http://geoffcolvin.com/fortune_articles/ Geoff Colvin's Fortune magazine articles en geoffrey_colvin@fortune.com Copyright 2009 2009-09-21T20:36:42-05:00 http://geoffcolvin.com/site/renovating-home-depot-aug-18-2009/ http://geoffcolvin.com/site/renovating-home-depot-aug-18-2009/#When:20:36:42Z That's part of CFO Carol Tomé's job, and after the housing bust it's tougher than most - but the lessons are valuable for anyone.(Fortune Magazine)—Think the recession has been tough on you? If you’re in the housing sector, like Home Depot, this is the downturn’s fourth year. The company’s revenues are down, and the stock has dropped 36% over that period—but revenues have held up at its rising competitor, Lowe’s (LOW, Fortune 500), and its stock hasn’t suffered as much. All of which makes life more than interesting enough for Carol Tomé, 52, Home Depot’s CFO since 2001. Her boss, CEO Frank Blake, thinks highly of her; he has expanded her responsibilities to include the company’s growth initiatives and real estate portfolio, and he has called her "the central nervous system of the company." Analysts think she could be a future CEO. Born in a log cabin hospital in Jackson, Wyo., Tomé (pronounced toe-may) is very likely one of the few Fortune 500 CFOs who knows how to brand cattle. Her father owned a bank, and as a university student she intended to work in it—until he sold it. From a career perspective that was probably a lucky event. She talked recently with Fortune’s Geoff Colvin about the outlook for housing, the state of the U.S. consumer, leadership in tough times, and much else. Edited excerpts: Home Depot has as great an interest in the housing sector as any company in America, so you spend a lot of time developing an outlook on housing. What’s the outlook now? We look at every housing indicator you can imagine, and the statistic that we seem to be most correlated with is private fixed residential investment as a percent of GDP. The 60-year average is 4.8%. At the height of the homebuilding market, that number stood at 6.3%. At the end of the first quarter of 2009 the number stood at 2.7%, so there has been a huge contraction, which has certainly impacted our business. Between 2006 and 2009 our sales will be down about $15 billion. So I look at the number 2.7% and 60 years of data and say, Hey, it’s logical to assume that the worst is behind us. Could there be continued contraction? Sure, but that serious, significant decline that we’ve experienced should be over. That gives us some comfort that recovery will happen. The question is when. And what’s the answer? We don’t know. I wish I could give you a definitive date, but we don’t have it. 0:00 /4:17A female CFO’s journeyvidConfig.push({videoArray: ["/video/fortune/2009/08/19/f_cs_tome_woman_cfo_experience.fortune.json"], collapsed:false});We’ve also seen that the housing crash is highly regional. What have you learned? We’ve seen great variability across the country, and one thing that we are looking at very closely is foreclosures. In states like California, where we saw foreclosures accelerating, our comps—same-store sales—in the first quarter were worse than the company average, but in states where foreclosures are decelerating, like Indiana, our comps were better than the average. If there’s a silver lining in any of this, could it be that foreclosures are a good thing for Home Depot? Anybody who buys a house in foreclosure almost certainly needs to fix it up. There is always a silver lining. When homeowners come into a foreclosed home they need to do some work. They often need to clean the house, and we’ve got a wide variety of cleaning products. They need to replace the carpet, paint, replace the faucets, perhaps the window coverings—so yeah, we see a real opportunity there. Housing is at the center of this recession. Do you have an economic forecast? For the home improvement sector we were forecasting a contraction in 2009, and that’s turning out to be true—with the first half worse than the back half, and that’s turning out to be true. As we build our plans for 2010 and beyond, there’s a lot of inconsistency in what we’re hearing, a lot of wanting to believe that the recovery is soon upon us. Our approach is to be more conservative. If we’re wrong and the upside happens before we plan, that will be great. Home Depot spends a lot of time and effort studying the U.S. consumer. What’s the state of the U.S. consumer today? For the consumer shopping in our space, their spending patterns have changed dramatically. There’s been a real shift away from discretionary big-ticket projects to the core repair and remodel. In this year’s first quarter, tickets of $50 or less were basically flat year over year. But tickets of $500 or more were down by double digits. People are coming into our stores, but they’re shifting how they’re spending. We also know that credit is an important part of the value proposition, and the U.S. consumer’s ability to get credit is lower than it was a year ago. The credit quality of our customers is quite high, but we think perhaps consumer credit will keep tightening. So that’s your environment. How has the company responded? First we wanted to make sure that we kept our associates, the men and women on the floor of the store, totally engaged. In an environment where a lot of companies were cutting back, we said no. We are going to invest in those associates. We’re going to pay merit increases, pay bonuses, make contributions into the 401(k) plan. We’re going to be singularly focused on them so they can take care of the customers. We introduced something we call power hours inside our stores. In the hours when traffic is heaviest we stop all activity that is not customer facing—pack-down activities, say—and spend 100% of our time taking care of customers. Meaning everybody in the store? Everybody. Even if you’re in the receiving area, if you’re in the vault, you come out on the floor. It’s a wonderful experience. We hear from 100,000 customers a week more or less. They rate us on a number of attributes, and our scores are better than they’ve been in three years. So the voice of the customer is telling us we’re doing the right thing. A lot has happened from an expense and capital allocation perspective as well. We made some really hard decisions last year, including the closing of 15 stores. We removed 50 stores from our new-store-opening pipeline. We exited our [high-end] Expo business, 34 stores that we closed earlier this year. We reduced our support staff by over 2,000 people. We made the right choices to take care of the customer and preserve the company for the long term. Part of the choice that we made was looking at our square-footage growth and saying, Hey, this country is over-stored. We’re going to rationalize square-footage growth and reallocate capital into activities inside our stores that should help the customer experience. Adding stores used to be something that Home Depot did on a mammoth scale. Now that has almost come to a stop within the U.S. That’s a strategic choice. Is there a danger that you may be at a competitive disadvantage some years down the road? Because you have a strong though smaller competitor in Lowe’s (LOW, Fortune 500), which is expanding more aggressively. You can’t win the game by square-footage growth. You win by the customer experience, making sure that service is there and the products are there at the right price. We realized over the years that you could continue square-footage growth because there’s plenty of real estate out there, but you’d dilute returns. That is not in the best interest of the customer or the shareholder. We have a three-legged strategy, and you will recognize this from Jim Collins’s book "Good to Great." What are we passionate about? We are passionate about our customers. What are we the best at? Product authority. And what drives our economic engine? Productivity and efficiency. It is no longer driven by square-footage growth. We’re still going to open stores—we’re opening 13 stores this year. But it’s not about that any longer. It’s about how do we get more sales per square foot in the existing stores? We do that when the market recovers, and we do that by capturing market share. The market share focus is something we are starting to show great results on. In a recession practically every company has to decide what it’s going to cut and what it absolutely will not cut. How did you decide? We really let the customer make some of the decisions for us. Investing in the associates was a decision that I mentioned. Reducing our support staff was a hard decision. We lost 10% of our officers. They were personal friends of mine, they’d come to my house for dinner, and they are no longer there. That was hard. But it