Posted by Marc Hodak on October 29, 2008 under Executive compensation | 
Andrew Cuomo is going after the Wall Street bonuses that pay his salary every which way.
First this argument, taken directly from Tony Soprano:
Now that the American taxpayer has provided substantial funds to your firm, the preservation of those funds is a vital obligation of your company. Taxpayers are, in many ways, now like shareholders of your company, and your firm has a responsibility to them.
Translation: “When your shareholders were merely institutions, pension funds, and assorted traders, widows and orphans, you could do whatever you thought was right. But with taxpayers as investors, you will do what I think is right.”
Of course, the Delaware courts have strongly ruled that shareholders can’t second-guess the board on what they think they need to pay managers in order to attract and retain their services. Which is why companies incorporate in Delaware instead of, say New York. Andy supported his threats using a New York law, a la role model Spitzer, that “permits the recovery of payments worth more than the services provided by executives.”
Excuse me, Mr. and Ms. Juror, do you think this guy was worth $763,249 last year? Here, let me explain roughly what he did… So much for business judgment.
Andy’s other ploy is another law from the code on debts:
Specifically, corporate expenditures and payments, made in the absence of fair consideration of undercapitalized firms, may well violate NY Debtor and Creditor Law 274, which deems such payments illegal fraudulent conveyances
What, you didn’t know that every dollar you paid Joe might be used to pay down your debt instead? Well, you have 10 years to think about it, with time off for good behavior.
I don’t think Mr. Cuomo talked to the Governor recently, who was in Washington begging the Federal government to save New York from massive cutbacks. Stopping some of the wealthiest, taxpaying New Yorkers from getting their full pay, and probably chasing them away, is likely to greatly help things. By “help things,” I mean Mr. Cuomo’s gubernatorial aspirations.
Posted by Marc Hodak on October 28, 2008 under Economics |
While the presidential election is quickly becoming anti-climactic, the real race is in the Senate, where the Democrats might possibly gain a filibuster-proof majority of 60 seats. A lot of the most economically destructive aspects of an Obama presidency, like implementation of a thoroughly pro-union agenda, or carte blanche on appointing liberal judges, would need to get through a Senate unable to block those initiatives.
Normally, it’s impossible to isolate the impact of political power on economic value. Many studies purporting to find that economic growth is more or less likely to occur under one party or another are hopelessly overwhelmed by noise in the data. But is it possible that yesterday we got a data point that could support the semblance of an event analysis?
Yesterday afternoon, at about 3:30 pm, a jury announced a guilty verdict on Senator Ted Stevens of Alaska. Before the verdict, the Senate race was extremely close. The verdict itself was not able to be predicted. So, the guilty verdict is a bona fide surprise event (statistically speaking), with a certain impact on a close race, which could determine a key threshold composition of the Senate. Shortly after the verdict was read, the stock market dived 2.6 percent. The rest of the world dropped by the same amount, but that is to be expected under current conditions.
That would be about a $350 billion verdict, half the amount set aside for the bailout. Not that I’m blaming the jury for Steven’s misconduct.
Posted by Marc Hodak on October 25, 2008 under Executive compensation |
I’d like to know what an “AP review” means. When I did a review of likely bonuses for a Forbes story last week, I predicted that Wall Street bonuses would be down by 30 to 50 percent. The Associated Press claims that “despite the Wall Street meltdown, the nation’s biggest banks are preparing to pay their workers as much as last year or more.”
What did the AP see that led them to this bold prediction? An “AP review” revealed that “total costs for salaries, benefits and bonuses grow by an average of 3 percent from a year ago.” They presented this to Andrew Cuomo, New York’s AG (Aspiring Governor), who summoned the outrage appropriate to an elected official:
Taxpayers have lost their life savings, and now they are being asked to bail out corporations. It’s adding insult to injury to continue to pay outsized bonuses and exorbitant compensation.
What was the AP review, and subsequent Cuomo comments based on? The pay expenses disclosed by the banks in their quarterly reports.
Uh huh.
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Posted by Marc Hodak on October 17, 2008 under Practical definitions |
For Sale in Detroit
Failed city: Any major city in North America where the average home price is $9,250. No, I didn’t forget any zeroes. How ironic that in the Motor City, cars now cost more than homes?
HT: Walter Olson
Posted by Marc Hodak on under Self-promotion |
Many people believe that corporate social responsibility is part of good governance. I guess that’s why Forbes asked me to write this article on the subject.
