Posted by Marc Hodak on August 27, 2009 under Reporting on pay | 
First France tries to chase its traders over to Switzerland. Now Great Britain is doing the same.
In the magazine interview, Mr. Turner said that London shouldn’t worry about losing banking business, in part because the U.K. economy has become too dependent on financial services and in part because “London is a classic cluster and it will remain the dominant time zone in Europe.”
If that sounds like a second-best academic, your hunch is confirmed in the next paragraph:
An FSA spokeswoman said his statements were merely part of “an intellectual debate” and that “any specific policy proposals are for politicians to debate and decide.”
That’s kind of a relief. “This is just an academic exercise, folks. Our regulators are just flapping their jowls.” I guess some things are worth reporting, after a fashion. At least you know where the academic stands. No one knows what the politicians believe, except that they wish to get reelected, and will compromise most of their other beliefs to preserve that one. Sarkozy may think that capping bankers’ pay is batsh*t crazy. But if he has the choice between keeping his job and losing half of the traders in France, the money men are always expendable.
Posted by Marc Hodak on August 24, 2009 under Irrationality, Politics, Reporting on pay |
Kenneth Feinberg is contemplating the serious issue of whether or not to disclose the names and compensation of the highly paid executives whose pay he is reviewing. On the one hand, there are personal privacy and security issues:
“One of my clients makes $25 million a year and drives a Honda,” said Eckhaus, of Katten Muchin Rosenman LLP. “He tries to lead a fairly modest life and he would be horrified if what he makes appeared in the paper. Not only would his neighbors know, but his kids would know, and it would affect his ability to raise his kids. These are people, not a circus sideshow.”
Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution think tank in Washington, said releasing names and salaries of top executives could be intrusive and would not serve a public good.
“When you turn it into specific names, it’s kind of voyeurism,” Elliott said. “It’s not the principles anymore, and I think it does violate their privacy.”
He also said too much disclosure could prompt top executives to resign, harming companies as they try to recover and repay the government.
Very good points all. On the other side, you have Democratic Representative Alan Grayson:
Grayson told Reuters he is unsympathetic to the argument that the pay czar should not name names.
“If this is the same top talent that caused their firms to be destroyed and put the entire U.S. economy at risk, I wish they would leave the firms and leave the country,” he said.
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Posted by Marc Hodak on under Collectivist instinct, History, Invisible trade-offs, Revealed preference |
Confiscatory taxation: What is going on in Great Britain.
Contrast this with
Socialism: Using state power to penalize success and reward failure.
Using the threat of violence to take an extra $50,000 from someone making $1 million is not considered a crime if implemented by authorities elected by the people who are, for the most part, not being taxed at that level. In fact, these people call their confiscation the patriotic or moral thing to do. They will claim that most of the people being taxed are actually OK with it; but they don’t dare let the class of people paying it vote on whether they should all do so. They will claim that those who do not wish to pay it lose their claim to their money by virtue of their selfish desire to keep it; but they don’t see the irony of their preferences forcibly imposed on others as a baser form of selfishness, abetted as it is by coercion.
But the victims of this self-justified view of theft-disguised-as-patriotism-or-morality won’t sit still for the grasping hypocrisy. They will leave. They take their money and, more important, their wealth-creating talents, to friendlier climes.
Posted by Marc Hodak on August 23, 2009 under Collectivist instinct, Executive compensation |
Previously, I was wondering out loud what possible retention or alignment benefit Oracle’s shareholders received from awarding their CEO another 0.007 billion shares on top of the 1.173 billion he already owns. The cost, in the many tens of millions of dollars worth of dilution is impossible to justify. The one part of this compensation I didn’t criticize was his $1 million salary, which amounted to about 1.2 percent of his total compensation. So, guess which part of this compensation his toothless board chose to cut?
The compensation committee recognizes that Mr. Ellison has a significant equity interest in Oracle, but believes he should still receive annual compensation because Mr. Ellison plays an active and vital role in our operations, strategy and growth. Nevertheless, during fiscal 2010, Mr. Ellison agreed to decrease his annual salary to $1.
At least the disclosure was honest about who was agreeing to what, here.
