3/10/2014

#44 The High Cost of Overpriced Management (2000)

All Rights Reserved © 2000 Thomas W. Day

If you didn't see this one coming, you haven't read a single Rat's Eye, ever. I'm nothing if not not-subtle. (While my past English profs would have a field day slashing red lines through that double negative, I'm leaving it in because of its irritant value.) In my 35 years of employment, I've worked for companies that were:

  • small and totally unprofitable,
  • large and going bankrupt at the speed of sound,
  • small and bagging money like a New York drug dealer, and
  • huge and listed on every Fortune 500 list ever cobbled together for the purpose of misleading investors.

I think I can apply way too much personal experience to the cost of overpriced management. In fact, I can provide examples of actual companies that lived and died in the real world. Of course, the names will remain slightly disguised in the interests of protecting the incredibly guilty.

Unfortunately, the toy I'm using to do the math for this Rat Rant is Microsoft's Excel 97. For those of you not cursed with this piece of software, I apologize. For those who have found various marginally legal or totally illegal ways to "find" this program on your computers, I recommend that you play with the numbers and experience the many ways that you've been screwed over by management salaries. (Yes, there are macros in the file and if you don't enable them you'll have to figure out your own company salary distributions.) Just to make this toy as simple as possible to understand, I put together a quartet of examples for you to play with. However, you can enter your own information into the shaded cells and play with the calculations. Here is the spreadsheet: salarygame.xls. [Sorry, I don’t know how to put a spreadsheet on Google’s Blogger, so the tool is gone. Email me if you want a copy to play with.]

The first example (Small & Bankrupt) is of a company I worked for in the late 1970's. It would be a mistake to assume that the pack of execs who mismanaged this company cared about profitability or the company's survival, but the example demonstrates how simple a turn-around would have been. The company had gross profits (before salaries) of $425,000 on a gross income of about a million and a half. Because the execs were executing a slash-and-burn game with the company's assets and products, they stripped off all of the "excess cash" for themselves, to the tune of $150k salaries for each of the "owners." (The company "owned" nothing, because these guys were experts at leveraging nothing into yet another quarter-million dollar loan.)

Like most small businesses, even 20 years ago, this company had a hard time attracting talent and labor. The bottom line was almost a quarter of a million in the hole, which finally sunk the company about six months after I abandoned ship.

Obviously, the management of a company with this kind of history doesn't deserve anything resembling top dollar for its performance. These guys paid themselves like they were winners, but they couldn't have hit the ocean from a life raft. Dropping their salaries 60%, to $60k a year, could have radically changed the complexion of the company. If that money were simply put into the bottom line, the company would have shown a $49,880 profit. If that money were equally distributed among the rest of the employees, the two middle managers would have been making $57,210, the three engineers would have made $52,443, and the assemblers would have earned $15.49 an hour. All good wages for 1980. For that kind of money, there would have been no issue with finding talented people for the company's positions.

The next example (Small & Profitable) was a company that had struggled for almost 15 years to break even. During the early years, the execs/owners limited their salaries to reasonable numbers because they recognized that their contribution to the company's success was marginal, at best. But when the company suddenly stumbled on a successful product line and the bottom line flipped polarities, they started doing "equivalent salary" searches to justify making themselves instantly rich. In less than a year, they tripled their take-home and followed that with similar (but smaller) increases for other management people. Instead of sharing the wealth with the folks who made it possible, a very dedicated hourly work force, the execs hoarded the company's good luck to themselves. The end result was steadily declining growth and market share and a decade of complaints about the quality of the workforce. Within five years, the average tenure of their assembly workers declined from ten years to eleven months, and the quality of the product followed.

This example shows that if the company had held the management salary line during the first year of profitability. The constant complaint was "we can't keep good people on the assembly lines." At $8.50 an hour that was a problem, at $14.50 (what we could have paid if we'd have put all of the excess exec salaries into hourly wages) we'd have had people standing in line to apply.

My loser big company example (Big & Brain-dead), managed to gross huge numbers for a few years while producing a net loss for its conglomerate owner. The salaries and bonuses it paid to executives were so huge they were obscene. The company was part of a group of like small-minded corporations that constantly petitioned to the federal government for higher technical green card quotas because of a non-existent "skilled labor shortage." Hit the button for this company and see how much they could have been paying engineers ($176,229) if they'd have cut back their non-productive executive costs and plowed that money straight into technical positions. Somehow, I'm pretty certain that plenty of talent would have been found for that kind of money. Unfortunately, money doesn't often equal talent when it's spent on executives.

Finally, I pick on one of the companies that is regularly found on Fortune Magazine's many lists of top companies. This is yet another company constantly whining about the lack of technically skilled employees. If you look at their corporate statement, you'll find that they pay their top execs an obscene average of $11M in salaries and bonuses and stock options. This is a company that averages $13.50 an hour for assembly workers and $80k a year (including bonus and benefits) for technical employees. How serious do you think their employee problems would be if they paid $27.60 an hour for assemblers and $163,565 a year for engineers?

It's amazing how many problems can be solved by cutting back expenses for the most unproductive workers in a business. If you have an example you'd like to have added to this spreadsheet, let me have it maybe we'll start a revolution. Like that will happen in my lifetime..

October 2000

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