Outrageous CEO Pay? How About Lowering Salaries of Longtime Workers

Last Updated Jul 22, 2011 9:29 AM EDT

CEO compensation increases continue to be gaudy, but if you think they are overpaid take a look at the paycheck of Joe the machinist.

In what is sure to be a heavily debated think piece out of management consultancy Booz & Co., the case is made that employers should be reevaluating what they pay to people who have held their same jobs (no promotions or added responsibilities) for a length of time, in light of the readjusting employment market. And in some cases, that pay should be lowered or the employee retrained or terminated.

They lead with the example of Joe, a machinist at the same company for 25 years.

"Although Joe is a significant asset to his firm, his wages have gone up steadily while his responsibilities have remained largely unchanged. The result is that Joe is significantly overpaid as a machinist compared with co-workers who have been doing the same job for just two years," write Booz consultants Harry Hawkes, Albert Kent and Vikas Bhalla.

They could fire Joe and hire a younger, lower-salaried machinist to take his place. But Joe is a valued contributor with a wealth of institutional knowledge. The question: Can an economy-challenged company that needs to cut costs to remain competitive continue to pay such high salaries to Joe and his colleagues?

At fault are the companies themselves, according to the authors, because they continue to give these workers annual increases, inflation adjustments and above-inflation bonuses even though their responsibilities remain unchanged. "Repeated enough times, these compensation increases can morph into an exorbitant trend."

Here's the solution from B&Co.. First, employers need to put in place an ongoing program that analyzes responsibilities, wages paid, and market realities to determine what salaries have grown out of whack.

And then hard choices must be made for employees who fall north of the norm.
  1. Appropriate job categorization and responsibility adjustments. Employees can be retained and put into new positions that reflect their pay.
  2. Voluntary separation. Buyout packages might motivate long-time employees to leave of their own volition.
  3. Involuntary separation and performance management. Fire poor performers and employ a ranking system where subpar workers are let go routinely .
  4. Wage reduction. Just what it says.
With proper execution, net labor savings of 15 to 20 percent are possible, the consultants claim.

Early readers of the piece have fired back at the authors, bemoaning a hard-heartedness and lack of loyalty to valued employees. Why not concentrate on reducing CEO pay instead?, they ask. "Attacking the shop floor workers wages is appalling; is this what the USA is coming to?," asks one reader. Another comments: "Without reciprocal loyalty from employers, and a narrowing of the employee-executive wage gap, this advice is hypocritical and the benefits short term."

But a counter argument is offered by reader Marc Effron, who says the contract between employer and employee has no room for "loyalty points," and that if the company continues on its present course it will collapse, leaving Joe out of work. "We infantilize workers like Joe by insulating them from the harsh economic realities by paying above market wages ... and that failure can be corrected by treating Joe as an adult and having him face the market realities."

For the entire article read Retooling Labor Costs in Strategy + Business.

So we have the makings of a great argument to discuss. I agree with the idea that subpar performers should be weeded out rather than given pay raises -- Microsoft routinely lets go a fixed percentage of below-par producers annually. But I wonder what corporate morale looks like when esteemed, long-term workers are subjected to a retrain-or-die mandate. And would good talent really want to work at such a business given the possibility their salaries may eventually go down, not up?

What do you think?

Related Reading (Photo courtesy aflcio, CC 2.0)
  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.

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