was the right thing to do for the company. In the first quarter we were $80 million under our expense budget. We’re finding opportunities that you wouldn’t believe—we’re so big that a small change can mean real money. For example? We have a pro desk inside our stores. The professional contractor is a very important customer to us—3% of our transactions and about 30% of our business. We serve coffee at the pro desk. By changing the brand of coffee—not stopping the coffee, because coffee is important—but by changing the brand we will save our company $500,000. It doesn’t take too many $500,000 decisions to make a penny per share. Another key strategic decision is pricing. In your space you have to decide whether you’ll use everyday low pricing, the Wal-Mart strategy, or use promotions. You’ve been on both sides of that choice. What’s your thinking now? Our thinking is everyday value. Every product in our store has a role and intent, and they drive the pricing strategy. Two examples. Think about insulation—we should be the destination for insulation. When you say, I need to put some insulation in my ceiling, we should be top of mind. So when you come into Home Depot (HD, Fortune 500) for insulation, we should be the very best price, the lowest price in town. That would be a destination category for us. Now think about batteries. Are we top of mind when you need a double-A battery? No, that’s an impulse product for us. We will have a good price, but we don’t have to be the best price. Imagine the power of assigning role and intent to everything we sell. We said we would grow our gross margin, and in each of the past seven quarters in the U.S. our gross margin has increased. We’re able to bring great values every day to the customer and still grow our gross margin. Can you give more detail on that? Lots of people would love to know how you grew gross margin in this environment. We’ve moved off the promotion, and when you don’t repeat promotions from the prior year you get a margin benefit. We’ve also looked at our assortments and decided that for some categories we’re happy where we are. We are the No. 3 retailers of appliances. We’re happy being No. 3. Appliances are a low-margin category. If you don’t increase the penetration of the low-margin categories, you can grow your gross margin. When a company has a prominent competitor, like Lowe’s, differentiation becomes really important. How is Home Depot going to differentiate itself? Today one point of difference is that we have more stores and are more convenient, but that will erode over time if they continue on their path of opening stores while we are rationalizing our square-footage growth. So then what is the point of difference inside the store? It is really that belly-to-belly experience between the associates and the customer. The customers who are shopping us today are saying they see a difference. Our challenge is to invite back those customers who may not love us because we’ve disappointed them. We need to invite them back so they can experience that point of difference. From a merchandising perspective, I will tell you that if you go to our hand-tools or power-tools aisle, we’ve got a broader assortment than anyone in town. We have great prices, and we should always win on product. But what is the stickiness? The stickiness has got to be about the human experience. What are the financial measures on which you reward store managers? An interesting point—we changed it for our store managers. They have a financial bonus and a nonfinancial bonus, and for the financial bonus you have sales and profit. We changed the weighting so it is more heavily weighted on profit, and in an environment where expense control is so very important, guess what happens—they are all focused on expense control. The store managers understand it impacts their wallet. So we are seeing a tremendous performance across the board from an expense control perspective. You know, you can drive behavior based on how you compensate. The Employee Free Choice Act, generally known as card check, is a huge issue for Home Depot, with 300,000 non-union employees. Does it worry you less now than it did six months ago? We are worried about it because we think it is just wrong. It has morphed a bit [with a key provision weakened in the latest version], and that we think is very good news. But we think it’s wrong. Any expectations about what’s going to happen with it? No, but let me tell you what will happen. We will do the right thing for our stores. When we talked to our store associates and said, Why would you want to join a union, you know what we learned? It is really not because of our pay. It is because of the relationship they have with their boss. So the most important thing for us is to make sure that our store manager can call each of his or her associates by name without their apron on and know something about them—to create that connectivity, the family within the store, which keeps any organizing activities outside, regardless of what might happen. Financial organizations are traditionally very male, and there aren’t many women CFOs in the Fortune 500. What’s the key to becoming one? The key is to surround yourself with the very best talent. I am currently blessed. I have the best financial team in corporate America, I believe, and with them we have done just great work. You’re the only senior manager at Home Depot who has worked for all four of the company’s CEOs—Bernie Marcus, Arthur Blank, Bob Nardelli, and now Frank Blake. They are radically different human beings. Tell me honestly—what is the key to your longevity at the top of the company?It boils down to a few things. I am really passionate about the business. I am not kidding—you cut me, and I will bleed orange. I love the business. I also know the business. When I started in the company 14 years ago, I knew the company only as a customer. I didn’t know it from a retail perspective or a merchant perspective, and I learned very quickly that I needed that knowledge. So I put on an apron and worked in a store. I know the numbers, but I know the drivers behind the numbers even more, and I think that has really helped throughout my career.Bernie Marcus told me when I became the CFO, "Carol, I think you’re charming, and you can use your charm on Wall Street." I was, like, okay. Then he said, "But I won’t know that you’re really doing your job until somebody calls you a bitch." I said, "Well, I can do that too." Listening to the advice that I get now, I might have taken Bernie’s advice a little bit too literally.What have you learned about leadership from the experience of these past two or three years? I’ve learned a lot. I’ve learned that it is really about the power of the team and the importance of alignment. You’ve got to break down silos, particularly in an environment like this. The only enemy we have is the company headquartered in North Carolina [Lowe’s]. We need to be aligned as a team, and we have made great progress in that regard. I’ve learned that you’ve got to have a sense of humor. We’ve had some dark days, and the ability to just crack a joke or laugh for a minute really does help. It really is important to laugh at yourself and to say, Okay, I blew that, but that’s okay. Pick yourself up and keep going on. And never lose sight of the customer. At the end of the day it all comes back to the customer. The more time you can get out of the office and spend time talking to the customer, the better it is. 2009-09-21T20:36:42-05:00 http://geoffcolvin.com/site/3-big-myths-about-health-care-reform/ http://geoffcolvin.com/site/3-big-myths-about-health-care-reform/#When:20:28:06Z With historic legislation on the line, the spin is coming from all sides. Here's how to sort through it.