Tuesday, July 19, 2005

Obscenity at Hewlett-Packard: When greed is (NOT) good

From the Times, one of the true obscenities of the year:

Hewlett-Packard announced Tuesday that it will lay off 14,500 workers, or nearly 10 percent of its staff, over the next 18 months as part of a revamping plan that the company's executives hope will turn around the struggling fortunes of the giant computer and printer maker...

The company also announced that starting Jan. 1, it would no longer contribute to the pension plans of its employees in the United States...

While the company will offer a voluntary retirement program, [CEO Mark] Hurd said "the majority of the head count reductions will be achieved through involuntary actions."

The company expects to complete the layoffs by November 2006, which marks the start of its fiscal year 2007. By that point, the company estimates that it will save $1.6 billion annually on labor costs with an additional $300 million in annual savings from reduced pension costs.

(Um, "involuntary actions"?)

Look, I'm a capitalist. I like business. Unregulated, it's a monster, but, properly regulated, it's part of the foundation of any healthy liberal society.

But as guest blogger Michael Hiltzik argues at Political Animal, "this is another example of how the rank and file pays the price of management derelictions and blunders, while the guilty get off scot-free". How so? Well, 10 percent of HP's workforce will soon be subject to "involuntary actions". That is: Laid off. Let go. Terminated. Get it? Meanwhile, former CEO Carly Fiorina, who resigned in February, received a $21 million severance package, along with a $7 million bonus and another $23.5 million in pension and benefit payouts. That's $51.5 million!

14,500 HP employees will soon be paying the price for executive incompetence -- because, in today's corporate America, share price means more than loyalty. 3,000 employees have already been laid off this year, and another 17,900 were let go after HP's failed merger with Compaq in 2002. Do the math. Fiorina walks away with $51.5 million while 35,400 employees, many of whom no doubt face hardship or worse, are terminated.

That's obscene. Truly, utterly, and outrageously obscene.

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  • I'm not sure how you get around this. The CEOs negotiate these packages and, while it would be nice to think that companies should compensate based on performance, it's really no different than baseball teams that sign free agents to big contracts and then have to pay the money regardless of how they play. That's how the market works. (Of course, ballplayers don't cost other people their jobs other than perhaps the manager.) It is certainly unfortunate and you can condemn it, but unless you require some sort of mandated ceiling on executive compensation, there's not much you can do about it. And let's face it, executives at that level will always land on their feet.

    As far as share price being more important than loyalty, I'm not sure what the alternative is. There are many shareholders in companies like HP (maybe I'm one for all I know) and they expect a return on their investment. I don't know the HP story, but it's clear that global competition is going to lead to situations where companies have to shed costs to remain competitive. The alternative is some kind of protectionism.

    I believe that we should not abandon globalization, but that the US should provide a stronger social safety net for employees. I think, along with Joseph Stiglitz, that the Republican deification of the free market as beyond improvement is leading to increased insecurity among the middle class. But at the same time, I think it's unrealistic to expect that we can avoid layoffs in a competitive global environment.

    By Anonymous Anonymous, at 11:44 AM  

  • What about board cronyism? One of the assumptions of a free market is that the negotiating parties on a contract will both be working on their own self-interest. Yet from my understanding, the boards of public companies are frequently CEOs or ex-CEOs of other companies. Their relationship with each other can become quite incestuous, making their accountability quite questionable.

    If I were a stockholder in HP, I would not be happy right now. It would be fairly clear that my so-called representatives wasted millions on a poor executive who couldn't successfully turn the company around. And I would really want to know why Fiorino's severance package was so sweet.

    I'm not really suggesting an answer for this. But as a board director of a small company who gets paid squat for his efforts and who struggles constantly to make decisions in the interest of all stakeholders, it really pisses me off when high-paid directors of these larger companies are seemingly so lax about their duties.

    By Blogger Tom Strong, at 5:48 PM  

  • I agree, Marc. There's isn't all that much that can be done about it. Unless shareholders hold what they own accountable, regulation can only go so far. And I certainly realize that CEOs and other top executives will be paid exorbitant amounts of money and that layoffs are inevitable.

    But Tom also makes a valuable point on a more personal level. I wish I had an answer for this, but I don't. It's interesting that CEOs and other top executives don't make nearly as much money in Europe, however. But in this case it's just outrageous that mismanagement has led to so many layoffs. All too often, the human side of business is forgotten.

    By Blogger Michael J.W. Stickings, at 4:07 PM  

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