1% of their payroll that they can use for spot bonuses at any time in order to keep critical but discouraged employees from resigning and to trick young, ambitious types into thinking that someone is watching what they are doing and grooming them for advancement.

Stock awards: see executive compensation.

4. Executive Compensation [CONFIDENTIAL Not to be shared with employees]: Very simply, the formula is this: internal performance will be measured at the executive level by said executive's ability to remove as many people from his organization as possible without outright mutiny from those who remain. Preference is to be given to those with the most seniority and working knowledge of products and processes, followed closely by young, intelligent, ambitious people who, under the appropriate tutelage, could become the leaders of tomorrow in this or any organization but who could also undermine our short-term objectives if their ideas and enthusiasm are not snuffed out. Executives will be rewarded with a bonus that is roughly equal to the combined salaries of all those they eliminated the prior year, minus the cost of rehiring replacements in low-cost geographies.

In addition to these generous bonuses, executives will also receive one stock option for every dollar in average annual salary earned by those employees eliminated during the year. In order to facilitate the exercising of these options, certain executives will be eligible for interest free loans direct from the corporation that do not have to be repaid in the event the executive is fired or otherwise dismissed.

So there you have it--a clear explanation of the people strategy. Granted, this does not get into all the details of the specific cuts you may have been wondering about, but you should be able to read this document and determine which category motivated the particular cut you will be fuming about from the moment you receive it until your next 5:00 a.m. conference call. Thanks for the suggestion!