(Fortune Magazine)—One of Washington’s true epic battles will play out over the next several weeks. It’s the fight over health-care reform, of course, and it will be big, brutal, and ugly. The stakes are high—trillions of dollars, the reelection prospects of hundreds of legislators, and President Obama’s legacy. So let’s acknowledge right now that nobody will be fighting fair. We will hear half-truths, shameless spin, and outright lies coming from all sides. How to keep your head when all about you are losing theirs? You can start by understanding three myths about health-care reform we’re guaranteed to hear repeatedly. Remember them. Whenever you hear one of them, you’ll know that someone is trying to mislead you.Myth no. 1: Rising health-care costs are a problem in themselves. We’ve all seen the graph that shows health-care costs increasing much faster than GDP; it’s usually presented as evidence of the crisis we’re in. Take a graph with that same trajectory and label it "Sales of hybrid vehicles" or "Downloads from the iTunes Music Store," and nobody proposes government intervention to stop it. Yet health-care costs, too, are in fact revenues, and fast-rising revenues are generally seen as exciting and laudable in every industry except one. How come?0:00 /3:36Health care attitudesvidConfig.push({videoArray: ["/video/pf/2009/08/11/p-velshi-chattanooga.cnnmoney.json"], collapsed:false});It’s because we all sense that in health care we aren’t getting our money’s worth—that tons of dollars are wasted. So the problem isn’t that we’re spending so much, but why. That distinction is crucial because partisans on all sides will soon be telling us how their plan would slow the rate of spending growth. But slowing spending is easy—just give people less care. Instead, make advocates tell how their plan would address the "why" by cutting waste and boosting efficiency. When they do, make sure they don’t invoke ...Myth no. 2: The fee-for-service system is a major part of the problem. You hear this from both sides: When you pay providers for each service, they have an incentive to sell you more services. Thus, the argument goes, we squander billions on needless MRIs, doctor visits, hospital nights, and so on. The trouble with this reasoning is that we avoid that problem when buying other complex services, from consulting to car repair, on a fee-for-service basis.The reason we buy loads of unnecessary health-care services is not the fee-for-service system, which we use to buy almost all services. It’s that we aren’t paying with our own money. Only 12% of U.S. health-care spending is out-of-pocket, a proportion that has been falling for decades. If each of us controlled more of the money that’s being spent on our behalf for health care, we can be certain it would be spent more carefully, on services directly or on insurance that covers those services. Don’t let reform partisans tell you how they’d eliminate fee-for-service; make them tell you how they’d let consumers direct more of their own health-care spending.Myth no. 3: A well-designed government plan can avoid rationing. The Obama administration has stated flatly that "health care will not be rationed" under its plan. So let’s be clear on this: Health care will be rationed. It must be. To say otherwise is to say the government can supply it in unlimited quantities to everyone. This point is so obvious it should not be controversial, but the high-voltage word "rationing" seems to blow people’s processors. (By the way, health care is rationed in private systems too, but it’s done by price, and we don’t call it rationing.)Reform that broadens coverage, improves outcomes, and reduces waste is such an ambitious goal that we may fail to achieve it. The contending forces are so powerful and have so much at stake that I won’t attempt to predict the outcome. But we’re likely to get something, so we should at least try for reform that isn’t based on these myths. That may be asking a lot. 2009-09-21T20:28:06-05:00 http://geoffcolvin.com/site/making-big-drugs-during-troubled-times-jul-9-2009/ http://geoffcolvin.com/site/making-big-drugs-during-troubled-times-jul-9-2009/#When:20:24:30Z Amgen CEO Kevin Sharer's job is to produce blockbuster drugs. Will health-care reform make that harder?(Fortune Magazine)—These are momentous times for Amgen, the world’s largest biotech company. The health-care revolution brewing in Washington could be dramatically good news or bad for a business whose drugs tend to be life-changing—and highly expensive. Also on deck this year is a critical FDA decision on Amgen’s denosumab, a possible blockbuster treatment for osteoporosis and bone cancer on which Amgen is betting heavily. If it’s approved, analysts expect annual sales of at least $1 billion—maybe double or triple that. Overseeing it all is CEO Kevin Sharer, 61, who joined the company 17 years ago as a newcomer to biotech after a career with the U.S. Navy, McKinsey, General Electric, among others. Amgen (AMGN, Fortune 500) stock has been up and down during his nine years as chief, but right now Wall Street likes its prospects: 19 analysts rate it a buy or a strong buy, based on denosumab’s prospects and further operating efficiencies, while five say it’s a hold in light of the recession and strengthening competition. Fortune’s Geoff Colvin talked with Sharer recently about health-care reform, cancer treatments, advice for new CEOs and aspiring CEOs, and much else. Edited excerpts: Health care looks like the big issue of the summer, and President Obama’s major theme is cost reduction. Many Amgen drugs are very expensive. Does that make them especially vulnerable? To give a little context, the biopharmaceutical industry, including pharmaceuticals and biotechnology, is about 8% of the total health-care bill, and it’s projected that, due to generic drugs and a few other things, that expenditure line is going to be flat for a few years. So the biopharmaceutical part of the system is sort of self-correcting. As for individual biotechnology drugs, I think we have to look to value. For example, one of our drugs, Enbrel, is profoundly important to people with rheumatoid arthritis. It lets people who in many cases couldn’t even get out of bed have a full life. It’s an expensive drug [costing typically $20,000 to $24,000 a year], but the value it delivers is there. Sixty percent of the potential medicines for cancer are in the biotechnology pipeline, and if we can have a cancer drug that has profound benefit, generally that’s seen as really good value. But we do have to be able to defend the value of the drug. 0:00 /3:30Managing Amgen in a recessionvidConfig.push({videoArray: ["/video/fortune/2009/07/08/f_cs_amgen_managing_recession.fortune.json"], collapsed:false});What about value in enabling the system to avoid costs that would be greater without the drug? The way I think about value is avoided cost and quality of life or extension of life. Extension of life is very, very hard to achieve, but quality of life is important. We haven’t yet developed a language in society to have that conversation. We need to develop a language of value in health care. A central part of the debate right now is whether the program, whatever it turns out to be, should include a public plan. What’s your view? The devil’s in the details. I would generally favor a private-sector solution, but if a public plan is deemed necessary, I would hope that it’s on a level playing field. I fear statements like "What the industry needs is a not-for-profit plan to keep it honest." I’m not sure how that works. We do need to get access for people who don’t have insurance. But I’d favor private sector over public. If you could write the bill and have the President sign it, how would it read? There are three big principles I’d want to keep in mind. First, access—are we giving access to people in a reasonable and affordable way? Second is hope. The real thing I think America looks for my industry to do is come up with cures for the toughest diseases society faces, and I wouldn’t want to do anything to diminish innovation. And the last thing I’d hope for is equity—each member on the game board is going to have to contribute money to pay for this new environment, and we’re probably going to have to tighten our belts. I hope those decisions are made on an equitable basis and everybody feels like they’re paying their fair share. When biotech was getting started back in the 1970s, part of the excitement was its potential for someday defeating cancer. It’s 30 years later—how are we doing? It’s still an important goal. There’s definitely been progress made. There are many cancers that would’ve been a complete death sentence 30 years ago and that now we manage in a chronic way. We still have a lot of work to do. We understand the biology a lot better, but cancer is hundreds of different things, at least seven to 10 different biological mechanisms. And the body is amazingly redundant—you block one thing, something else happens. I think we’re going to be fighting cancer as a disease for the next 50 to 100 years, which seems very, very long, and it is long, but in a medical products development time frame, that’s probably four or five product development cycles. We are making progress, there’s no doubt about it. They say every problem is an opportunity. Have you found any opportunities in this recession? The opportunities are for a company that has a strong financial position and a good reputation. In our industry there are many biotechnology companies that are having a hard time raising cash. Those are opportunities for us to help them develop products. Our biggest opportunity in this situation is to reach out to some of the earlier-stage companies and see if we can find