Wednesday, April 26, 2006

An Executive Fish Fry

It would be hard for me to describe how liberating it is to have blog! As I lay in bed the other night, I was pondering the things in my mind that I wanted to share and discuss with the rest of world. I wondered if anyone from the rest of the world would stop by the shack - and then I realized I didn't really care. Simply having the forum to let some of this out was good enough for me. As a result, I tossed and turned, trying to list out the things in my mind that were really bothering me - things I haven't really had a chance to disclose - until now.

In 2002, a very large software company in the pacific northwest (I'm trying hard not to name names) announced the retirement of one of its senior vice presidents - this one happened to run the company's Human Resources division. A job search ensued, and towards the tail-end of 2002 the search ended with the announcement that it had hired an HR "executive" with an impressive resume. At the time, a couple points intrigued me about the selection:

  • First, that the candidate was male: typically the senior HR role in a company is filled by a woman – now, before you hurl accusations that I’m making a sexist remark, let me assure you that I’m sharing my observations from what I see in the world
  • And second, the company demoted the position from senior vice president to corporate vice president. Now, for those of you not familiar with this particular company, "senior" is exactly what it says in relation to its younger sibling, "corporate": it is senior. A corporate VP role is significantly less significant than a senior VP. The signal, intended or not, was that this position just wasn't impactful enough to warrant a "senior" title, nor was the candidate who filled it "senior" enough to pull the bigger title.

The first time I met him, I was under-whelmed. He was short, fidgety with little beady eyes, and noticeably suffering from early onset baldness. His actions and his speech clearly disclosed that here was a man suffering not only from a self-esteem complex, but also from short-man's syndrome in the worst way.

He was relocated from somewhere in the southern US. The relocation expense to move him was quite large - I would know, because I owned the financial policy and accounting for said corporation's relocations. At that time, the company had a policy of providing tax gross-up assistance for employees who had relocated and received taxable benefits as part of their relocation package. The rate at which the gross-up was calculated (at that time) was based on the IRS guidance on supplemental income - 25%. Tax gross-up is an important benefit as part of the package; often, many relocation activities, if reimbursed by the company, are considered a taxable gain to the employee. However, once the company pays the tax on the benefit, the IRS considers the payment of tax a taxable benefit as well - and so the company continues to pay the tax burden on successive tax payments until the benefit to the employee becomes negligible. An example might help:

Say an employee is relocated and receives a taxable benefit as part of the relocation package - we'll use reimbursement of real estate commissions. They sell a $500,000 home, pay 6% real estate commissions which translates to $30,000. The company reimburses the employee $30,000 to cover that expense. However, the IRS considers that reimbursement a taxable benefit (income). Using the supplemental tax rate (which I understand isn't the employee's real tax rate), the employee would owe $7,500 in tax. The gracious company, not wanting the employee to be put out as a result of the relocation, pays the $7,500 tax. But the IRS considers that payment a taxable benefit (income) as well, and requires the employee to pay tax on the $7,500, which at the 25% supplemental rate is $1,875 - the company picks that up as well, which the IRS also considers taxable, and so on until the taxable benefit is so small that the employee couldn't possibly be harmed by the incremental penny (or so) in additional tax liability.

Back to the story. The tax gross-up policy stated to use the 25% supplemental rate. However, when the new HR VP arrived, he was upset that his particular situation wasn't grossed-up at his marginal tax rate (which would have been 39% back then). Now, for those of you that have had the joyful experience of working with senior level “executives”, you will understand that they can, and often do, throw tantrums when things don’t go their way. So, it was no surprise that he threw a small fit about wanting the additional tax benefit.

As expected, our subject of small stature decided to change the policy since the relocation guidelines fell within his purview. The proposed change entailed an increase in the tax gross-up rate to the highest marginal rate for all senior level relocations (anyone at the corporate VP level or higher). Why is this problematic? Because his proposal grandfathered all relocations within a specific period of time … and wouldn’t you know it, the period encompassed his own relocation by no more than two weeks. He set the timeline to include his own relocation.

Now, just think about it, because I’m not going to disclose actual numbers. This impacted the company by millions of dollars, during a time where all of us were doing our best to control costs under a famous cost efficacy campaign. As part of the cost control efforts, the payroll and promotions increases were cut multiple years in a row. Thousands upon thousands of rank and file employees were taking it on the chin to support the operating margins of the world’s wealthiest company, and here you have an officer of the company implementing policy to enrich his own pocketbook.

In 2002, Sarbanes-Oxley became law and required greater financial transparency on the part of all publicly traded corporations. It also put greater fiscal responsibility on the officers of said companies to avoid implementing personally enriching policy decisions. In my book, this episode was, at the very least, a violation of the spirit of Sarbanes Oxley and certainly a violation of the trust given by the employees and fellow officers of the company (some of whom were also enriched by this policy decision).

Should I be so troubled by this incident – I don’t know, but I am. To be fair, it is my understanding that the policy was ratified by the CEO and the senior leaders of the company, so in a way they endorsed this executive’s proposal and thought it perfectly fine to allow him the liberty of setting a personally enriching corporate policy. But it certainly reinforces in my mind an impression of class and caste in the corporate culture … a ruling nobility and a struggling bourgeoisie. Despite the nobility’s claim to the contrary, they only seem interested in their own enrichment, welfare, and entitlement; their actions are usually in conflict with their stated objective of developing their people and promoting from within.

In the end, the “executive” who is the object of this blog left the company in disgrace as a result of having at least one extramarital affair with a subordinate. It turns out he truly was a man of no morals or ethics, and was only looking to satisfy whatever whim he might have had at the moment, be it his wallet or his … well you know what. It is a shame that the CEO allowed him to resign, as opposed to terminating the sorry little sod; that seems to be the way of the “executives” – rarely are they terminated – and thus they continue to spread their disease of self-interest and narcissism in other organizations.

Am I the only one who feels this way? Am I being too harsh about this? Something inside me says I’m not – that the disgust I feel is fully warranted, but maybe I’m out on the far end of that continuum. I have a few more stories that I’ll share later … for now, thanks for stopping by and I hope the fare was to your liking.


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