Jake Martin, CMDR USN Ret., didn’t do much to make Larry feel at ease. Martin always arrived precisely on time at Larry’s office dressed in his well-tailored pilot’s uniform, his brimmed hat tucked securely under one arm, black shoes shined to a high gloss. Jake Martin consistently greeted Larry Baxter with his outstretched, unnaturally tanned hand and artificially white-toothed smile. The pilot’s very presence triggered feelings of inferiority and insecurity in Larry that had been suppressed since junior high school.
Jake Martin was Jeffery Elkins’ first choice for corporate pilot. One interview made the CEO feel secure and safe – and they weren’t even in the air. The retired Navy man exuded calm confidence without a hint of ego. Jake Martin was an exceptional pilot and he knew it – there was no need to brag or boost his resume. What he wanted from an employer was trust and respect.
His personal story was interesting but largely irrelevant to his qualifications. Born and raised in Florida, at age eighteen he applied to and was accepted at the Naval Academy. He loved everything about Annapolis and made the most of his four years there. Jake knew he wanted to fly and after flight school his desire quickly landed him in Vietnam near the end of the war. His extended tour of duty kept him in the service through the departure of American forces in 1975. He flew evacuations from the American Embassy that year, and later was stationed in Thailand as the U.S. government’s attentions turned to Laos. During the most stressful periods of his duty, Jake Martin found solace and sanity in his dreams of returning to the charms of the Annapolis area with its four distinct seasons and the beauty of the Chesapeake Bay.
After his early retirement from the Navy, he bounced around for a brief period, looking for an opportunity that felt right. Then came a call from a Navy buddy who had recently gone to work for Federal Express.
“They’re recruiting pilots, Jake. The money’s good and it’s a solid company to work for. You should come to Tennessee and check it out.”
Flying for Fed Ex felt effortless after the war. It was a great gig in the companionship of pleasant and reasonable people who respected and rewarded hard work and excellent skills. But after a few years Jake got restless. Tennessee was okay, but he missed being near the water. He started scanning ads for private pilots in trade magazines. Not just any pilot job, Jake was looking for something specific. It took nearly eighteen months, but one evening as he paged through Aviation Week, there it was: an ad for a full-time corporate pilot in the greater Washington, D.C. area.
Now, what seemed like a lifetime later, Jake Martin was happily working for Easton Transportation. At forty-eight, he looked every bit the part of a corporate pilot, just as his boss had the classic appearance of an American CEO. When they exited the plane together, they could draw stares – in part due to their good looks and chiseled features, but also because their heights differed by nearly a foot. Jake was short, tan, and trim with dark eyes and dark hair graying slightly at the temples. He loved the corporate pilot lifestyle. He lived in a stunning home on the Severn River near Annapolis and flew regularly to Vegas, San Diego, Miami, Austin and occasionally London. He enjoyed piloting a corporate jet for a CEO who sincerely appreciated his abilities. Best of all, his job description was blissfully simple: fly the plane and keep one person happy – Jeffrey Elkins.
Comp Gap 101
When word traveled back to T.J. Clarke about the rumors Larry Baxter was spreading concerning his competencies, T.J. was furious. For weeks afterward, he sat behind his closed office door and brooded on what to do. He even discussed the situation with several of his closest colleagues, including his long-time mentor at the consulting firm he previously worked for in Washington. In these conversations, T.J. played out his “what if” fantasies of confronting Larry Baxter, or scheduling a private meeting with the CEO to enlighten him about T.J.’s compensation knowledge relative to that of his boss. He even considered stirring up a confrontation between Larry and some of the division heads who continued to be impressed with T.J.’s skills despite Larry Baxter’s insults.
Ultimately, T.J. did none of these things. Some informed observers surmised that T.J.’s inaction resulted from his hatred of confrontation. He couldn’t bear to initiate one. Others thought it was his distaste for any change to his established daily routine and habits, and a major confrontation would likely result in a job search and a new employer.
Although both observations about T.J.’s personality were accurate, the main reason he chose to do nothing about Larry Baxter’s assault on his abilities was the realization that, in the end, he would gain nothing and risk losing everything. More than confrontations and change, T.J. Clarke hated to lose.
Instead, T.J. decided to remain at Easton and quietly champion fair compensation practices for the average employee. Although he acknowledged his efforts were quixotic, T.J. still considered it a noble cause. To do this, he would need to stay on top of every relevant salary survey available. He would also have to closely follow all the established and emerging executive compensation trends in the industry. Larry Baxter would need to keep up if he wanted to continue discrediting T.J. as a dim bulb.
The more T.J. Clarke studied the developments in the gap between executive compensation and everyman’s pay, the more disgruntled he became. In the two years between Clarke’s fall from wonder boy status and the day The Easton Company was sold, there was plenty to be angry about.
The phenomenon of creating lottery-size pay increases for top executives was helped along by the innovations of the nation’s leading executive compensation consultants, who were profiting wildly from their advice. It would be a few more years after the sale of The Easton Company, and multibillion dollars more in U.S. mergers and acquisitions, before the IRS began playing hardball on executive compensation. It would take even longer for Congress to start asking questions and taking names to determine whether all this expensive consulting advice regarding executive compensation was truly independent.
