CEO Profit Equation: I Will Cut X People To Increase Stock Value By Y And Get Paid $$$$$$$$$
Goal: Discuss how having less people on your team is only ideal for CEOs
Recently the CEO of BP, Bernard Looney, was praised for being transparent for planning to cut people. I was amazed that people were praising him for his announcement.
Let’s take a look at a few ideas.
For a team, the number of connections between members grow by the formula [N*(N-1)/2]. So for 2 people they communicate on 2*1/2=1 channel. For a team of 8 we can determine that 8*7/2=28 channels exist.
(This is why most supervisors seldom have more than 7 direct reports)
As the number of people goes up so does the need to communicate and there is a definite increase in communication channels and need to lead people. This requires an effort to accomplish and it is one of the reasons why companies have layers of management. Unfortunately, with each layer the communication gets diluted and lost in translation.
Why is communication and leadership important?
The equation above in the title is our current reality. Most CEOS have salaries hundredths of multiple of the front line workers and their supervisors.
I would guess that most hourly guys at BP make anywhere from $25-$50 dollars per hour. So somewhere $50000–100000 per year.
What about the CEO? The company stated that he makes 1.3 million as a salary. Is that believable for running BP? HELL NO! There are probably hidden bonuses on top of bonuses. Most likely it is a few hundred times more than the front level workers.
I know I would not run a global organization with 80000+ people for less than 10 million. I am sure he is getting at least that. A 1.3M is not worth the headache.
BUT back to the equation…
These CEOs are only focused on the short term game. They will get rid of people in the name of being more competitive. Maybe oil is down at the moment BUT remember there is BP wind and BP solar. By reducing people the idiot Wall Street analysists will sing his praises and pump up the stock. By pumping up the stock he will ultimately benefit. Next year the board will meet and give him a raise for doing so well that he increased the stock price.
What if the price of the stock goes down after he cuts the people. Well, the board which is often made up of CEO cronies from other companies will increase his pay to make sure he sticks around.
So it is a win-win for Bernard Looney. No matter what he does he will get rewarded. The people below him and their families will be hurt.
Maybe the CEO should consider cutting his own salary for the sake of keeping the people that do the work? There is no reward for that.
Back to leading 80000 people. A boss and their team needs to be creative in this pandemic world and determine how to keep their people. These people are what makes you unique and profitable in the first place. By getting rid of them you lose the knowledge and ideas that can make you better.
The problem with BP is that their HR groups adopted the failed GE mindset of getting rid of bottom 10% of the workforce every year. This is their way of staff reduction each year. While I was there we went from 100000 down to 80000 employees. Were those 20000 employees bad employees? I doubt it. So now at 80000 BP wants to reduce forces.
Maybe it is not the people BUT the leadership?
If I had it my way I would tie every CEOs bonus AND salary to employee retention and development. If 0% and their skillset has improved then the CEO gets his package. This package is tied to the lowest salary in the company. It can only go up by the same percent that the bottom person goes up. So if the front line employee gets 1% then so does the CEO. Make the pay a set 20 times the lowest person pay. This will force the CEO to improve the skillset of the bottom and raise their pay.
The new equation will be:
CEO pay=20*(% employees retained)*(% employees developed)*(% stock increase)*lowest employee pay
As an example, if a CEO keeps all employees, develops half, and raises stock price by 10% then their pay would be
CEO pay= 20*1*.5*1.1=11*lowest paid person. If we assume 50k for lowest then Mr. Looney would get 550k as salary
BUT if they developed all it goes to
CEO pay= 20*1*1*1.1=22*lowest paid person. With the 50k lowest assumption he would be 1.1M
I like it! It seems fair. You get more responsibility BUT you get rewarded by keeping people, developing them, and improving the financial state of the company. No need for a board to vote a salary up.
As I said, 10M would be what I would want to run BP so the bonus would be based on how well the CEO did vs. peers of other major oil companies. If their stock went up on the average 10% then this CEO did nothing extraordinary and their bonus is 1x their salary. If they did 10% and our Looney did -10% then he gets no bonus. BUT if he did 20% compared to the other CEOs then he would get 2x the salary.
With these two simple equations you can see how it is very hard to get to that 10M. The bonus would have to be 8x. That might be fair if it is the same for the bottom line worker. Make their bonus go up 8x if they exceed their targets by 20%.
The truth is that most front line workers could hit a 20% target easily BUT CEOs can not. This is why they would never agree to these equations. They would rather cut the people doing the work, increase the stock price due to perception, and collect their golden bonuses and parachutes.
This year CEOs get the benefit of using COVID to make their numbers. There are businesses that are not loosing money but cut people. This is just a way to reduce forces without bad press.
To the people who congratulated Mr. Looney for his “transparency” for firing people I say, ”You fell for the sucker move.” He was only looking out for himself NOT improving BP into a better company. If he had a vision of how to lead BP it would not start with cutting people BUT determining a new direction.
Leading and creating a great company takes vision and action. Cutting people is easy and over time destroys the culture. New people will give you the loyalty that you gave the people you cut. Leadership is badly needed at the top to thrive in these hard times.
Just my two cents…
I got to go…my future self alarm went off
Robert Trajkovski is professional with experience in leading people and projects in Steel/ Power, Refining, Chemicals, Industrial Gasses, Software, Consulting and Academia. He has worked for both owners and engineering companies. In addition, he has instructed 73+ courses at several institutions and often offers his courses for free on LinkedIn.
https://www.linkedin.com/in/roberttrajkovski/
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