some products we can help develop. Just the other day we announced a $50 million investment in a small company called Cytokinetics (CYTK), which has a novel mechanism of action for congestive heart failure. It’s a difficult disease. This is an early stage, but we think the biology is exciting, and we were delighted to have the chance to invest. In April you cut Amgen’s full-year sales outlook. How come? For the first time in anybody’s memory we’re starting to see the biopharmaceutical industry and the medical industry at large affected by a recession. I think there are a couple of reasons. One is very high unemployment, and every time the unemployment rate goes up, people lose health insurance. Second, I think people are more aware of what they have to pay—some of the cost has been shifted to them. While people don’t have a full understanding of their cost of health care, they now bear more cost. That combination, I think, is unique. And so what we did, out of caution, is we said it looks like a 1% effect on sales. We cut some costs, and our earnings should still be fine. Everybody has made cost cuts in this recession, but choosing what to cut is a major management decision. How did you make that decision? We made it as a team. I have eight or nine people I work with, and we try to make decisions based on collective judgment. The most important thing is to develop the products we have in the pipeline, so we protected that. Equally important is to make sure of the quality of the products we deliver to the market—no compromise. But you’d be surprised when you look at things as mundane as travel, temporary workers, and vendors. You can get more money out than you might think. It’s no one big thing. It’s tightening the belt across the board but keeping the critical activities well funded. One area where companies typically cut in a recession is training and development. What have you done? We have not cut anything in development. When I became CEO about nine years ago, we decided that executive development was profoundly important, and we run weeklong classes with case studies from Amgen’s experience, mostly things we didn’t do well, because that’s what you learn the most from. We haven’t cut back on that at all. Developing people is the future of the company. Earlier in your career you worked in three of the highest-performing organizations I know of: the U.S. Navy, McKinsey, and General Electric. What lessons did you take away about what creates a high-performing organization? I was in the submarine force in the Navy, Adm. Rickover’s child, and the basic thing that came out of the Navy was that the level of excellence you should hold yourself to should be extraordinarily high. At McKinsey what I learned was to make complexity simple in an analytic way and to communicate it so people can quickly understand it, and be right. At General Electric (GE, Fortune 500) I learned how to be a general manager. It was probably the best factory I ever saw for that. I spent time on the chairman’s [Jack Welch’s] staff, and watching him up close showed the power of embracing reality, being nimble, being adaptive, aggressive, competitive—but still, as he used to say, we can be hardheaded in business yet softhearted when it comes to taking care of people. All those organizations are intensely people-focused. My life experience has taught me that there is no substitute for the best team. If I were going to give advice to a new CEO, I’d just say there is no substitute for the best team, and do what it takes to get one. What have you learned about evaluating people when you’re trying to distinguish the future stars from the rest? Early in my career I thought I was able within a minute or two to evaluate anyone. I’m not that cocky anymore. So I’ve learned it’s good to have multiple views of someone before you make a decision. The second thing I’ve learned is that personal characteristics are fundamental. If you don’t have the right personal characteristics, I don’t care what experience you have. The third thing is that, particularly at the senior levels, looking at where someone has been and what they’ve done is profoundly important in deciding what they can do. Then there’s some intangible that’s hard to describe, but you know it when you see it—and if you’re right three out of four times, you’re in the hall of fame. You mentioned Enbrel, the arthritis treatment. It accounted for almost a quarter of revenues in the first quarter, and sales of it were down markedly. How is Amgen going to make up for that? One of the things that has affected that drug is these high co-pays that I talked about, and we’ve taken steps to relieve consumers of that burden. We’re making sure that consumers don’t pay any more than a nominal amount in co-pay, and we basically will handle the co-pays for them. Why are investors and the industry so interested in denosumab? Denosumab is a drug for osteoporosis. It has a new mechanism of action. It works on the bone biology to slow down the molecule that chews up the bone. You only have to take a shot twice a year, and you’re protected from osteoporosis. We’ve very, very excited about it. We’re also developing it for a kind of bone cancer, and we look forward to the final results of those trials this year. This has been a drug we’ve worked on for 15 years. We did the fundamental biology and invested over $1 billion. I bet my job on it. So I was happy that it turned out okay. What happens next? We’re working with the FDA now, and it’s not over till it’s over, and you never predict exactly what agencies in the government are going to do, but I’m very, very enthusiastic, and more important, the doctors who’ve looked at it have been very positive in their response. I think it’ll really be important for patients. How dependent will Amgen be in its near-term future on this drug? As is often the case in our industry, one drug is important, and this is clearly important in the intermediate term to us. Some analysts have predicted that it could have quite large potential. The unmet need for osteoporosis is huge. So it’s very, very important to us. You’re an engineer, not trained or educated as a biologist or scientist, but you’re managing a company that’s built entirely on science and biology. How can you make the big decisions you have to make? I leave the early discovery decisions to the scientific leadership. It’s not something I have expertise in. It doesn’t cost that much money. When I get involved is when we start spending a lot of money, which is when we start registration trials. For example, denosumab was over 10,000 patients, 25 countries, hundreds and hundreds of millions of dollars. We put the firm’s reputation on the line. It gets publicity. So as the product moves through the pipeline, I get more and more involved. Again, I don’t independently make the decision. I just convene the right people, listen to the conversation, and ask the right 10 questions. Would I be correct in saying research is the core of Amgen? Yes. So much depends on the passion and dedication of your scientists and researchers. How can the CEO manage that? The board asked me that question, and sitting on our board is a Nobel Prize winner in biology [David Baltimore, now president emeritus and a professor at Caltech] and a distinguished physician-scientist who’s run big systems [Gilbert S. Omenn, former CEO of the University of Michigan Health System, now a professor at Michigan]. So it was a serious question. When I knew I was going to be CEO, I took a little sabbatical at their direction to learn about R&D, and I thought maybe there was a system, an answer. What I found out is, there’s about 16 things you’ve got to do right, but the single most important thing, I decided, was hire the best person in the world to run research and development, and support that person. That’s what I tried to do, and I think I got close to succeeding. [Amgen’s R&D chief since 2001 has been Dr. Roger M. Perlmutter, a former Merck executive and professor at the Howard Hughes Medical Institute at the University of Washington.] It’s having that person, then giving them the money and telling them to swing for the fences. Presumably that person has tremendous power to attract other scientists. Another easy concept I have is that A’s don’t work for B’s very long, so you’d better start with A’s at the top. Earlier you told us your advice to a new CEO. What’s your advice to somebody who wants to be a CEO but isn’t one yet? First is broad responsibility—don’t get channeled into just one functional area. Second is to focus on the job at hand, not your career. Third, be willing to embrace risk and know that you only grow outside your comfort zone. Talkback: What diseases do you think Amgen should focus on when trying to develop the next blockbuster drugs? 