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Monday, 25 February 2013

The controversial ethics of bonuses: executive management Philips hands out itself a higher bonus over 2012, in spite of Polish fraud trial, EU mega-penalty for cartel formation and 2200 fired workers.

Most Dutch online newspapers (and I presume that worldwide most online newspapers do) show the news message that you choose to read, in combination with linked tags to other, older news messages that apply to the same subject.

When reading the Dutch newspaper NRC ( today, this characteristic made that my eye was caught by the following three headlines concerning the Dutch electronics firm Royal Philips Electronics NV ($PHIA):
  • Philips scraps ‘Electronics’ from its company name – Bonuses executives rise [published today];
  • Philips and other companies receive mega-penalty from EU: almost €1,5 bln [published 5 December 2012];
  • Philips scraps another 2200 jobs [published 11 September 2012]; 
I thought with myself:

What a perverted world it is. A company pushes 2200 families into misery, by firing excess(?) workers, less than two years after it fired 4500 other workers.

The same company is currently on trial in Poland for serious charges of fraud and bribery, concerning the sales of medical systems.

Only two months ago, the same company received a mega-penalty from the EU for another disgraceful form of cheating, with the prices of spare parts for television sets.

So what does the executive management? Instead of being ashamed of themselves and promising to behave better in the immediate future, they hand out themselves a higher bonus. Just because they met some fuzzy targets. What the heck…?!

The only thing that this story can be compared with, is when a professional cyclist:
  • Would have taken massive amounts of doping before entering a mountain stage in the Tour de France;
  • In the race would have stepped on a bike with a strong electric engine;
  • Would have ridden to a finish-line, that he set up himself at his favorite spot;
  • Afterwards could hand out to himself the prize-money that he set himself as a reward for his achievements; 
When it would not be so disgusting, it would be almost funny.

The NRC wrote on this story:

In the meantime the company presented its annual report. This report disclosed that the bonuses of the Philips executives rose considerably last year, as the company presented better figures.

CEO Frans van Houten received a bonus of €1.3 mln. This amount made his bonus higher than his fixed annual salary of €1.1 mln. One year earlier, he received a bonus of 44% of his fixed salary.

CFO Ron Wirahadiraksa received a bonus of €523,000, on a fixed salary of €600,000. One year before, he received a bonus of 33% of his fixed salary.

At Philips, the height of the bonus depends for 80% on the financial results and for 20% on reaching targets for (environmental) sustainability. That the bonus increased this year, was the consequence of better performance by the company than originally planned.

Already last month, Philips presented the results over 2012. The company reported sales of €24,79 bln, about 8.9% higher than the year before. The profit in 2012 has been €231 mln, where 2011 showed a loss of €1.3 bln.

About two years ago, I wrote in an article on Philips, that a CEO in his rookie year often reports a (mega-)loss, comes up with a turn-around strategy and leaves the company as a CEO with a record profit. With the new CEO the same sequence starts over again. Here are a few snips and a chart from this article:

However, there is one rule-of-thumb that you can follow, if you look at the long-term stats: the new CEO-effect.
In the last full working year of a Philips CEO, the company almost always shows good profits and a high stock price. In the first year of the new CEO the company often reports (record) losses and the stock price drops (see chart).

The CEO-effect _Philips stock rates 20Y
Copyright :
Click to enlarge
Of course there is no guarantee that this is a winning strategy. Especially after the crash of the dotcom bubble and in 2008, the stock got hammered. But it seems more than a coindicental pattern, that the last full year of the old CEO of Philips is always successful if you look at the stock price, while the next year is a year with reported losses and falling stock prices.

The following is not an investment advice(!). Therefore I don’t take any responsibilities for following it up:

Well, if you are a trader and investor with a conscience that can easily be shut down, you might consider buying Philips now (if you didn’t dare to do so in the rookie year of Frans van Houten), as the company might have three or four reasonably profitable years ahead. However, if you feel like a good sportsman that dislikes cheating and earning money over other people’s backs, than you drop the Philips stock.

To be clear about one thing. Philips is and has always been a good, innovative company that has meant a lot for The Netherlands. The company has been a lighting example for General Electric, Sony and almost every other electronics firm in the world, when it came to:
  • understanding what people ultimately wanted and needed; 
  • a radical, scientific approach for fighting challenges, which were often solved with unusual and groundbreaking inventions; 
  • innovation and out of the box thinking; 
  • mass-production and production-optimization; 
  • (to a much lesser degree) marketing;

Concerning the aforementioned Philips headlines in this blog: I can understand that it is sometimes necessary to lay off excess personnel, when the future profitability and thus the chances of survival of a company are under jeopardy, due to soaring costs and diminishing sales.

What I don’t understand is, how you can defend a €1.3 mln bonus for yourself after firing 6500 workers in less than two years. Either you messed up as a CEO if you had to fire all these poor people, or your predecessor messed up. Bigtime…

And what I really don’t understand, is that you can be caught twice in two consecutive years with your hand deep in the cookie-jar, on extremely serious charges, and still hand out yourself a massive bonus. 

At least Lance Armstrong had the decency not to do so!

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