It will come as news to no one that corporations are complex and unwieldy beasts. Considered by some, including our increasingly illegitimate Supreme Court (that’s a topic for another long post) to be ‘people’ with rights and privileges, they are increasingly the most protected of our “citizenry”. I would argue they are in fact highly predatory groupings of otherwise well-meaning people, driven tangentially by the incentives of the market and more specifically by the incentives of their top executives. And that dichotomy of incentives is what I’d like to explore today.
It has always fascinated me how a relatively simple objective in a CIO or CFO’s annual performance objectives like “reduce cost-of-goods-sold by 5%” or “meet top quartile industry benchmarks for network costs” can have so direct and profound an effect on people’s live while at the same time seeming innocuous and benign. Just a couple of folks, directing their teams to focus all their efforts to deliver “shareholder value” or whatever the consultant-speak bullshit du jour is at the time. Sure, lowering COGS increases profits and increasing profits are good, and nobody wants to pay more than their competitors for the same service. But costs include overheads, which are made up mostly of salaries and benefits (read: jobs), which in turn pay for people’s medicines, children’s shoes, future retirement savings, and Christmas presents. The human cost of the endless quarterly focus to increase profits has had a truly profound and unsettling effect when you look at how businesses are run today. Only those who set the goals – the already wealthy and successful lucky few at the top – get to decide what those measures and incentives will be, and rarely do they consider the implications for the rest of us.
Here’s an example of how this plays out. Our company’s first-half profit exceeded a record $4.5 BILLION dollars, and we are on track to beat that for the second half of the fiscal year. Let’s call it an even $10B for this year. Our CIO, my number one stakeholder, has been challenged to reduce his circa $300M annual budget by about 15% over the next two years based on a recent benchmarking exercise. Being a British company, our exec is not wildly over-compensated like some corporations, and I would guess that hitting this target will help him meet his objectives and maybe earn him an incremental $1M. Not small change, but no golden parachute either.
His incentive is clear: reduce his costs by $45M – or about 1/2 of 1% of our annual profit – and get $1M in additional pay. Fair enough, that’s what the company’s leadership has interpreted the will of the market to be, and that’s what they’ve told us to do. That $45M represents a rounding error to our overall performance, but it will have a real and devastating effect on hundreds of employees, suppliers, and other stakeholders of the corporation, many of whom are in fact also shareholders. What’s important to note is that even though the people affected are recognized as stakeholders and shareholders, their interests are 100% discounted to those of the few with the megaphone to drown them out. Bankers, analysts, executives, non-exec board members and the like are all given a priority that a regular (disposable) employee and their families are never given. All stand to gain, some a lot, some less so. But none are going to suffer 1 penny if the goal isn’t met. The company will turn in record profits and they will remain fabulously wealthy by any measure. The project manager in Chicago, not so much. The temp-to-perm contractor, even less.
So let’s say our CIO is successful and gets all of us to work extra hard and cut out those nefarious overheads. We are already planning some internal layoffs to close some of the gap, and undoubtedly suppliers who must reduce their costs will eliminate some jobs as well. Our CIO will meet his objectives, and he will get the extra $1M. We will also meet our objectives but get exactly the same compensation based on company wide performance we would have gotten anyway. The incremental $45M has no material effect for 99.9% of employees. But in order to get his $1M in incremental bonus, he will have eliminated $45M in spending. That’s the equivalent of 450 jobs at $100k each. Those are the famous middle class jobs – programmers, project managers, business liaisons, help desk manages – that drive our economy. These are the people who struggle to pay college tuition and day care bills. These are the people whose parents must move in with them as they age to avoid a Medicare nursing home. These folks are mostly middle-aged managers, like me, who will never recover their current earning power, never regain what little security they imagined they had. All to put $1M in some guy’s pocket and make a rounding-error-sized contribution to the company’s bottom line. And this is how the system stays rigged in favor of the wealthy and against the disposable employee.
Our CIO and CFO aren’t bad or venal people. I like most of the people I work with, but can’t abide what most are willing do as part of their perceived responsibilities. I like the idea of my job, but not what I’m asked to do to do it – in my better’s opinions – well. I like my vendors and the relationships I manage and the products I buy: technology is ever-changing and always on the cutting edge. Its fun and challenging and intellectually stimulating. I like the products my company sells, some perhaps too much, and I think we are in many ways exemplary corporate citizens. We’re generous. We’re responsible citizens in all the markets we operate in. We stop to help those in need before we help ourselves after a disaster. The good consciences of the individuals who make up our company comes through loud and clear in many different ways. But it all goes wrong when it comes to setting the incentives that drive our business behavior.
What good is slavish adherence to things like Sarbanes-Oxley if you don’t care about your own employees? What good is there in a rigorous and enviable ‘code of conduct’ when you can’t see the tragic consequences of a trivial decision to enrich the few? I have come to despise the ethics most companies stand for, which despite the lovely platitudes in the glossy annual reports, are bereft of both humanity and conscience in the most fundamental ways. I am no longer proud of what I do. I am not proud of what I have done in the name of profit. When a company can report $4.5B in profits for 6 months and still feel the need to lay off over 1000 employees (this on top of over 5000 in the last 5 years), we truly have lost what it means to be a good corporate citizen. While most of these jobs cuts have been (and will be) in the developed world – America and Europe mostly – and have been replaced by jobs in the developing world – Africa, Asia, and Latin America – they are still unnecessary. At no time during or since the financial crisis set the brakes on the world economy has my company lost 1 penny. Did we have a few years of less-than-record profits? Yes. Was that to be expected given the global economy? Yes. Should it have resulted in thousands and thousands of lives disrupted with thousands more fundamentally damaged by ridiculous workloads and unrealistic demands in order to deliver farcical goals in order to deliver the aforementioned “savings” so two or three people could continue to get their millions in bonuses while literally ripping the food from the mouths of thousands of families? I think not.