2009-09-21T20:24:30-05:00 http://geoffcolvin.com/site/national-healthcare-may-never-happen-jul-7-2009/ http://geoffcolvin.com/site/national-healthcare-may-never-happen-jul-7-2009/#When:20:09:36Z Americans love the idea of insurance for all - until they realize how much it will cost them.NEW YORK (Fortune)—The latest polling looks great for President Obama: It shows that Americans love national health care. If history and polling trends are any guide, however, that will change. Voters right now are in what the famous pollster Daniel Yankelovich called the Wishful Thinking stage—a moment in the life of an opinion analogous to the dreamy early days of a relationship. Yankelovich believed opinion evolved through seven stages: Dawning Awareness, Greater Urgency, Reaching for Solutions, Wishful Thinking, Weighing the Choices, Taking a Stand, and Making a Responsible Judgment. In the next few weeks, when voters discover what national health care will cost and how it would affect their own care, romance will give way to reality.Americans favor by more than 3 to 1 "the government offering everyone a government-administered health insurance plan that would compete with private health insurance plans" and other large-scale federal initiatives. At least that’s what they thought as of mid-June in a New York Times-CBS News poll. But the respondents in that poll were opining about an idea, not hard facts.Only after most of the polling was complete did the Congressional Budget Office release its bombshell evaluation of Sen. Edward Kennedy’s reform bill, which would just begin to do what the poll respondents so enthusiastically favor. The report’s sobering bottom line: The bill would increase the federal deficit by $1 trillion over the next decade yet make only a dent in the number of uninsured, who would decline from 19% of the non-elderly population to 13%.That combination—huge cost, minor benefit—is probably not what most people thought they’d be getting. Another bill, from the Senate Finance Committee, would cost still more. Legislators are scrambling for fixes, but even if they find them, they’ll face a separate problem. Health-care reform is going to cost major dollars no matter what, and those dollars will have to be extracted mainly from those most able to pay, the top-earning 40% of the population. When these top earners figure out that they’re being asked in a recession to shell out more—through increased taxes, higher insurance premiums, or other mechanisms—for benefits that will go mostly to others, they won’t be happy. And that top 40% knows how to make itself heard in Washington.This isn’t just speculation. Similar scenarios played out in 1992 when the Clintons pushed for their ill-fated Clinton Care plan and in 1988 after Congress passed an insurance plan to protect the elderly against the costs of catastrophic illness. In 1988 polls had shown that Americans overwhelmingly favored such a plan in the abstract, and large bipartisan majorities passed it in both houses. Only the top 40% of seniors would have paid a tax surcharge to fund the plan, but those were the people who tended to carry supplemental insurance already. Once they realized what was happening, they howled in a way that legislators couldn’t ignore. Seventeen months after President Reagan signed the bill into law, Congress repealed it. None of its provisions ever took effect.0:00 /2:47Health insurance nightmarevidConfig.push({videoArray: ["/video/news/2009/06/24/n_health_insurance_nightmare.cnnmoney.json"], collapsed:false});Today, with more ambitious reforms on the table, a scenario not unlike 1988 could be taking shape. Dig deep into the latest polling, and you’ll find that while most Americans believe health care is a serious problem, 77% are satisfied with "the quality of health care you receive." When that large majority finds they’re being asked to pay more for something they’re basically happy with, they will enter Yankelovich’s fifth stage, Weighing the Choices.Yankelovich wrote rather presciently in the pages of Fortune back in 1992 that stage five is the hardest because it is the moment on the journey to a rational judgment when people must come to grips with the painful tradeoffs inherent in all complex issues. So when will that happen? I predict that stage five will begin in August, assuming the House passes a bill before Congress takes its August recess. Only then will we discover what citizens truly believe about health care. The result could be far more modest reform than we’ve been led to expect. 2009-09-21T20:09:36-05:00 http://geoffcolvin.com/site/bussiness-gets-taxed-workers-get-hurt-jul-29-2009/ http://geoffcolvin.com/site/bussiness-gets-taxed-workers-get-hurt-jul-29-2009/#When:20:04:45Z The Obama administration wants to whack companies with stiff new taxes, but the real victims are already suffering enough.(Fortune Magazine)—Sometimes what’s politically irresistible is economically nonsensical, as we may soon be reminded. The Obama administration, desperate for revenue and spotting an easy target, is proposing three hefty tax increases on business. If the administration gets its way, the result will be bad news for all Americans. The first instance of dangerously mixing politics with economics was the administration’s announcement in May that it wanted to "reform our international tax laws" so that they don’t "stack the deck against job creation here on our shores." In a smooth bit of political rhetoric, the White House linked international corporations to individuals who illegally evade taxes by secretly stashing income overseas. "Today our tax code actually provides a competitive advantage to companies that invest and create jobs overseas compared to those that invest and create those same jobs in the U.S.," or so began the White House’s May 4 statement. In the very next sentence, the administration segued to "our tax system is rife with opportunities to evade and avoid taxes through offshore tax havens." The average citizen had to conclude that most big U.S. companies are tax cheats. Only a dedicated student of accounting would figure out that the term "tax haven" as defined by the Treasury Department means any country with a lower corporate tax rate than America’s, which is all countries except Japan. The reality is that the administration is lashing out against perfectly legal behavior. A U.S. company that makes money in Country X pays Country X’s taxes on that money. If the company ever brings the money back to the U.S., it must also pay the additional tax that would be due under America’s higher rate. The administration argues that since America has virtually the world’s highest corporate tax rate (and even Japan’s is only a fraction of a point higher), current rules create incentives for U.S. companies to operate anywhere but here, at the cost of U.S. jobs. The White House therefore proposes charging all American companies full freight—the whole difference between their overseas taxes and the U.S. corporate rate—on all their profits as soon as they’re earned, no matter where. This measure, in their minds, would bring jobs home. If the logic eludes you, you’re not alone. The bottom-line effect of the change would be a steep tax hike—more money vacuumed out of corporate coffers. Would that make U.S. companies competing in a global economy more inclined to hire additional workers in the highly expensive U.S.? The answer is clear. It’s why Microsoft chief Steve Ballmer said recently that if the change is enacted, "we’re better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S." That’s Obama’s first proposed business tax increase. Another would require companies to account for their inventories on a first-in-first-out (FIFO) basis rather than a last-in-first-out (LIFO) one—an eye-glazing change that’s highly significant. In an era of rising costs, to assume that you’re selling your oldest inventory rather than your newest increases reported profits and thus taxes, even though nothing real has changed. If inflation turns worse, as many analysts predict, FIFO would force companies to pay real taxes on phantom profits as the value of goods gets inflated while they sit in inventory. The third business tax hike would be the new levy on carbon emissions. Regardless of the form it takes—a cap-and-trade system or a carbon tax - and despite the good reasons for it, it’s still a tax, money out the door for which a company gets nothing. 