Page 34 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

20 The Complete Guide to Executive Compensation

An industry in decline is the result of a disappearing market (e.g., black-and-white TVs)
dominated by several companies struggling with costs and excess capacity.

Turnaround, Sale, or Demise
The decline phase leads to one of three positions: turnaround, sale, or demise. Turnaround is
clearly the more attractive alternative. It is intended to reposition the organization to an
earlier stage, preferably growth, and could begin earlier (e.g., in the maturity phase). The
focus is not simply are cutting costs but also are improving performance. Sale is when the
organization believes a turnaround to be unlikely, and begins the search for a buyer before
the situation gets worse. This is often done under the guise of “exploring strategic alterna-
tives”—most believe this means the company is looking to sell out. Efforts will be made to
reduce costs in an attempt to make the business more attractive to a buyer—dressing it up for
sale. Demise means the company has been unsuccessful with the other two alternatives, or
may not have even had the foresight to attempt them, and goes out of business, resulting in
a bankruptcy Chapter 7 liquidation. If the company believes it can work its way back, it
may go into a Chapter 11 reorganization, holding back the creditors as it tries to return to a
profitable state.
There are many possible explanations for a company moving into a decline phase. They
may be internal, external, or both. Internal factors might include poor management deci-
sions, rising costs and declining prices, and a nonproductive workforce. External factors
might include new competitors, new technology, declining markets, or a redefined market.
Overnight carrier service companies soon learned that the fax machine would redefine the
movement of hard copy. This market in turn was redefined by e-mail.
To prevent demise, the organization must cut expenses. This includes shutting facili-
ties, terminating employees, and writing off nonproductive assets. Fixed costs such as
salaries and benefits are reduced where possible but, at the minimum, are frozen salary
increases are replaced by variable pay plans with upside potential and downside risk.
Substantial investments in company stock may be required of executives to reinforce the
company’s commitment to survival. It must then return to its core competencies (it prob-
ably does not have enough time to develop new ones), identifying products and markets
that will help it to a brighter future. Time is of the essence but the business must be viable:
buggy whips, 33 rpm records, and manual typewriters would be difficult businesses to turn
around.

New vs. Old Economy Companies
Much is being made of the difference between the new economy (high tech) and the old
economy (long-established, traditional companies). This difference between the “clicks”
and “bricks” is often described in terms similar to that shown in Table 1-10. Whereas the
old economy has high emphasis on salary, employee benefits, and short-and long-term
incentives (except for a low emphasis on stock options), the new economy is virtually the
reverse situation, with broad-based stock option plans going deep into the organization.
Companies in the new economy also would use larger grants for new hires and persons
promoted.
Actually, these are not so much differences in economies as differences represented by
their stage in the market cycle. The new economy mirrors the compensation element
emphasis in the threshold stage of development, whereas the old economy is representative