I tuned into a Public Radio interview this morning and happened to hear a guy who was identified as a venture capitalist saying that the first thing he looks at when considering an investment is a company’s “head count” — the number of people on its payroll. The idea here, presumably, is that the best way to improve a bottom line id to fire as many employees as possible, thereby cutting a company’s labor costs.
This idea struck me as incredibly dumb and I turned off the radio in a snit. The reason being that for me, it’s obvious that the first thing you look for when thinking of investing in a company is what it has in the pipeline, what products and services it it preparing to sell, products and services with the potential to expand its customer base and increase its sales.
My really successful and profitable models are the likes of Apple and Ford. They produce good products, people buy their products, their bottom lines grow, and so, too, do their employment rolls. However…
Maybe this guy on the radio, it suddenly occurred to me. had something worth considering after all when it comes to reducing payroll costs to boost bottom lines. Except he wasn’t looking at the right part of corporate payrolls. Maybe just firing one person, the CEO, is the key to better profits. Then just move every one up a notch in the executive pecking order, but don’t raise the salary of the new CEO, who was probably getting only about half as much as his former boss before ascending.
Let me emphasize that this isn’t some goody-goody progressive notion designed to prevent layoffs that destroy the economic well-being of countless workers and their families. God forbid considerations such as this should intrude on sound, veins-in-the-teeth, squeeze the orange till the peel squeals, business decision-making. No, sir. Simple, straight forward numbers validate this approach,
The Institute for Policy Studies in Washington came out with an interesting report recently. It found that in 2009 the ratio of CEO pay to average U.S. worker pay was 263-to-1. And this ratio grew to 325-to-1 in 2010.
The reason this ratio is not just huge but getting more so is not just the proclivity of CEO to pay themselves outlandish salaries, but because average workers pay is staying about the same, and when inflation adjusted, actually falling. What this means is that there’s no average worker wage inflation keeping bottom lines from being as good as they could and should be, Rather, its the huge inflation at the very top that’s making this so.
Indeed, it’s possible to opine that the reason CEOs are so often inclined to cut payrolls to keep profits up, is to hide the fact that their own pay-based inflation mongering is really the profit killer. It need hardly be added that a stepped up (but not comped up) new CEO making half as much as his/her predecessor, saving 162 full time and one part time job by doing so, would almost certainly churn out better quarterly results with 162-plus more people on staff.
The numbers tell the story here. But, you might ask, will the CEOs, who make the big decision in most corporations, go along with this notion? I believe they will. And here’s why.
Just as a naval captain at sea will go down with his ship if need be, the captains of commerce that lead our national economic fleet would almost certainly put the best interest of their company vessels before their own interests. Yes, and these self-proclaimed battlers for the bottom line will willingly quit with no platinum parachute, name a half-price successor, and rejoice that the layoffs of eight score employees can be canceled in consequence.
Which CEO of a major corporation will be the first to take the hit? For the corporate good. I can hardly wait to find out.
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