0:00 /4:24Evaluating Obama’s overhaulvidConfig.push({videoArray: ["/video/markets/2009/06/19/mkts_ss_obama_overhaul_analysis.mov.cnnmoney.json"], collapsed:false});The problem with sticking it to business in these three major ways is that ultimately business doesn’t get stuck. Taxwise, a company is just a bunch of incorporation papers; all taxes are paid by people—customers, shareholders, and employees. And guess who would bear most of the burden of these tax increases? It’s the U.S. employees of the companies being taxed. Research has shown that when business taxes are raised by a dollar, 70¢ to 92¢ of it comes out of employees’ pay. When workers wake up to that fact, they may decide this is one time they don’t want the White House beating up on business. 2009-09-21T20:04:45-05:00 http://geoffcolvin.com/site/geoff-colvin-on-the-upside-of-the-downturn/ http://geoffcolvin.com/site/geoff-colvin-on-the-upside-of-the-downturn/#When:21:32:42Z View the associated video for The Upside of the DownturnView the associated video for The Upside of the Downturn 2009-06-10T21:32:42-05:00 http://geoffcolvin.com/site/the-upside-of-the-downturn/ http://geoffcolvin.com/site/the-upside-of-the-downturn/#When:21:20:20Z This recession will change the course of your career. Whether you're damaged or strengthened depends on the way you respond. Can you rise to the challenge?(Fortune Magazine) -- The recession that followed World War II was hard on everybody, but it was especially tough for Bill Hewlett and Dave Packard. Supplying equipment to the government had been a big part of their young company's business, and that revenue mostly disappeared when the war ended. Beyond that problem, the overall economic contraction that followed the drop in government spending meant that companies - HP's (HPQ, Fortune 500) other class of customers, since it didn't then sell to consumers - weren't buying either. The firm faced a crisis of survival. It was one of those moments when the behavior of a company's leaders in a brief period will determine its future for a very long time. As biographer Michael S. Malone has documented, Hewlett and Packard had built their business from the beginning on the principles of loyalty and trust, but in these circumstances they realized that they simply could not avoid mass layoffs. They fired 60% of their employees. Among the survivors, though, something curious happened. Those who remained were forced to stretch themselves in new ways. The company's manufacturing chief turned himself into a knockout marketer and was so successful that he remained in that role for the rest of his career. Even Packard himself found muscles that no one suspected he had. Though never considered a genius engineer - that was Bill Hewlett's role - Packard returned to the lab at this time when the company was desperate for new products, and he invented one. It was a voltmeter, the beginning of a product line that would serve the company quite profitably for 50 years. Packard never invented any more products; his genius was managing the company. But when a dire situation pushed him beyond his apparent abilities, he excelled. This recession is much worse than the one following World War II, and for millions of people globally it's a time of deep personal trials. Truly everyone is being stress-tested. Yet of the many opportunities that arise out of troubled times, the most valuable of all for many businesspeople are the opportunities for personal growth, particularly for developing as a leader. But the growth isn't automatic. Achieving it demands that we respond in the right ways. How leaders view crisisTurmoil presents the ultimate leadership opportunity, but for every inspiring story of James Burke and the Tylenol crisis, there's at least one less heralded tale of a leader who blows it. Coca-Cola (KO, Fortune 500) CEO Douglas Ivester happened to be in Paris in July 1999 when news reports said that cans of bad Coke had made several Belgian schoolchildren sick. Ivester, a brilliant financial executive with a sharply analytical mind, quickly determined that all production procedures were being followed and that his products did not pose any health risks. He got on his plane and flew back to Atlanta. But more people got sick, images of suffering children dominated TV news, politicians demanded action, and the mess eventually cost Coke millions of dollars plus years of distrust and bad will from all its stakeholders. It also contributed to Ivester's getting fired within months. In a crisis, he turned out to be a manager, not a leader. So what does true leadership under unimaginable stress look like? It can be boiled down to four actions. They're simple to state and may seem deceptively simple to do, but they aren't. Finding the strength to take these steps will contribute significantly to any leader's growth. 1) Be seen early and often. This most basic requirement is important for a fundamental reason that is often forgotten: People want to be led. The reasons we crave leadership are deep. We want the leader to be a repository for our fears. When people are desperately worried, they want to know that someone with greater power than theirs is working to solve their problems. Thus, successful leaders in a crisis first make emphatically clear that they are present and on the job. This kind of visibility isn't easy, because the leader in a crisis has a million things to do, most of which require being on the phone or meeting with small groups. In a business crisis, lawyers may be advising the leader not to make any public statements. Yet it must be done. Michael Dell's company was not large or well established in the early 1990s when he was scheduled to appear at a conference where I was moderating. The day before, Dell (DELL, Fortune 500) had announced unexpectedly terrible results. The stock had plunged, and some people wondered whether Dell himself, who wasn't yet 30, could lead his organization past this. The situation was so serious that most of us at the conference assumed he wouldn't show up. But he did, appearing unfazed and explaining his plan. Simply appearing reassured his constituencies and increased their confidence for the future. 2) Act fast. It's amazing how people who would be at one another's throats in good times will accept that in a crisis, decisions have to be made. Leaders in a crisis must not lose their rare opportunity to act. The difficulty is that just when decisions are most easily accepted, they're hardest to make. All business decisions are made with incomplete information, and that's especially true in the heat of a crisis. At the same time, the stakes are much higher than usual. Every instinct tells you to decide more slowly than usual, yet it's vital to decide more quickly. 3) Show fearlessness. When Robert the Bruce led the Scots against the English at the Battle of Bannockburn, he led them literally, riding a horse in front of the rest. As legend has it, a mounted English knight spotted him, lowered his lance, and charged. Bruce stopped and didn't move as the knight thundered toward him. Then, at the last moment, he stood in his stirrups, turned sideways, swung his battle ax, and split the passing knight's helmet (and head) in two. Bruce's troops were so inspired that they roared into battle and won the greatest victory in the history of their nation. We want our leaders to show us that they're not afraid. In business that means facing bad news head on without cringing. The effective leader announces trouble in unvarnished terms - people can smell evasion a mile away - then explains confidently how it will be defeated. Fearlessness can be shown more tangibly as well, when a leader cuts his own pay or, even more powerfully, uses his own money to buy company stock, as several CEOs have done in this recession. Note that the advice here is "show fearlessness," not "be fearless." A prominent CEO, who didn't want to be quoted for obvious reasons, told me, "Any CEO who isn't terrified in this recession has no sense at all." To suggest that you be fearless would be ridiculous. But what counts is what you show. Robert the Bruce was probably terrified. It didn't matter. 