EQUITY ISSUES: The Creation of Value, August 1996
SOCIAL TOPICS (Archive): EQUITY ISSUES
The Creation of Value
Published, August 1996
The contrast between rapidly rising executive compensation and record layoffs during a non-recessionary period raises important questions about who creates value and how creation of value is rewarded. Management initiatives at Northwest Airlines and Bristol-Myers Squibb demonstrate two dramatically different approaches to enhancing value by shifting economic risks and rewards.
Northwest Airlines was on the brink of failure when John Dasburg became CEO in 1990 and began the successful turnaround for which he is widely credited. How did Dasburg create shareholder value? First, in 1993 he negotiated $886 million in wage concessions (a 12% payroll cut) for three years in exchange for future payouts of stock. While Northwest’s employees have recouped their concessions thanks to significant stock appreciation, their acceptance of stock in lieu of pay entailed significant risk as former employee-owners of Eastern Airlines, PanAm and People’s Express would attest. Secondly, after Northwest failed to create the number of well-paying mechanics jobs required by an $838 million financial aid package from various governmental bodies in Minnesota, Dasburg successfully renegotiated less stringent criteria, again shifting the burden of a shortfall away from Northwest. Finally, factors beyond the control of any CEO contributed significantly to the turnaround at Northwest: strong demand for airline travel and an inherited route system that was largely removed from the impact of low-cost new entrants. As his reward for creating value, Dasburg was by far the industry’s highest paid executive in 1995 with total compensation of $8,700,000.
The creation of value at Northwest Airlines resulted from significant contributions from employees and communities and from a revision of the rules by which companies, employees and communities split the rewards and risks of production. Without these sacrifices and rule changes, the company would have failed.
While many companies embrace Northwest’s model of value creation by extracting concessions from employees and communities, other firms follow a model that instead focuses on sharing wealth generated by production without significantly changing the rules. During the last eight months, we have engaged in dialogue with the management of Bristol-Myers Squibb on the subject of executive compensation. Our shareholder resolution calling for a report on the company’s compensation philosophy was withdrawn after the company agreed to strengthen its disclosure on this issue. Bristol-Myers Squibb has made several important and innovative changes in its compensation structure during the last year. One such change, the Team Share program, affirms that value is created by every employee. Under Team Share, each of Bristol-Myers Squibb’s 47,000 worldwide employees received a 200-share stock option after completing three years of service.
Many companies have encouraged employee ownership by domestic workers, but few have extended these programs worldwide. Bristol-Myers Squibb is the first we know to reach into less industrialized countries. For a Bristol-Myers Squibb employee in Latin America, stock appreciation since the option grant has resulted in a gain of more than $5,000, the equivalent of a year’s salary. For the first time, many workers can think about owning a home or educating a child, their rewards for the creation of value.
The Bristol-Myers Squibb model should be considered by other multinationals. While on the surface the 9.4 million share “cost” of the program might seem high, it is equivalent to the 9.2 million options granted to a few hundred company executives during 1994 and 1995. Because of Team Share, Bristol-Myers Squibb investors can expect to receive the value created when all employees share the economic incentives previously reserved only for corporate managers.
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