By the way, Jeffrey Berg, chairman of the compensation committee that once again awarded Mr. Ellison his 7 million options owns a talent agency whose actors have been used in Oracle advertisements. Anyone who watches Entourage can imagine how arms-length that transaction had to be. I wouldn’t impugn the integrity of the other two comp committee members, Hector Garcia-Molina and Naomi Seligman, but the former is a computer science professor and the latter runs networking organization for CIOs. Not exactly the types who would stand up to Mr. Ellison for the little people who share ownership in his firm.
This composition belies the rebuttal offered by Oracle to the Say on Pay proposal in their current proxy:
Our Compensation Committee, which consists entirely of well-informed, experienced and independent directors, meets regularly to review and set executive compensation…The Committee also retains an outside compensation consulting firm and regularly seeks its advice and assistance as part of the Committee’s review and approval process.
And how did the compensation committee use its outside consultant?
The Compensation Committee selected and directly engaged Compensia, Inc. as its outside advisor for fiscal 2009 to provide the Compensation Committee with insights and market data on executive and director compensation matters, both generally and within our industry. Compensia also assisted the Compensation Committee with a peer company executive compensation comparison. Compensia did not determine or recommend any amounts or levels of our executive compensation for fiscal 2009. [Emphasis mine]
Translation: They got peer data from their consultant, then asked Larry how much more he wanted than his peers.
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Posted by Marc Hodak on August 19, 2009 under Scandal |
Ex-Brocade CEO Greg Reyes was the example that prosecutors wanted to make out of a greedy CEO backdater, i.e., someone who schemed to inflate his compensation in stock options. The prosecutors surveyed the field for the perfect poster child for their prosecutorial campaign, the perfect trophy for their case. They passed over Steve Jobs, and settled on Greg Reyes.
The first problem they had to overcome was that Reyes, unlike Jobs, didn’t agree to the backdating of his own options–only those of certain people who worked for him. Never mind that he didn’t personally benefit from the backdating; the prosecutors wanted their conviction.
The next problem was that Reyes claimed he didn’t know that the disclosure he signed off on was improper. Backdating is, in fact, perfectly legal as long as it’s properly disclosed; then it’s just an in-the-money option, which is like an at-the-money option plus cash, both of which are commonplace (as were backdated options in Silicon Valley public companies of that time). But never mind that he didn’t know his firm’s disclosure was improper; the prosecutors wanted their conviction.
The next problem was that the prosecutors knew Reyes didn’t know the illegality of his actions, and they held back that evidence from the jury. That’s what bugged out the eyes of Ninth Circuit when they overturned the conviction.
The record demonstrates that the prosecution argued to the jury material facts that the prosecution knew were false, or at the very least had strong reason to doubt…
Deliberate false statements by those privileged to represent the United States harm the trial process and the integrity of our prosecutorial system. We do not lightly tolerate a prosecutor asserting as a fact to the jury something known to be untrue or, at the very least, that the prosecution had very strong reason to doubt.
I’m grappling with what the Court meant by “not lightly tolerate.” If a CEO fails to disclose an otherwise legal award of options to his employees, we should not tolerate that by threatening his liberty and property to the tune of a 21-month jail sentence and $15 million fine. If a prosecutor lies to a jury in order to deprive a man of 21 months of his freedom and $15 million of his cash, we should not tolerate that by…telling him it was a bad thing to do? Help me out here.
Larry Ribstein offer his usual, insightful coverage
Posted by Marc Hodak on August 18, 2009 under Economics, Invisible trade-offs |
Driven to distraction
As anyone who has studied it knows, Cash for Clunkers program doesn’t accomplish any of its stated goals. It does not materially reduce energy consumption because the difference between the mileages of the cars getting traded in versus the cars getting bought does not account for:
– The fact that the net difference in energy use and carbon dioxide emissions, etc. must more than outweigh the energy needed to build the new car, which includes mining the basic materials, transporting them to the factories, running the assembly plant, etc.
– The fact that one is likely to drive a high-mileage car with less concern for energy because it’s more energy efficient.
Once the environmental rationale gets swept away, then we are left with two items. One of them is: Even if it doesn’t help the environment, at least it creates jobs.