Meanwhile, reload stock options – the financial equivalent of a perpetual motion money machine – helped give millions of valuable stock shares to executives, until a change to the accounting rules unplugged the machine. A compensation consultant had invented reloads, too.
But little changed despite all the fierce talk about reining in executive compensation practices after Enron, Tyco, and a slew of other big payouts and bad press credited to top corporate executives. In fact, negotiated CEO pay packages just kept getting bigger. Sure there were a few CEOs – Steve Jobs and Ben and Jerry for example – who were attempting to do the right thing by capping their cash compensation or taking only one dollar in annual salary in answer to the universal questions: When is enough really enough? How much can one person deservedly earn? What should be the maximum x-factor when comparing CEO compensation to the pay of an employee in the lowest job within the same organization?
For T.J. Clarke and many other observers of the executive comp phenomenon, it all boiled down to one searing ethical issue: How can an organization justify giving rank-and-file employees four percent raises for excellent performance when the CEO could sink the ship – or better yet, sell it out from under himself – and walk away with a king’s ransom?
PART THREE
LEADING UP TO ANNOUNCEMENT DAY
Thought Leader
In the months immediately preceding the announcement of the sale of The Easton Company, T.J. Clarke closely followed the widening gap between executive compensation and everyman compensation within the company. The company initiated several rounds of layoffs and opened an early retirement window accompanied by a modest incentive package targeted at long-service administrative employees. It was clear to T.J. that the company was attempting to get lean to make itself more attractive. But attractive to whom? Stockholders? Lending institutions? Potential buyers? T.J. considered each of these possibilities.
Then came the hiring of Lee Martino as Easton’s chief operating officer, and the swift early retirement of three senior company executives, ea
ch of whom had been perceived as a potential successor to the CEO if Jeffrey Elkins ever retired. All three had spent their careers at Easton and were serious businessmen. To the surprise of most corporate employees, each had walked out the door with a big package and the sure knowledge that they would not be the next CEO of The Easton Company.
Around the time Lee Martino joined the company, T.J. Clarke began quietly sharing with friends his vision of what was coming: the sale of The Easton Company. T.J. continued to repeat his theory whenever conversation among coworkers turned to recent company decisions that somehow failed to fit the history and framework of Easton’s corporate culture. The reaction from his fellow employees was outright disbelief when he predicted in a low voice, “They’re going to sell the company – I just know it.”
Long-service employees who couldn’t begin to imagine a world without The Easton Company would always quickly disagree.
“Oh T.J.,” they would say, “you’re such a pessimist. That’s not going to happen.”
T.J.’s response was always the same. With a look of brooding disappointment on his face, he’d silently return to his office and shut the door, totally convinced – despite his workmates’ reactions – that he was the prophet of doom and the day of reckoning was near.
Three months before news of the company’s sale hit the airwaves, T.J. Clarke was invited to speak at a regional compensation and benefits symposium on the topic of executive compensation trends. He accepted gladly, knowing the invitation was made based on the reputation of his employer more than his own. Larry Baxter tried but failed to intervene after hearing from a colleague that T.J. was on the speaker’s list. T.J.’s former boss at the consulting firm had suggested the speaking invitation to the July symposium, and the firm was one of the event’s sponsors.
T.J. Clarke’s executive compensation presentation featured the level of detail many expected. There were plenty of charts, graphs and statistics that reflected his love of the topic’s fine points. Then T.J. stunned the room with his summarizing comments:
“The persistent problem we face in executive compensation at the beginning of the twenty-first century is lack of transparency. From a reasonable person’s perspective, there is no sound logical explanation for the value given to a CEO’s job in relationship to the pay of everyone else in a company – no matter how hard we attempt to spin it.”
T.J. could sense his audience audibly holding their collective breath. This was not the message they were expecting at a business leaders compensation and benefits symposium.
“These huge paydays for executives are a major contributor to the perception – and in some cases the reality – of the gap between the very wealthy and everyone else in the American workplace. Let’s be honest. Exactly what is it that these gentlemen are doing to make their contribution worth so very much more than all the other workers in the same organization? When the CEO’s base pay is $4.35 million, how much should the receptionist be making?”
Looking out into his audience, T.J. saw what was always obvious in any gathering of human resources professionals – significantly more females in the room than males.
“And yes, we’re definitely talking about men. If you want to know how women executives are making out in the world of executive compensation compared to their male peers, flip through the pages of any merger Schedule 14-D and look for women among the list of Named Executive Officers who are getting special treatment in these deals. If you find one, make sure to notice that, no matter their titles or credentials, even in the world of merger bonanzas, the women are getting significantly less than the men.”
Pausing briefly T.J. took a slow, deep breath as he headed for the conclusion of his speech.
“The concept of market driven CEO pay may be one of the biggest hoaxes in corporate America. It’s pure fiction that top executive pay packages are constructed by independent compensation consultants. Clearly, when the same consulting house is hired for additional projects and services, it becomes difficult to recommend executive pay restraints that might jeopardize their other business with the same client, thus stifling any hope for independent guidance.
