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Anders’ strategy creates value. Some of the value created is obvious: Shareholders benefit from increased share price and dividends. This includes any employees who own stock or stock options. And of course, the twenty-five executives in the gain sharing program receive value from their incentive payments. Less obvious is the value to society created by downsizing. Any excess capacity GD has, including human resources, is not creating value. (By definition, otherwise it would not be “excess.”) When GD sells assets or releases employees, other companies can put them to use in value-creating activities. If the cash that GD receives from selling assets or reducing payroll is paid to shareholders then that money is available to invest elsewhere. This is the Coase theorem in action: resources are allocated to their highest-valued use, and society benefits overall. But not everyone benefits. Employees who are released lose value if they are not able to find another job offering the same utility. If these employees had specific knowledge that was valuable to GD, it may not be as valuable to other employers. While GD probably paid them for both their time and training, that will be small comfort to those facing lower wages. However, the 90,000+ employees who remain with GD enjoy better long-term security because their employer is in better financial health. If GD had kept employees to do work that did not add value, many more employees would likely have lost their jobs in the long run. 2) GD should retain the gain sharing program, though it may opt to make cosmetic alterations to make it more palatable to employees, shareholders, the public and the government. Gain sharing appears to be a successful incentive: the executives created value for shareholders by making difficult and unpopular decisions to downsize the company. If the gain sharing program were eliminated now, it would damage trust, and reduce incentives to make difficult value-adding decision in the future. Critics of the program claim that the executives can manipulate the stock price by exploiting information asymmetries, or that it provides incentives to make short term gains at the expense of long term company health, or that such large payouts are unfair given that many employees are losing their jobs.
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