IBM recently laid off an estimated 2,500 workers, and our hearts go out to them and their families. IBM also recently disclosed that CEO Sam Palmisano earned $24.3 million for 2009, and some groups are screeching about the injustice of it all: how, their argument goes, can a company lavish such riches on one man while 2,500 of his employees are losing their jobs?
And while that argument is certainly steeped in class warfare and misplaced emotion, it is certainly not based on economics or logic.
Because the real connection between Sam Palmisano's 2009 compensation package of $24.3 million and 2,500 IBM workers losing their jobs is that without Palmisano's ongoing leadership and willingness to make difficult—often excruciatingly difficult—decisions over the past decade, a whole lot more IBM employees would be out of work right now.
Companies are not in business to employ as many workers as they possibly can. That's a nice ideal but in practice it's terribly flawed, and IBM's own history shows a stark reminder of this.
For decades, the company had a no-layoff policy: IBM workers had jobs for life, with employment security that even a tenured professor might envy. That policy worked just fine in IBM's early days but became almost fatal starting in the 1980s when competition surged, new technologies like the PC arrived, global dynamics came into play, and IBM began to suffocate under the weight of its bloated, unimaginative, and internally faced culture.
When Lou Gerstner too over as CEO in the early 90s, he started the job of overhauling a culture that had become far too concerned with sustaining the status quo and employee comfort, and begain building a new culture based on external performance, customer responsiveness, and market leadership. One of the world's largest and most insular organizations was about to be turned inside-out.
The great work—the company-saving work—that Gerstner began has been continued and in many ways accelerated by Palmisano, who's aggressively accelerated Gerstner's attempts to unify the formerly splintered company and ensure it's not wasting any energy on internal politics and is instead focusing all of its efforts on customers.
Here's an example of how that's playing out, as described in a recent Wall Street Journal article: "The company ended a 'team-based bonus' for the top executives that ran from 2002 to 2009. It ended, the company said in an annual report last year, because "integration is now part of the management culture."
Another significant part of the Palmisano-driven culture is a willingness to sacrifice some revenue by exiting high-volume, low-margin businesses, such as PCs. As a result, IBM's 2009 financial results outperformed not only the tech industry but also most of the corporate world, and more of the same is expected for 2010:
"IBM reported $13.4 billion in net income for 2009, up 8.8%, with record earnings per share of $10.01," writes the Journal in the article cited above. "Revenue fell 7.6% to $95.8 billion. The software and services giant bumped up its dividend to $2.9 billion in 2009 from $2.6 billion in 2008. In a letter to shareholders, Mr. Palmisano wrote that IBM is poised to 'outperform our industry and the market at large' as the economy recovers in 2010."
And that is precisely where the fallacy of the class-warfare arguments about Palmisano's pay is revealed: as with any public company, the job of the IBM CEO is not to maximize the size of the company's workforce, but rather to maximize its profitability, its relationships with customers, its future growth and success opportunities, and its new-product development.
Meanwhile, a chapter of the Communications Workers of America union that is supposedly trying to represent IBM workers dug deep into its bag of incendiary language and came up with these comments about IBM's layoffs and Palmisano's compensation via an article on localtechwire.com:
"IBM CEO Palmisano's pay and compensation of $21 million is outrageous given the firing of over 10,000 employees in 2009 and the recent firing of 2600 more this year," said Lee Conrad, one of [email protected]’s executives and a retired 26-year IBM veteran.
"Those ex-employees and their families are struggling in an economic recession where companies like IBM increase profits on the backs of working families," Conrad added.
"Where is the humanity and remorse of executives like Palmisano? It is clear they do not see or care what happens to employees and former employees who through their labor and expertise help him and other executives become richer."
In fact, Mr. Conrad, you and your fellow anti-capitalists should be thanking Sam Palmisano for navigating the company through such a tumultuous time in the global economy and for creating an operating model whose financial stability allows the company to employ more than 100,000 workers in the U.S.
Rather than 'not seeing or caring' about IBM employees, Palmisano has led IBM to a position as one of the world's most respected, successful, and innovative companies, and no CEO can "give" anything better than that to employees.
As I've said before, layoffs are a sad and sometimes-awful element of free-market capitalism. But sometimes they're the right choice for CEOs to make because the objective of public companies is not maximum employment—it's maximum success for customers, owners/shareholders, and then employees.
And while IBM's layoffs are unfortunate, CEO Sam Palmisano deserves every cent of the $24.3 million he earned for 2009. I hope he has an even better year in 2010 because that will mean that IBM's customers, shareholders, and employees will also have had a better year as well—and the only "remorse" anyone should feel from that will come from the anti-capitalists whose fringe commentary will only become more irrelevant.
Bob Evans is senior VP and director of
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