When Hewlett-Packard’s Chief Executive Mark Hurd resigned last month he received something few regular workers see when they quit their jobs under a cloud: A massive payout.
Turns out Hurd is far from the only top executive to be rewarded with a rich package despite a management performance that could be considered less than optimal — especially by rank-and-file workers.
A new report concludes that chief executives of the 50 firms that have laid off the most workers since the onset of the economic crisis in 2008 took home 42 percent more pay in 2009 than their peers at other large U.S. companies.
The report, from the Institute of Policy Studies, found that the 50 layoff leaders received $12 million on average in 2009, compared with an average compensation of $8.5 million for chief executives of companies in Standard & Poor's 500. Each of the 50 companies examined in the report laid off at least 3,000 workers between November 2008 and April 2010.
“Our findings illustrate the great unfairness of the Great Recession,” said Sarah Anderson, lead author of the study, “CEO Pay and the Great Recession,” the latest in a series of annual “Executive Excess” reports published by the institute, a progressive think tank. “CEOs are squeezing workers to boost short-term profits and fatten their own paychecks.”
Those CEOs include HP’s Hurd, who slashed 6,400 jobs in 2009 — a year when his compensation amounted to $24.2 million.
Hurd made headlines last month when he suddenly resigned after an investigation into a sexual harassment claim against him found he had falsified expense reports related to meetings with a female contractor. Despite the findings, he walked away with a severance package that reportedly could be worth more than $40 million.
The report also highlights Johnson & Johnson’s William Weldon, who took home $25.6 million — more than three times the average CEO compensation for big U.S. companies — even as the health care giant was slashing 9,000 jobs and facing a massive drug recall scandal.
Fred Hassan of drug pharmaceutical company Schering-Plough received a $33 million “golden parachute” when his firm merged with Merck in late 2009, the report said, even as Schering was laying off 16,000 workers. The report calculates that Hassan’s total compensation for 2009 of almost $50 million could have been used to cover the average cost of these workers’ jobless benefits for over 10 weeks.
Overall, the Institute for Policy Studies calculates that the $598 million total compensation awarded to the top 50 CEO layoff leaders was enough to provide average unemployment benefits to 37,759 workers for an entire year, or nearly one month of benefits for each of the 531,363 workers their companies laid off.
While the details of the report may seem shocking at first blush, it’s worth remembering that a public company’s chief executive has a fiduciary obligation to maximize value for the owners of a corporation — its shareholders.
“This report is not quite as cynical as it seems,” said Dr. Andrew Ward, associate dean at the College of Business at Lehigh University in Bethlehem, Pa.
“We often find CEOs are simply taking action in the face of an economic crisis to reduce expenses," he said. "The thinking is that, in the future the company’s productivity will increase (and) that it will ultimately perform more efficiently, and this usually garners a positive reaction on Wall Street.”
However, one worrying aspect of the report is the finding that five of the 50 top layoff leaders received taxpayer-funded bailouts. American Express, for example, gave CEO Kenneth Chenault $16.8 million in 2009, including a $5 million cash bonus. American Express has laid off 4,000 employees since receiving $3.4 billion in taxpayer bailout funds, the report said.
“Questions should be asked of the boards of these sorts of companies,” Ward said. “A company’s board has a great deal of responsibility for overseeing CEO compensation.”
The report also highlights the structure of company pay packages and unintended consequences of tying performance to stock price, said Ward.
In the past, many companies rewarded executives with stock options, which had little downside risk and gave corporate leaders a clear incentive to drive up a company’s stock price.
These days there is a movement toward rewarding corporate executives with “restricted” company stock instead that has more downside risk because it behaves like regular shares.
Employees generally may not sell restricted stock until a certain amount of time passes or a financial target has been met, and they may have to forfeit their shares if they leave a company before a certain period.
“So there’s less incentive for a company executive to engage in actions in the short term that simply boost a company’s stock price,” Ward said. “The executive’s incentives are more aligned with those of the long-term individual shareholder.”