The biggest story in Sotheby’s improved earnings this last quarter is the amount of money that was saved by revamping the company’s incentive pay program or, as we working stiffs call it, the bonus system. Remember, the net revenue improved by $21m in the last quarter. But Sotheby’s reduced its bonus cost by $16m. That’s a huge amount of cash to drop to the bottom line and improve your earnings.
There was another nearly $16m in other salary related savings that mostly came from not paying out severance to executives who left in the transition and not paying out shares. At least $11m of that money was used to plug holes elsewhere in Sotheby’s cash flow (again, a subject for another post.)
In the International New York Times, Scott Reyburn mentions this savings in his analysis of Sotheby’s earnings but puts more of the emphasis on the layoffs:
Sotheby’s has also cut costs. The company’s salary-related expenses fell 30 percent, to $75.2 million, in the second quarter, following the shedding of 80 staff members through buyouts, the departure of several highly paid senior directors, and a reduction of incentive and share-based compensation plans.
A Sotheby’s spokeswoman says the incentive program savings are all related to current employees, not a reduced bonus pool because of fewer employees. That’s important because Sotheby’s either showed its improved earnings by limiting employee compensation or simply revamping the formula to increase salaries and reduce incentive pay.
Previous Sotheby’s management was always proud to point to the incentive pay program as a smart financial management tool allowing compensation to “float” with revenue. Sotheby’s new management clearly has something different in mind.
The filing also suggests that there has been a fair amount of hiring at Sotheby’s to replace the 80 positions that were bought out.
Here’s the firm’s 10-Q:
Full-Time Salaries—For the three and six months ended June 30, 2016, full-time salaries decreased $0.5 million (1%) and $0.7 million (1%), respectively, principally due to changes in foreign currency exchange rates and savings resulting from the voluntary separation incentive programs enacted in December 2015 (see “Voluntary Separation Incentive Programs (net)” below), partially offset by base salary increases and headcount reinvestments in the current year.
Incentive Compensation—Incentive compensation consists principally of the accrual of annual cash incentive bonuses, which are paid to employees in the first quarter of every year. For the six months ended June 30, 2016, incentive compensation expense decreased $16.7 million (48%). For 2016, Sotheby’s adopted a new cash bonus incentive program that more directly aligns payouts in relation to performance against its annual financial plan. Prior to 2016, the annual cash incentive bonus pool was determined utilizing a formula that was based, in large part, on the absolute level of Adjusted EBITDA* earned during the year. Incentive compensation also includes amounts awarded to employees for brokering certain eligible private sale and other transactions.
How Sotheby’s Found a Path to Higher Profits (The New York Times)