Part 2 Incentive Pay and its Significance

A few months ago I wrote a blog post about how disgusted I was by the news of the Postmaster General and his compensation of nearly $1mm in 2008 even when the USPS lost so much money.  The primary reason for my frustration in that post was because of TARP and the restrictions that the Government (which is leaning more and more left every day) wanted to place on incentive-based pay for executives at banks.

A couple of very significant things have happened since that blog post (which was written on March 2nd).

The first: GM, after receiving billions of dollars in federal “loans” because they were deemed too significant to fail (by elected politicians who receive massive support from Unions and the Auto Industry), finally went bankrupt.  Anyone who didn’t see that coming back in November simply didn’t want to admit to the harsh reality of a company that was ultimately doomed unless it could shed its massive financial obligations and return to a management structure of fiscal prudence and actually providing a product that people wanted to buy.

GM has stayed in the news because they’ve got a massive overhaul to return to significance and it’s going to take a herculean effort by their new CEO to pull it off.  What the government hasn’t bothered to really look at, because of its fear that if they have highly compensated executives at an organization like GM their constituents won’t vote for them, is that Incentive-Based pay, with HUGE performance bonuses, is exactly what their CEO needs.  At the end of the day, why is he going to be punished for the sins of his predecessors?

Forbes had a brilliant article written at the end of May by Jack Dolmatt-Connell that you can find here.  In it, he suggests that the CEO should have a four-pronged compensation structure that is based on:

1. Cash Compensation that is limited to no more than $500,000 in base pay
2. Equity Compensation tied directly to increasing the market cap of GM over a long period of time.  The argument, if the CEO can turn around a company with a market cap of less than $1B and return it to its former prominence of $18B, they should be justly rewarded.
3. Severance & Change in Command: if there’s a crisis, the CEO is an At-Will employee.  They’re not entitled to a massive golden parachute if they get fired for cause.  However, if the CEO can turn the company around and sell it, they should receive a significant bonus on the money that is left over after the taxpayers are repaid.
4. Stock Grants: give them skin in the game that encourages prudence and gives a sense of ownership.

The second: I met with a long-time mentor of mine: the Honorable Carolyn Gallagher.  Carolyn happens to be the Chairman of the Board of Governors for the United States Postal Service.  I asked her some very blunt questions about the news surrounding the compensation package that Mr. Potter had received as the Postmaster General.

WOW! I was more than just a little surprised by her answers.

Because she had just returned from testifying in front of Congress, her understanding of the topic was very strong. Her argument for the justification of Mr. Potter’s pay was based on these points:

1. He’s the CEO of one of the largest Companies (in both revenue and workforce) in America.  Add to that, it’s a “quasi for profit” organization that leads all others in the mailing and delivery business.
2. Over the past 7 years, he has reduced annual costs by more than $1B per year while facing a reduction in business that is unprecendented in the 234 years of the organization’s existence (15% alone in 2008).
3. The pace with which mail volume has declined in the past 18 months has outpaced their ability to reduce costs because of the operational and financial restrictions that the government places on them.
4. He’s been responsible for leadership that eliminated 50 million hours of paid labor in 2008 (approximately the equivalent of 25,000 full-time employees).  He’s also proposed further cost reductions as well as a contraction of mail delivery from 6 days to 5 (a move that would save nearly $4B per year).  That’s quite a bit different from our current government’s perspective of looking at anything but service cutbacks to get our budgets in line.

All of these points were both valid AND significant.  They helped me better understand why Mr. Potter was likely under-paid (a mindset I would have never imagined leaving with) in 2008.  But none of them had the impact on me that her last point did – and this should both SHOCK and ANGER you as a citizen of America:

“Adding to this unprecedented financial challenge is the requirement passed in the Postal Accountability and Enhancement Act of 2006 that the Postal Service make payments of $5.4 billion or more per year to fund future retiree health care obligations. In fact, if not for this payment, the Postal Service would have earned a profit of $2.8 billion in 2008, an exceptionally challenging year.”

In case you’re wondering, the USPS is the ONLY organization affiliated with the US Government that is required to fund their future retiree health care obligations.  While I believe that a model like this is fiscally prudent (though I don’t believe in pensions and retiree health care), it’s ridiculous to think that we could come anywhere close to predicting what the cost of healthcare will be 20 or 30 years from now.

I realized at this point, that our Postmaster General is not only deserving of incentive-based pay, he should be considered as a viable candidate for President of the United States.  Not only is he running a massive organization that is profitable during a period of intense market pressures and decline in demand, he’s doing so while having to deal with heavy governmental criticism and oversight that is akin to him having to fight with one hand tied behind his back while at the same time improving customer satisfaction and delivery rates.

To you Mr. Potter and to you Mrs. Gallagher: BRAVO.

For Reference:

You can read the full transcript of the Honorable Carolyn Gallagher’s testimony in front of congress HERE.

Tags: 234 year history, align pay with performance, bankruptcy, barack obama, Carolyn Gallagher, congress, employee retention, fiscal prudence, forbes, fritz henderson, GM, Honorable Carolyn Lewis Gallagher, incentives, Jack dolmatt-connell, Jack Potter, John Potter, pension, performance bonuses, Postal Accountability and Enhancement Act of 2006, postal service, Postmaster General, reduce mail delivery from 6 days to 5, retiree healthcare, stock grant, TARP, testify in front of congress, testimony, united auto workers, United States Post Office, USPS