4) Tell a story that puts the crisis in context. Extensive research has shown that how people are affected by stress depends heavily on the way they see it. Those who see stressful events as bad, abnormal, and inescapable tend to suffer from them much more seriously than do people who see those same events as normal, interesting elements of life from which they can learn and to which they can respond. Some research has found that members of the first group suffer much worse health than those in the second group. The first group burns out more quickly and performs much worse than the second, even though both are subjected to the same stress. A critical question for leaders is whether they can help everyone in the organization respond more like members of the second group. The answer seems to be yes. When the stock market was dropping in late 2008, I asked Charles Schwab about it. He began his answer by saying, "I've been through nine of these darn breaks. This happens to be the most pervasive in terms of how it has spread through the economy." He went on to explain how it differed from previous market declines and how the market would eventually climb back up. This was precisely a group-two response, starting with the idea that what some investors considered financial Armageddon was really just part of a very long pattern. His overall message was that this is interesting and something to which we're all capable of responding. ***These four steps may require you to stretch beyond your comfort zone. And that is exactly the point. Research has established that what turns average performers into great performers is a process of being continually pushed just beyond their current abilities, and then responding to the new challenges with focused efforts to overcome them, accompanied by abundant feedback about the results. But constantly attempting what you can't quite do, which is the essence of the process, is a recipe for trouble in most jobs. It means that you will inevitably make mistakes and have failures. Now if you ask accomplished businesspeople, as I have often done, whether they learned more from their successes or their failures, 100% of them will say the latter. But most employers don't want to hear that your mistakes have been an absolutely necessary part of your growth. They just want you to perform. So that's what most people do in their jobs, operating entirely within their comfort zones and as a result not getting any better. We know this not just from observing it in our own workplaces but also from considerable research showing that most people improve rapidly in the early days of a given job, then plateau, and may continue for years thereafter without progressing. Seen against this backdrop, the precise nature of this opportunity is clear. The recession, by pushing everyone past the limits of his or her current abilities, places us all on the first step of the process. Whether we take the next steps is for each of us to decide. Five moves to make nowCertain practices that are always valuable for a business actually become easier to adopt in a recession.1) Evaluate employees better. In good times it's easy for employees to look like stars, so evaluations tend to become less rigorous. Managers are fooled into believing they've assembled all "A" players. In tough times it's much easier to distinguish the true stars from the third-stringers. Just as important: With the unemployment rate rising, employees are much more inclined to take evaluations seriously.2) End guidance. Telling investors what quarterly earnings are likely to be, then talking that number up or down as the quarter progresses, and then contriving to beat it - that corporate game has never served a useful purpose and can lead to much harm as managers feel pressured to hit announced targets. That's why such respected firms as Aetna, General Electric, Intel, and Unilever have stopped giving quarterly guidance in recent months.3) Manage for value. In good times your company's performance is probably attractive almost any way you look at it. Now it's more critical than ever to focus on what really matters, which is earning a return on your company's capital that exceeds the total cost of all the capital in the business. If that seems painfully obvious, please stop and reflect on whether you or anyone in your business is being paid explicitly for achieving that goal. Most employees at every level are paid to hit other targets - salespeople have sales quotas, plant managers have quality goals, even the CEO may be focused on reported earnings per share. None of those goals is the same as value creation.4) Expand your mind about risks. The most dangerous risks your company faces are the ones no one wants to address. That is always true; now the trauma of this recession has made it far easier than it has been for years to talk about unimaginable risks.5) Mine employees for ideas. Potential improvements can hide in a million places. Staples recently found $21 million of efficiencies in the way it runs its warehouses. When I asked CFO Christine Komola how they knew where to look for the savings, she replied immediately, "Ask the associates. They know."  2009-05-28T21:20:20-05:00 http://geoffcolvin.com/site/when-government-calls-the-shots-april-1st-2009/ http://geoffcolvin.com/site/when-government-calls-the-shots-april-1st-2009/#When:15:51:22Z (Fortune Magazine)—Forget about the debate over stimulus "coordination" coming out of the March G-20 meeting, or whether some countries, like France and Germany, should do more. The fact is, between China’s $586 billion stimulus, Japan’s $200 billion, and U.S. government outlays that will soon be the highest share of GDP since World War II, we’re already looking at more than $2 trillion of added government spending worldwide in response to this recession. That’s an unprecedented global wave, and it means that government will soon be exerting more influence over business than it has in decades. Culturally, it is the reverse of the Katrina effect. Then government looked incompetent while business rode to the rescue, with Wal-Mart, FedEx, Home Depot, and others sweeping in to offer victims well-organized help. This magazine’s cover line: GOVERNMENT BROKE DOWN. BUSINESS STEPPED UP.Now it’s the opposite. Business looks inept or worse, and we turn to government to punish the guilty, help the suffering, and fix the economy. The new view: Business screwed up; government steps in. Sir Martin Sorrell, chief of giant communications company WPP, recently told me, "Government is the only growth industry in the world right now." The best companies and managers will figure out how to profit from this shift. The opportunities are many - and they go well beyond the obvious. Trying to cash in directly on government spending will provide short-term benefit for some, though any who are new to government transactions will be staggered by how cumbersome, slow, and uncertain they are. The better bet for most businesses will be to observe a few general principles. Watch for different effects in different markets.Some steelmakers have cranked up production in anticipation of a major jump in demand from government infrastructure projects. No doubt they’re right, but those projects haven’t started yet, so for now the supply surge is actually sending steel prices down. The low-price buying window will close when infrastructure spending takes off. A different example: Consider that Brazil’s stimulus package consists entirely of tax cuts, with no additional spending, while Argentina’s is all spending with no tax cuts. Companies with operations in South America can start responding now to more consumer spending in Brazil - and more capital spending in Argentina. Don’t expect government to ease your burdens.We haven’t seen government as hero in the U.S. since the 1960s. No one knows how long the new perception might last, but for the moment this is the worst possible environment for any business to claim it’s burdened by overregulation (as the airline industry arguably is) or is overtaxed, as corporations in general are. Find a wealth redistribution play.Worldwide, we’re likely to see heavier taxes on high earners and greater benefits for low earners. In the U.S., for example, now is the best possible moment for labor to be pushing the Employee Free Choice Act, legislation that would make labor union organizing far easier; as Washington funnels hundreds of billions into giant corporations like GM and AIG, a Democratic administration probably can’t deny labor its top priority. That will hurt some businesses and help others. The chief of a major grocery chain tells me it would help him because it will probably raise the costs of Wal-Mart and other non-union competitors, while his company is already unionized. Adapt to changing global economies.Not all stimulus spending will be major; the Italian and French programs amount to less than 1% of GDP, for example. But China’s program not only is large - about 7% of GDP and growing - but is also structured to redirect the Chinese economy. Spending on R&D and worker training are intended to build the country’s stock of intellectual capital, making it more attractive for high-tech and information-based businesses and eventually less inviting for lower-value businesses, like toymaking, as worker pay levels rise. Similarly, subsidies for wind, solar, clean coal, and nuclear power in the U.S. stimulus could reshape the energy sector for years or decades. Government is now the world economy’s driving force. Not many businesspeople will like that. But it’s reality, and the best leaders will