“What about the role of a company’s board of directors in these situations? Unfortunately, the compensation committee of a board is often no better than the proverbial fox watching over the hen house. Commonly, directors who demonstrate the slightest concern about executive pay excesses mysteriously never make it to, or are promptly bounced from, the board’s compensation committee.
“And what about the role of government? No matter the level of interest and intervention by Congress, the courts, or the SEC in the area of executive compensation, it will take a lot to convince me that executive compensation decisions are given the same scrutiny as other business decisions in any for-profit corporation.
“I have to agree with that business writer in the Washington Post – Steven Pearlstein – who wrote: ‘We’ll know there’s a true free market evaluation of executive comp taking place when an executive comp firm by the name of Hard Bargain Associates shows up to claim the best track record for securing from skilled CEOs the highest level of performance for the least amount of money.’”
As T.J. stepped away from the dais to a combination of polite and enthusiastic applause, one of the other presenters – a silver-haired gentleman in a very expensive suit – leaned over and whispered into T.J.’s ear, “Who the hell do you think you are?”
Turning to face the man who was pretending to clap and smile for the benefit of the audience, T.J. firmly replied, “Oh, I know who I am. I’m T.J. Clarke, your new creative thought leader on matters involving everyman compensation.”
What Happens In Vegas…
On a hot day in late May Jeffrey Elkins casually stopped George Miles in the corridor outside the annual real estate developers conference and asked if he had dinner plans.
Elkins had speculated about this encounter for months before it actually happened. Inviting the head of your major competitor to dinner certainly wasn’t a common occurrence, even during these annual industry events. For too long now he’d been thinking about the possibilities – and the outcome.
Six months earlier Elkins first planted the seed of change with his senior executives during a company meeting also held in Las Vegas. He’d explained where The Easton Company fell in the pecking order of its competitors and spelled out the current realities of this dog-eat-dog business. As of the previous spring, all their remaining U.S. competitors were family owned and controlled. The Easton Company was not. It was only a matter of time before a hostile takeover or a white knight situation might present itself.
His executives listened attentively, asked a few polite questions, talked among themselves, and then intellectually set aside the CEO’s comments during the plane ride home. Their perspective focused on a different set of factors. Among its peers, The Easton Company was an industry leader with a respectable history and deep roots in the community. The corporation was profitable, viable, and stable. A takeover of any sort seemed inconceivable.
Jeffrey pondered his executives’ reaction. They’re all too comfortable, he thought. I won’t speak of it again until after I’ve floated the idea of a sale to a potential buyer. Then I’ll know more about the possibilities.
Over a bottle of Opus One Meritage and grain fed, free range bison filets, Jeffrey Elkins made George Miles’ eyes light up. Pratt-Miles was about the same size as The Easton Company, but its properties were definitely more middle class, while Easton was known for its diamond-level developments. By the tilt of George Miles’ head, Jeffrey knew he was already mentally running the numbers. Pratt-Miles was cash rich and had a reputation for “buying up” in the world of mergers and acquisitions. Buying The Easton Company would be a very big deal – the biggest in Pratt-Miles history. It would not be easy but it would be lucrative.
Just like in the game of Monopoly, when you have a handful of Illinois Avenue and someone offers you a chance to buy a fistful of Park Pl
ace, mouths water. Game on. Roll the dice. Let the negotiations begin.
Get On Board
“What in the world is going on?” Turning the corner into summer, that question started nearly every closed-door session among the Easton employment staff. Their impromptu meetings characterized by intense whispers and occasional expletives had been ongoing for nearly a week. The situation at hand was peculiar for The Easton Company. In the midst of an unusual downsizing program at corporate headquarters affecting administrative staff and support personnel, here they were suddenly interviewing for three newly created executive positions. These high level jobs were not in the budget, nor on anyone’s wish list for the current fiscal year. It was a puzzle. There were a number of hunches, but no one could figure it out.
The employment staff had just completed a series of meetings with administrative employees affected by the downsizing. They were primarily older women with long service whose jobs were being eliminated. The one-on-one appointments were painful and the employment department had exhausted boxes of tissues as tears flowed. The enhanced pension benefits and severance payments were generous for the industry and the region, but very few of the targeted employees wanted to leave The Easton Company. That was always the problem. Hardly anyone ever chose to leave unless they were moving, retiring or dead.
The downsizing had made it a rough month and it reflected the mood of the headquarters staff. The soon-to-depart employees were quite popular and well known to their fellow workers. Many were female employees who had been instrumental in carrying on Easton company traditions, giving their time and talents to mark holidays, birthdays and other important occasions. Some were part of Easton’s informal social committee; the group that always volunteered to help run the company’s charity events, fundraisers, and celebratory luncheons. Newer corporate employees quietly speculated that was one reason these individuals’ jobs were being eliminated. As employees in a fast-paced, demanding Fortune 500 corporation, the social committee group seemed to have too much work time available for so much social frivolity. Employees who had been around longer saw it differently. They sensed the company was eliminating these jobs to get rid of the people who fostered the Easton culture from an earlier era.
Pink Slips and Parting Gifts Page 7
