Corporate downsizing: Getting our policy right (original) (raw)

2019, Organizational Dynamics

During the early 1990s, the end of the Cold War resulted in a major recessionary shock felt across the defense industry. A 40% US government procurement reduction and major acquisition reforms led to widespread corporate retrenchment actions. Several firms exited the industry entirely. Others exercised major corporate restructuring and divestiture initiatives, commonly referred to as "smart downsizing." The most notable execution of this strategy was performed by General Dynamics Corporation (GD). From 1991 to 1993, GD exercised a series of restructuring activities, divesting seven divisions valued at 3.1billionandreducingitslaborforcebyanother27,250employees.Inordertoachievethisrestructuring,GDimplementeda"Gain/Sharing"approachtoexecutivecompensationwhichpaidcashbonusincentivestoexecutivesforreductionsinoperatingcosts(includinglaborforcereductions)andsharepriceappreciation.Higherexecutivecompensationinthefaceofsignificantlaborforcereductionswasroundlycriticizedbypoliticians,journalistsandlaborleaders,howeverGDdefendedtheplanasrequisitetoincentivizemanagerstomakethehardchoicesnecessarytoreturnvaluetotheshareholder.ParticularcriticismwasleviedatGDforexercisingemployeeforcereductionsratherthanretraining.CEOWilliamAnders′patentlydisagreed,stating"Idonotseethatwehaveaspecialobligationtoouremployees.Thisisanissueofexcesshumancapacitythathadtoleavethedefenseindustry...Wehavedonemorethananyotherdefensecontractorincreatingnewjobsbyputting3.1 billion and reducing its labor force by another 27,250 employees. In order to achieve this restructuring, GD implemented a "Gain/Sharing" approach to executive compensation which paid cash bonus incentives to executives for reductions in operating costs (including labor force reductions) and share price appreciation. Higher executive compensation in the face of significant labor force reductions was roundly criticized by politicians, journalists and labor leaders, however GD defended the plan as requisite to incentivize managers to make the hard choices necessary to return value to the shareholder. Particular criticism was levied at GD for exercising employee force reductions rather than retraining. CEO William Anders' patently disagreed, stating "I do not see that we have a special obligation to our employees. This is an issue of excess human capacity that had to leave the defense industry. .. We have done more than any other defense contractor in creating new jobs by putting 3.1billionandreducingitslaborforcebyanother27,250employees.Inordertoachievethisrestructuring,GDimplementeda"Gain/Sharing"approachtoexecutivecompensationwhichpaidcashbonusincentivestoexecutivesforreductionsinoperatingcosts(includinglaborforcereductions)andsharepriceappreciation.Higherexecutivecompensationinthefaceofsignificantlaborforcereductionswasroundlycriticizedbypoliticians,journalistsandlaborleaders,howeverGDdefendedtheplanasrequisitetoincentivizemanagerstomakethehardchoicesnecessarytoreturnvaluetotheshareholder.ParticularcriticismwasleviedatGDforexercisingemployeeforcereductionsratherthanretraining.CEOWilliamAnders′patentlydisagreed,stating"Idonotseethatwehaveaspecialobligationtoouremployees.Thisisanissueofexcesshumancapacitythathadtoleavethedefenseindustry...Wehavedonemorethananyotherdefensecontractorincreatingnewjobsbyputting3.4 billion back into investmentsby letting shareholders redeploy those resources in new industries for new products." From an immediate financial performance perspective, GD's plan was very successful. From the near 4billionincashassociatedwithitsrestructuring,944 billion in cash associated with its restructuring, 94% of GD's debt was retired, 4billionincashassociatedwithitsrestructuring,9413.2 million shares were repurchased, and shareholder dividends/special distributions were increased. During the 1991 to 1993 timeframe, share prices enjoyed a fourfold increase, significantly better than the defense sector average. However, GD simultaneously became a lightning rod of public scrutiny regarding its business ethics, particularly regarding its compensation policies. Between 1991 and 1993, distributions of 906million(906 million (906million(54 million to Anders alone) were made to executives in terms of salary and incentives. In 1993, after stating the major part of the turnaround was complete, Anders and two other corporate executives resigned their positions.