Wrong. The $15,000 used to replace perfectly good “clunkers” with new cars is money that could have been used to buy other stuff–1,000 nice steaks, 2,000 peach cobblers, 5,000 romantic candles, etc. The money you spent on a car is no longer available to the butcher, baker, and candlestick maker, which impoverishes them and the people selling to them about as much as it enriches the auto makers. And because the cash-for-clunkers program represents a centrally planned, non-market allocation of resources, 11 or 12 B-B-CM jobs may easily have been destroyed for every 10 auto jobs created. The difference, of course, is that most of the 10 jobs were union jobs in plants one can point to, whereas the 11 jobs destroyed were at dispersed bakeries, paraffin processors, etc. around the country–those that are not seen.
So, once the ‘environmental’ and ‘jobs creation’ rationale gets swept away, we are down to one: It gives the sponsors of the bill the ability to funnel taxpayer money to preferred union constituents.
Posted by Marc Hodak on August 17, 2009 under Executive compensation, Reporting on pay, Stupid laws |
…in the war for global banking talent:
“Aggressive compensation systems – amongst many other factors – contributed to the financial crisis by creating false incentives,” BaFin said in a statement. “In future, short-term profitability must play no further role in the variable components of the compensation of managers and employees who can establish high risk positions.”
The commanding tone of this pronouncement makes one believe that they have a working definition of “aggressive compensation systems” and some proof that they contributed to the financial crisis. They don’t.
The most startling aspect of these new regulations is the claw back provision for bets that go bad:
“Variable components of compensation must also take into account negative future developments,” Lautenschlaeger said. “With this, risk takers are to share not just in the profits, but also in the possible losses.”
There is no distinction between whether the bets that led to those losses were good ones or bad ones at the time they were made, only whether or not they turned out bad. Consider the following scenario: A banker sees an opportunity to bet $100 on a project that has even odds of either doubling his money or losing half of it. He would be a moron banker to pass up this bet. The bank wants to encourage him to find these bets and make them. They have two choices on how to reward him. They can either reward him based on the expected value of the bets, i.e., $25 in this case, or they can reward him based on whether the bet actually succeeds of fails, i.e., plus $100 or negative $50. A reward based on the latter has a much higher cost to the bank since it must compensate the banker for the added uncertainty.
According to the new rules, the bank must adopt the latter, costlier scheme. They will have no ability to pay people bonuses for their expected value contributions if they must claw them back if good bets sour, as they often do in the business world. And that latter scheme has additional problems in the real world besides cost. In some cases it may be easier to estimate the quality of a particular bet than to know its actual result if the results of that bet get tied up into the results of other bets from the same book. In some cases, the results of particular bets, even if they can be tracked, may not be known for several years, possibly after the banker has moved onto another position. Delaying bonuses also significantly increases compensation costs since one must be compensated for deferring compensation. If you don’t defer the compensation, and you have to take it back later, then you have the logistical issue of recouping compensation already paid–in essence reaching into someone’s personal savings to get back the cash.
What did the regulator say to all these problems?
For the first time, Bafin has established provisions for clawing back money from individual employees if the deals they do turn sour. In so doing, Lautenschlaeger acknowledged that she had overridden concerns from the banks that such provisions are unworkable.
The English translation for Lautenschlaeger’s response begins with an “f” and ends in “you.”
Ironically, the banks’ reactions to these provision are almost certain to both increase the costs to the banks, and also reduce the alignment of their bankers. That’s what happens when you base prescriptions on the wrong diagnosis.
Depressingly, the reporting of this news has basically read like BaFin press releases.
Posted by Marc Hodak on under Executive compensation, Reporting on pay |
The speaker is “Pay Czar” Kenneth Feinberg. The law he is referring to are the compensation clauses under the TARP legislation passed last September and February.
What does “anything is possible under the law” mean? I thought laws were supposed to delineate what was not permissable. Feinberg clarifies what “Pay Czar” means:
“The statute provides these guideposts, but the statute ultimately says I have discretion to decide what it is that these people should make and that my determination will be final,” Feinberg said.
“The officials can’t run to the Secretary of Treasury. The officials can’t run to the court house or a local court. My decision is final on those individuals.”
Man. I wonder if this means that he can also fend off the green-eyed monster we call Congress?
Posted by Marc Hodak on under Executive compensation |
Board capture Exhibit A: Larry Ellison
Ellison routinely gets Wall Street sized bonuses for running a software firm of which he owns about 23%. He is awarded millions of stock options each year, including 7 million new options in each of the last two years. In 2007, that award alone was worth over $50 million. Last year, the award was worth $71 million. Now, a board with some say over compensation would ask two questions:
– If we didn’t give Larry 7 million options, would we be risking him leaving? We probably shouldn’t be too concerned about Larry being snatched up by Microsoft or Sun, but would he even offer the credible threat of retiring?
