Pay to Lock-in

There are lots of ways to Lock-in a Success Formula, and one of the best is compensation.  If the Board of Directors, or management, wants to make sure that Defend & Extend management flourishes, all it has to do is compensate people to do what they've always done. 

We've seen this tactic executed well at the Tribune Company (see chart here).  As I've blogged recently, Tribune has done nothing for shareholders for years (check the chart if you have any doubt).  And now it's moving forward on a leveraged buy-out that's sure to leave it no cash for any new initiatives, despite incredibly fierce market Challenges from new internet players.  As was recently stated by the soon-to-be Chairman Sam Zell, he doesn't even care of if cash flow goes up, he just doesn't want it to go down (see full quote here.)  Well, he can hope for that unlikely outcome - but it's not the point of this blog.

Rather, this blog is about the compensation for the senior team at the Tribune.  According to the Chicago Tribune newspaper (see article here), top management is being rewarded very healthily for this deal.  The Chairman is getting not only his $1M salary, but a bonus almost 5x his previous.  And, he's getting big guarantees of future pay and bonus for 3 years.  Most of the management team will, in fact, get huge severance payments no matter how the future turns out for the business.

Tribune Chairman FitzSimmons is a lawyer by training.  So what did his personal Success Formula tell him to do when the market shifted and the internet started driving down revenues and profits?  Instead of trying to fix the business, he opted to sell it!  For a lawyer, a legal solution seems lots better than a business one.  And, to make sure he got everyone on board to do a deal, he tied compensation to creating one.  As the article points out, for the last year his bonus was largely tied to increasing cash flow - not to finding new revenue sources, or finding new advertisers, or developing a strategy to compete.   No, it was tied to generating cash.  So, he and his team kept up the pressure to CUT COSTS.  And through that, he pumped up the cash flow in order to make an acquisition more palatable and find a buyer.  The compensation wasn't tied to dealing with market needs, but rather to Defending & Extending the broken Success Formula, and finding a buyer to take it over.

Now we can look to the future.  The vey top management of Tribune will share in approximately $650million of bonuses if the company can pay off the $13billion of debt the company will hold post-transaction (see article here).  Once again, compensation wll drive the Lock-in to doing nothing new, and instead continue the cost cutting to D&E the failing Success Formula.

Suppliers, shareholders, bondholders and the consumers of newspapers in Chicago, L.A. and elsewhere will all suffer as the Tribune continues to be raided for more cash to dig out of this new debt avalanche.  But the people who made the decisions are getting hefty sums.  And it just goes to show the power of compensation as Lock-in.  No risk was taken of possibly saving the business - only cutting costs from a horribly broken Success Formula.  Good luck Mr. Zell.  And to all of us who have depended on the Tribune Company.