In a recent survey of 2,100 U.S. bankers and traders, half of the respondents say they expect bigger bonuses in 2010 than in 2009. At a time when many Americans continue to struggle with the effects of recession, it seems the banking industry – or least those who work in it – has made a full recovery.
But in the days and months ahead, this lingering disconnect between those suffering financial hardship and those many blame for bringing it about is likely to be leveraged by activist investors who are newly-empowered by the Dodd-Frank law. While strictures requiring U.S. corporations to hold non-binding “say on pay” votes and disclose the ratio between CEO pay and that of their employees don’t mandate action on executive compensation issues, they may very well have the same effect by intensifying the reputational hazards faced by companies whose pay policies do not align with results.
At such a time, the symbolic power of sacrifice looms large
Most people know the score. Employees, investors, and the public understand that economies rise and fall and they expect companies to have good years and bad. They will grant more latitude than you might expect to companies struggling with financial challenges, provided that top managers are open and honest with the numbers and are willing to share in the sacrifice.
This commentary is excerpted from the book, The Communicators: Leadership in the Age of Crisis, by Richard S. Levick and Charles Slack (Watershed Press, 2010).
But they will never understand or forgive corporate executives who prosper or appear to prosper while the balance sheet bleeds red, the stock price tumbles, and the company takes bailout money from taxpayers.
Consider John Thain, one of the more brilliant financial minds of our time. The son of a small town doctor in the Midwest, Thain enrolled at MIT with plans to become an engineer. He turned instead to Wall Street, where hard work and innovative decisions hoisted him up the ladder at Goldman Sachs and on to the top spot at the New York Stock Exchange. His appointment in late 2007 to lead Merrill Lynch out of the financial mess left by previous Merrill CEO Stan O’Neal was almost universally hailed as a major step toward a turnaround.
And then came the $1,400 wastebasket.
When it surfaced that Thain, hired specifically to bring financial discipline to the ailing brokerage, had spent $1.22 million of company money to decorate his office, critics of corporate greed went into overdrive. The tab included $87,000 for an area rug, $68,000 for an antique credenza, and $25,000 for a pedestal table. But nothing quite hit home like that wastebasket. Thain quickly apologized and refunded the company for the entire renovation out of his own pocket. Unfortunately, the damage was done.
Later, when reports surfaced that Thain had approved sizable bonuses to his executives (though not to himself) just before a distressed Merrill was sold to Bank of America, the public didn’t need to hear specifics in order pass judgment. They had already heard all the specifics they needed.
Thain did not cause the financial catastrophe that brought down Merrill Lynch, but the saga will most likely follow him for the rest of his life. Why? Because a man who’d even consider buying a $1,400 wastebasket cannot by definition be a man capable of sharing in sacrifice.
Sadly, Thain’s story is hardly unique. This financial crisis has abounded in tales of executives flying private jets to beg for bailouts, partying at exclusive spas or reaping bonuses while shareholders suffer. In virtually every case, the amount of money involved is negligible compared with the symbolism and the damage to the reputations of the individuals and companies involved.
Less well-known, and too few in number, are stories such as that of Boston’s Beth Israel Deaconess Medical Center and its former CEO Paul Levy.
In early 2009, the downward economy left the Beth Israel Deaconess, a legendary Harvard teaching hospital, with a $20 million budget gap and the prospective layoff of 600 of its 6,300 employees. They were mainly lower-paid workers in food services, transportation, and other departments.
At many companies, the CEO might have squirreled away in a conference room with the CFO and a few other top executives, crunching numbers and preparing the layoff announcement. Determined to save as many jobs as possible, Levy took the opposite approach. First, he sent out mass emails to employees offering full, clear details on the problems the hospital faced.
Every employee, at every level, was given full access to the numbers. Levy subsequently posted the figures on his blog, “Running a Hospital.”
Why such candor? Levy explains, “To me, it is so commonsensical. People need to understand the dimensions of the problem to help solve the problem. If you’re going to ask them for advice and actions, they have to know the real story.”
Once all the numbers were on the table, Levy turned to the employees and asked if they’d be willing to accept lower pay in return for saving the jobs of their co-workers. Crucially, Levy and other top managers led the way by talking voluntary cuts in their own pay. “Absent that, people would have felt they were being taken advantage of, that they were saps,” Levy says. “If you’re asking people to make sacrifices, and they think you’re not doing the same, then they’re going to say, ‘Well, there goes top management again, taking advantage of us.’”
The response, from celebrated physicians and department heads on behalf of clerical and maintenance workers, was overwhelming. Employees took pay cuts, accepted a freeze on 401(k) contributions, scaled back vacation days, and returned recent raises. Many employees dug into their personal bank accounts and mailed checks. “I wasn’t surprised by the nature of their response,” Levy says. “But I was surprised by the intensity. It was very, very sweet.”
Most of the 600 jobs were saved. As an ancillary (but hardly inconsiderable) benefit, the story generated positive publicity and goodwill for the hospital and for Levy himself. A CBS News report captured the sentiment: “The staff at Beth Israel Deaconess Medical Center in Boston made its name by caring for its patients,” the segment began, “but these days, they’re caring for each other.”
Now that the hospital has overcome its financial troubles, one lesson seems inescapably clear: let your constituents suffer alone and you may carry a black mark forever. Take the lead in sacrificing, and they’ll follow you proudly.
Richard S. Levick, Esq., is the president and chief executive officer of Levick Strategic Communications, a crisis and public affairs communications firm. He is the co-author of The Communicators: Leadership in the Age of Crisis and Stop the Presses: The Crisis & Litigation PR Desk Reference, and writes for Bulletproofblog. Levick is on the prestigious list of “The 100 Most Influential People in the Boardroom,” which is compiled by NACD Directorship Magazine. Reach him at rlevick@levick.com.