– If we didn’t give Larry these 7 million options, would the shareholders suffer in some way from lack of alignment of his interests with theirs? In other words, what alignment would 0.007 billion shares add to the other 1.173 billion shares that Larry already owns?
The most likely answer is that this board does not really have that much say over Larry Ellison’s compensation.
This would fit neatly into the widely accepted theory that boards in general are captured by their CEOs, willing to ignore shareholder concerns in favor of keeping the big guy (or gal, but usually guy) happy. This theory or managerial power behind the topsy of regulations being proposed this year.
But is Ellison the rule or the exception? Research suggests that he is the exception. So, if board capture is the exception, do we as shareholders benefit from the new rules? (Answer here.) But that is a tired question.
Today, I ask a different question. Would any of the new rules being proposed actually prevent the kind of agency costs/shareholder pilferage represented by exceptions like Ellison?
It is highly unlikely that the shares being showered on him serve any retention or alignment benefit. But how, exactly, would mandating nominally independent directors help? Oracle already has those. What would shareholders have to say about his pay, especially given that he owns nearly a quarter of those shares? Would they withhold votes for rest of the board if they ignored a non-binding vote against his pay? Would Ellison care?
In fact, all captured boards share certain characteristics. Their CEO has been around a long time–probably longer than any of them–so he benefits from multiple sources of authority. The main source of authority is raw success. You may not be surprised how hard it is to argue with extreme success, especially when measured in billions. The captured board’s CEO is probably a celebrity, and has the kind of PR machine that your average director could merely dream of. You don’t want to get in a public p*ss*ng match with this guy.
These characteristics of captured boards make it extremely difficult to contain their CEOs. Short of mandatory retirement or terms limits (and imagine enforcing that on an Ellison, or a McNealy, or Hank Greenberg, etc.), there is little one can legislatively do keep such people in check. Michael Eisner only became vulnerable when Disney’s performance lagged for about a decade, undermining that key source of his authority.
The average CEO who was appointed by the board within the last seven years. His or her track record ranges from OK to pretty good. People like this are already in pretty good check by their boards, and it’s a good bet that the market is driving their compensation. For those firms–representing the vast majority of companies–all the new rules simply add cost and risk to the firm, which I really don’t appreciate as a shareholder.
So, I’m waiting to see how the new rules may contain Larry Ellison and his board. I don’t doubt that Oracle’s shareholder suffer from overpaying their CEO, but they bought into this leaky bucket up front. Ellison didn’t just appear one day and take over. The costs of legislative and SEC attempts to keep his compensation in check may result in modest net savings for Oracle’s shareholders, but they are sure to add significant costs for the vast majority of the public company universe.
Posted by Marc Hodak on August 13, 2009 under Executive compensation, Politics, Reporting on pay |
The Screwed Seven must submit their pay plans to the horribly nicknamed Pay Czar by Friday. The reports about this have fairly captured his situation:
Many believe Feinberg will be squeezed between public fury over outsized bonuses on one side and what is best for companies trying to compete and retain talent in a marketplace that demands million-dollar salaries on the other.
If Feinberg rules that big compensation packages are mostly fair, lawmakers may assail him as the tool of corporate interests. If he tries to strike down salaries, boards and shareholders may blame him for chasing away the rainmakers.
The implication, here, is that our lawmakers consider corporate interests expendable. In the context of taxpayers’ interests in these particular corporations, this would make Congress a lousy fiduciary, but we already knew that.
Once again, this Congress has placed itself to the left of the administration:
“I don’t think the American people begrudge that people make big salaries, as long as they’re not jeopardizing the goodwill of the public in doing so,” White House spokesman Robert Gibbs said Wednesday.
Contrast that with this concern from Nancy Pelosi and Barney Frank:
[TARP recipients could] “enrich their executives while deferring repayment of the federal financial assistance that helped them avoid financial catastrophe.”
As if preventing their “enrichment” will help anyone avoid financial catastrophe.
The fact that Feinberg is doing this job for free is not reassuring. On the other hand, I know they could not have paid me enough to do it. I get rather claustrophobic in the crevices of shifting boulders.