face it - and find a way to profit from it. 2009-04-21T15:51:22-05:00 http://geoffcolvin.com/site/layoffs-cost-more-than-you-think-march-17-2009/ http://geoffcolvin.com/site/layoffs-cost-more-than-you-think-march-17-2009/#When:15:49:45Z (Fortune Magazine)—As Warren Buffett likes to say, "It’s better to be approximately right than precisely wrong." Every CEO should remember those words when confronting the powerful temptation to lay people off. When you’re desperate to save money, calculating the savings from firing staff is easy. But figuring the costs - the real costs - is hard. In fact, you can’t do it precisely. So a lot of managers, rather than trying to get the costs approximately right, just assume that they equal the severance costs. That’s being precisely wrong, as Buffett would say, and it can get a company in trouble. Sometimes, of course, layoffs are unavoidable. But before you pull the trigger, consider their true price: Brand equity costsHundreds of companies now state an explicit goal of being an "employer of choice" in their industry or locale. That’s a worthy goal in an economy where the war for talent is a long-term fact of life. How badly will a layoff damage your company’s brand as an employer - and its ability to attract the best talent? Top law firms compete ferociously for the best new lawyers, yet many of those firms are laying people off. New York-based Simpson Thacher & Bartlett figured this was the moment to offer associates a chance to take a year off to work on a public service project and get paid $60,000 plus benefits - less than half their normal pay but a lot better than nothing. And it makes the firm much more attractive to the next crop of law school graduates. Leadership costsLayoffs greatly increase the chance that you’re firing a future company leader. You may never know whom, but the effect is still real. The banking and electric-utility businesses went through severe cutbacks in the 1980s, and executives in both industries have told me that they paid a heavy price 20 years later when they needed experienced, knowledgeable leaders and found only a broad empty space in the ranks. Morale costsEven the survivors pay a price. They "will certainly experience some grief. They also fear the loss of their own job," says leadership consultant Wally Bock. Sometimes the effects are worse. Workers who remain after a layoff file dramatically more medical claims, reports a study by Cigna and the American Management Association. Wall Street costsDon’t count on a layoff announcement to make your stock go up. It might, if you’re laying off people because you’re combining two companies in a merger, says Bain & Co. But if you’re laying off employees strictly as a cost-cutting measure, Wall Street may see the move as a sign of trouble - and send your stock down. Rehiring costsThe day will come when the economy turns up, and when it does, you’ll face the costs and delays of hiring and training new employees. Companies that have held on to their workers will be able to respond far more quickly. Northwest Airlines learned that lesson when it fired hundreds of pilots during tough times in 2007. When business picked up later that year, it had to cancel hundreds of flights because it didn’t have enough pilots. The airline scheduled its remaining pilots too aggressively, and at the end of each month many of them had used up their permissible flight hours. The company had to speed up its recall and retraining of laid-off pilots. Not many companies will avoid layoffs in a recession as bad as this one. Yet some manage. What do they do instead? Toyota (TM) continues to pay people but uses the time for training, education, and public service projects. The city of Atlanta recently cut hours and pay by 10%. FedEx (FDX, Fortune 500) has imposed graduated pay cuts - less for front-line workers, more for managers. Then there’s Aflac (AFL, Fortune 500), which has never had a layoff in its 54 years of existence. Janet Baker, senior VP of corporate learning, told me how that record fuels a virtuous circle: "Everyone understands that we’ve never had a layoff and is a good steward of our resources to make sure we don’t have one." How much is that worth? How much do layoffs really cost? Just remember that it’s a lot - even if you never know precisely 2009-04-21T15:49:45-05:00 http://geoffcolvin.com/site/chris-dodd-wants-to-scrap-your-bonus-march-6th-2009/ http://geoffcolvin.com/site/chris-dodd-wants-to-scrap-your-bonus-march-6th-2009/#When:15:39:58Z p>(Fortune Magazine)—When Senator Chris Dodd, (D-Connecticut) crammed what he dubbed "tough new limits" on "lavish Wall Street bonuses" into the stimulus package, he may have created a bigger problem for the economy than the one he was trying to solve. The reason? His plan inadvertently rewards nonperformance and will drive talented financiers away from the companies that need them most. "There will be a flood of top performers leaving for positions that have no restrictions," says Richard Smith of the Sibson compensation consulting firm. The pay rules "will slow the only financial engine that can pull the economy out of this mess." Senator Dodd tacked 11 pages of pay restrictions onto the stimulus bill at the last minute. (Dodd’s office didn’t return a call seeking comment.) The main reason they’ll backfire is that they make pay for performance, otherwise known as bonuses, illegal beyond a modest allowance, yet they permit unlimited pay for nonperformance. An executive may be paid a guaranteed base salary of any size but may not receive a bonus exceeding one-third of total pay. And even that minor bonus cannot be based on profits; the rules prohibit any pay plan "that would encourage manipulation of the reported earnings" of the firm, which is of course what any plan based on profits would encourage. So paying top executives in any sensible way is forbidden. Think of it this way: You want your kids to clean their room, but they know you’re taking them to the movies regardless. You can still threaten not to buy them the giant box of Gummi Worms - but the decision must not be based on whether their room is clean. Will this plan work? Another consequence of the new legislation is that it will drive the craftiest financial minds away from the most troubled institutions. The new rules apply to the five highest-paid executives, plus at least the next 20 highest-paid employees at the largest firms getting TARP funds - "at least" the next 20 because the Treasury Secretary can extend the rules to cover even more employees. Let’s think this through: Imagine a guy running a foreign-exchange trading desk at Morgan Stanley (MS, Fortune 500) or Goldman Sachs (GS, Fortune 500). He has never been anywhere near toxic assets. Let’s suppose he’s good at his job and made $100 million for the firm last year - money that strengthens the firm and reduces its need for capital injections from taxpayers. And let’s imagine the firm wants to pay him a $5 million bonus on top of a $500,000 base salary. Washington’s message to him: You must be punished! We’ll make sure you’re not incentivized to perform as well this year. Thus, the best performers, those most eager to show their stuff and get paid for what they produce, will leave the firms that most need excellent performers. They’ll go to companies that can pay people what they’re worth. Deutsche Bank (DB) chief Josef Ackermann can hardly wait. "Talent will be happy to work for us," he said in anticipation of the new rules. Employees who stay put, by contrast, will be time servers who most like the comfort of guaranteed pay. Sounds like the post office. Senator Dodd’s attempt to turn masters of the universe into bureaucrats even extends to where they dine. Instead of using the Zagat guide, TARP recipients may be expected to work from a list of restaurants "identified by the Secretary" of the Treasury, since by law he must now specify which entertainment expenditures are "excessive." Thus, a Washington civil servant could end up judging whether a Manhattan banker can take good customers to dinner at Per Se, or whether TGIF might be elegant enough to close a deal. Your tax dollars at work. So here’s my suggestion: Trash the rules in the stimulus bill and let Wall Street’s ruthless labor market work. It’s true that Wall Streeters sometimes get staggering bonuses; they also get fired without pity. Tens of thousands are out of work now, the guilty and the blameless, including top dogs from Citigroup (C, Fortune 500), Merrill Lynch, and AIG. Washington would do a terrible job of figuring out who specifically was responsible for the billions in losses at Lehman, for example. But in coming months the Wall Street employment market will figure it out brutally well. 2009-04-21T15:39:58-05:00