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Gannett Cares for the People Who Count -- Top Executives

A few months ago, employees of Gannett's (GCI) local newspaper division learned that they'd get some unexpected extra vacation later this year. Once again, the media chain informed employees that they'd be furloughed for a week (memo obtained by the independent Gannett Blog). Three top managers -- the CEO, the COO, and the president of the newspaper division -- would either take furloughs or a commensurate salary reduction as well. But don't feel too bad for the brave souls steering the corporate ship, as hefty bonuses eased the pain.

It's not that unusual for a CEO to insist that employees take a reduction in pay or benefits at financially challenging times. But all too often, upper management is either exempt or only undergoes deprivation for show, with bonuses funneling back what they gave up.This is one of the dumbest things corporate leaders can do. It undermines their ability to get cooperation and move the company forward. Companies and their boards must reverse a foolish assumption that executives have more value than employees. It's actually the other way around.

The bonuses for top brass at Gannett were sizable, as David Carr reports at the New York Times:

[CEO Craig] Dubow had agreed to lower his salary by 17 percent through 2011, but then again, last month he received a cash bonus of $1.75 million for 2010 and [COO Gracia] Martore received $1.25 million. For 2010, they were also awarded stock, options and deferred compensation that would bring their combined packages to $17.6 million if the company and its stock hits certain targets.

A company spokeswoman pointed out that 70 percent of their compensation was noncash and dependent on future performance. In fact, the top six executives at the embattled publishing company would receive 2010 compensation packages of more than $28 million if the company does very well, which seems unlikely, but the symbolism remains.

Well, maybe a bit more than symbolism. After the voluntary salary reduction, Dubow will still receive $1 million this year in salary, according to the Gannett proxy statement. Martore gets $900,000. Dickey's salary is $625,000.

The bonuses paid were from 2010. (Dickey received $600,000, or almost his full salary.) The proxy statement also listed the criteria the board of directors used. Here are some of them:

  • earnings per share
  • operating cash flow and operating cash flow margin
  • free cash flow
  • return on equity
In other words, executives received bonuses for cutting costs, not growing revenue. And one significant cost cutting action has been ... furloughs.

Questionable accounting
What's more, there's some eyebrow-raising accounting behind the awards. One factor the board noted as justification for the bonuses was $130 million in voluntary payments to the Gannett retirement plan. And yet, according to the proxy statement, voluntary pension contributions are considered to increase free cash flow. That $130 million counted for nearly 16 percent of the $816 million in free cash flow.

In other words, the one action was effectively counted twice. Similarly, the company issued $500 million in bonds to pay debt -- one accomplishment that the board considered -- and then the company paid a total of $710 million in debt, most of which came from the issued bonds, which was a second accomplishment. Once again, the board was able to make a single action go a longer way. What frugality!

Now remember, 70 percent of the compensation is non-cash. But the compensation to which Carr referred was only the cash portion. It didn't count the many stock options and reserved stock units awarded to the managers. For a look at what 2010 brought top Gannett management, here's the appropriate table from the proxy statement, including estimated dollar values of stock and option awards (click to enlarge):


Last year's furlough didn't seem to hurt them too badly. The week furlough would affect only salary. Take one 52nd of Dubow's salary, divide it by his total compensation, and it turns out to be about 0.2 percent, versus the 1.9 percent employees who made a whole lot less had to give up.

But why be surprised? This is simply the value structure that many American corporations have. They put faith and money into the top managers and treat employees as disposable commodities, no matter what they say to the contrary.

Clearly a top management role is challenging, and paying for competent performance benefits the company and its investors. But when companies do badly and ask for sacrifices from the rank-and-file, executives should undertake equivalent sacrifices to promote good employee morale, to show that they will put their money where their mouths are, and to acknowledge that their work simply hasn't been up to snuff.

The high-tech parallel to Gannett was HP (HPQ) in 2008, when then-CEO Mark Hurd imposed 5 percent pay cuts on regular employees and 10 percent on executives, except for top managers. They made more even as HP shares lost 29 percent.

When a company struggles and executives get paid more, especially while employees are seeing paychecks shrink, the only reasonable conclusions are either that top managers are delusional and think that their performance really does warrant protection, or they dismiss employees and even the company and investors and are interested in only themselves. In either case, they do a great disservice to everyone else and make it very difficult to get the respect and cooperation they need from employees to turn the company around. But, that presumes they're actually interested in the company's needs to begin with.

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