Posted by Marc Hodak on October 15, 2008 under Executive compensation |
As everyone knows, the U.S. Treasury has chosen to distribute it’s first $125 billion in bailout funds to the nine banks that didn’t need it–or necessarily want it. So, I’m reading all over that this forced investment comes with a $500,000 limit on CEO pay deductibility. Why is everyone saying this? Because Treasury itself said so in their announcement of the plan.
But when we look at the term sheet upon which this announcement is based, it claims the authority for requiring the compensation restrictions as Sec. 111 of the EESA. Thing is, Sec. 111, which applies when Treasury makes an investment in the firm, doesn’t include the $500,000 tax limit. That’s in Sec. 302, which kicks in only when institutions sell troubled assets to the treasury. So, what gives?
Maybe I’m looking at a wrong version of the quickly evolved EESA? Or maybe I haven’t yet learned to stop questioning Herr Paulson’s authority. He was, after all, able to wring $700 billion out of a reluctant Congress, then turn a voluntary program into a “voluntary” program.
Posted by Marc Hodak on October 13, 2008 under Executive compensation |
My prior conclusion was that no major bank would wish to directly involve themselves in the TARP program because of the compensation restrictions that came with it. It didn’t even occur to me that the healthiest banks would accept direct investment because they were healthy. Well, they did accept it…in the sense that one accepts an offer one can’t refuse.
According to the bailout law, “acceptance” of this investment comes with the following constraints on pay:
– Prohibition of golden parachutes, while the government has its investment in the firm
– Elimination of incentives for “unnecessary and excessive” risk for executive officers
– Potential claw back of bonuses based on accounting results that turn out to be false
Of these items, the ‘golden parachute’ prohibition is apparently the most onerous. I say “apparently” for two reasons. First, these CEOs would have to agree to have their contracts renegotiated to eliminate their golden parachutes. It’s not clear how the government would compel this even when the investments were voluntary, but it’s even more mystifying given that they weren’t. Alas, I don’t think Jamie Dimon or Lloyd Blankfein will cause too much fuss over this. They know pretty well that JP Morgan Chase or Goldman Sachs are unlikely to risk their departures over a few extra million per year, and they can negotiate that accordingly. If they can’t get it on the back end via a golden parachute, they can get it in current or up-front pay, or somehow via the infinite devices that us compensation consultants can dream up while staying in technical compliance with the wording of this law. Folks, boards and shareholders are rarely the winners in a forced renegotiation with the CEOs they wish to keep. The ones they don’t wish to keep can leave of course…with their golden parachutes (before the investment has been made).
The second reason to use “apparently” is that the more troublesome constraint, I think, will be the elimination of ‘incentives for risk’. Incentives that create greater alignment between managers and shareholders are invariably incentives for risk. The government claims no voting rights with these preferred shares, but they will have to find some way to comply with the law. It will be interesting to see how they do it. Interesting, that is, for us non-shareholders in these semi-nationalized firms.
Posted by Marc Hodak on October 5, 2008 under Executive compensation |
This is a more up-to-date and (hopefully) better packaged version of my prior write up of the bailout…er, rescue package’s executive compensation provisions. It’s a story of consequences, some intended, some not.
Sec. 111(b)(2)(A): The Treasury Secretary is charged with eliminating “incentives for executive officers of a financial institution to take unnecessary and excessive risks” for firms in which the government has taken an investment position.
Intent: To discourage firms from overly high risk-taking on the part of senior management.
Likely effect: To discourage appropriate risk taking on the part of managers.
Analysis: The relevant consideration in this scenario is not management incentives, but board incentives. Boards are remarkably, perhaps inherently, poor at distinguishing strategic or governance risk. No government-appointed director, even a Goldman refugee who might know better, will risk a major problem arising from a strategy with significant uncertainty. The most risk averse (or economically ignorant) director will drive the board’s appetite for risk. There will be no force to stop the pendulum in the middle. The board will be happy to pay its managers like bureaucrats for bureaucratic results.
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Posted by Marc Hodak on October 2, 2008 under Executive compensation |
I was up way late last night trying to figure out what all this will mean for executive compensation, so here goes.
There are two sections dealing with compensation governance in this giant bailout bill.
Sec. 111 says that when the government makes a direct purchase of assets, then it must impose certain conditions on the compensation of “senior executive officers” (i.e., the top five NEOs).
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