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Steve Jobs's plans to slash perks at Apple Computer (AAPL) may amount to treating symptoms rather than the disease.
Analysts were underwhelmed by news of an internal memo cofounder Steve Jobs sent yesterday to Apple employees, outlining reduced compensation and severance packages.
For a company that is rapidly losing market share and revenue, trimming costs is
not going to solve the fundamental problems of company that is trying to
rediscover itself, analysts said. Past efforts--reconstruction after reconstruction, layoffs after layoffs haven't generated additional revenue, built the brand, or
recaptured the blue ribbon in the education market.
"Ultimately, expenses are not the problem. They've got to figure out the
top line," said James Poyner, an analyst at Oppenheimer & Company. "You can
fire everyone, turn out the lights, and save a lot of money that way, but
they must stabilize the revenue line. They do not need a new philosophy on
expenses, but [rather on] what products they sell and don't sell."
Jobs's changes will affect the
company's stock options, sabbatical program, travel plan, and bonuses.
"We're in a difficult time period, and we need to make difficult
decisions," corporate spokeswoman Katie Cotton said of the cutbacks to
fringe benefits.
The move to cut costs comes just a day after the company officially
reported that it will stay in the red through its fourth quarter. The
computer maker posted a smaller-than-expected net loss of $56 million, or
44 cents a share, for the quarter ending June 28, compared with a loss of
$32 million, or 26 cents a share, a year ago.
Stock will now make up the primary form of bonuses at Apple, a commodity
that until recently has not held much value to employees with options.
Profit-sharing programs will remain in place, but the emphasis in compensation will be on stock options.
Analysts have called the changes to the executive compensation plan a "no-brainer."
But this new emphasis on stock could make it more difficult to attract a
new chairman and chief executive. "The problem is that a Gil Amelio isn't
going to come just for stock options, and that could make it hard to fill
the spots. It narrows the field to a supreme risk taker, but that may be
just what they need," said Poyner.
Cotton noted that while employees may be upset with the changes, there is a
widespread understanding that the company needs to take drastic steps to
return to profitability. "The long term will benefit the company and then,
in turn, the employees," she said.
The company's sabbatical program will be discontinued at the end of the
fiscal year ending in September. Previously, employees with five years
under their belts at Apple received a six-week paid sabbatical, said Cotton.
However, those with five years experience for the period extending through September, will still receive the paid leave.
The travel plan was also trimmed. Now, all employees will use coach
travel on a trip less than ten hours long, and business class for longer
trips.
The executive team is forfeiting current and future bonuses in exchange
for stock options.
Executive compensation was one of the criticisms of investors. Shareholder
organization and pension fund manager CalPERS told CNET's NEWS.COM in an
earlier interview that "it is natural for companies to grow and downsize,
but when that is happening and they are paying excessive compensation, that
is not a great value to shareholders when assets are being used that way."
The pension fund was also displeased that personal stock ownership was low
among most board members, who therefore lacked a personal interest
in the company. "As shareholders--and owners of this company--we believe
that dedication of all of Apple's directors and personal incentives are
critical to recovery," Kayla Gillan, general counsel for CalPERS, said
previously.
This new arrangement is likely to ease shareholders' concerns. "As a rule,
shareholders like the idea of management being in the same boat they are
in," said Poyner. The options push should be a driving force for
executives to make the stock go up, and the most forward way to do that is
to be profitable.
While there are cutbacks of cash incentives to executives, the
rank and file are still being granted generous walking packages.
When an employee is laid off, he or she is put in "layoff notice period,"
wherein the employee is still receiving regular paychecks
and benefits but does not have to come to work.
The layoff period lasts 60 days and is intended to support outgoing
employees as they make the transition to new jobs. The cutback plan does
not provide additional severance based on rank; Apple used to give
employees a week of severance pay based on how high they climbed up the
Apple ladder. But the new plan continues to provide an additional week of
severance pay for each year of service, Cotton said.
Meanwhile, the memo reiterated previously announced plans to bring more of
the company to its R&D location, renamed the "Apple Campus." It will house
not just engineering and research and development, but marketing and sales
as well.
Apple now has just under 10,000 employees.
Analysts have said the new board Jobs has installed is a positive step towards addressing Apple's fundamental problems. They may bring a colder, more objective view to the turnaround process because they don't have a history with the company. "Apple history is exactly that," said Poyner.
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