Perverse Incentives Are Endemic (TM)
Posted by Marc Hodak on April 28, 2010 under Executive compensation, Self-promotion | 
Be the First to Comment
My newest article, published in Directorship, online version here. The comment they chose to highlight in their printed version:
The explosive growth in CEO pay over the last 20 years coincides with a huge shift of power from management to boards.
Which, I believe, pretty much guts the managerial power thesis of rising CEO pay.
Posted by Marc Hodak on February 2, 2010 under Self-promotion | Be the First to Comment
As I ramp up my quest for gurudom (sp?), I’ve been giving more and more talks. A young lady came up to me after my last one, and said I reminded her of one of her very favorite professors, a visiting lecturer from GMU (she went to Georgetown). Russ, Alex, et al, you’re on notice. Tyler, you’re still safe, for now. I have nothing to say about Mexican folk art.
Posted by Marc Hodak on under Executive compensation, Self-promotion | Be the First to Comment
Bulletin: If you are a public corporation, and you are still using Towers or Mercer as your comp consultant, you are now officially screwed. You are exposing yourself to all manner of legitimate shareholder concerns, and all the attendant publicity.
That is the real message behind Hewitt’s announcement to spin off its executive compensation practice from the rest of its HR consulting business. Hewitt has decided that they don’t want to deal with explaining to increasingly defensive boards how getting $100,000 for advising them on senior management pay is not a conflict with their selling that management $10 million worth of other HR services.
This was probably an easier decision for Hewitt than it would be for Towers or Mercer since Hewitt was not a particularly big player in the executive comp area. All the same, the biggest “in” you can have with a company to whom you are selling your services is a relationship with top management, which executive comp consulting certainly gives you. It’s a difficult relationship to spin off. Hewitt must have determined that, at this point, that relationship was more problematic than it was helpful.
You know Hewitt didn’t make this split out of a lofty concern for governance principles. This is being driven by an emerging consciousness among boards that this is a conflict that no “Chinese walls” can overcome. Boards need excellent, independent compensation advice.
Posted by Marc Hodak on November 22, 2009 under Self-promotion | Be the First to Comment
One Silicon Valley firm made a brilliant investment in a couple of great kids. And I can assure you that those kids are totally into getting that firm an obscene return on that capital.
Posted by Marc Hodak on October 26, 2009 under Self-promotion | Be the First to Comment
I was interviewed by the BBC last week on a story about Wall Street pay. Matt Frei conducted the interview and, I think, did a great job. You can hear the whole thing here.
My contribution comes in at around the nine minute mark, after the part where Matt Taibi calls our entire financial system a zero-sum game, and just before Katrina vanden Heuvel defends a culture of envy by renaming it a “system of shared prosperity.” Enjoy.
Posted by Marc Hodak on April 21, 2009 under Executive compensation, Self-promotion, Stupid laws | 2 Comments to Read
The second installment of my Lombard Street article here. Sample:
The clearest evidence of popular envy being the root of these provisions is the clause requiring the board to review “luxury” expenditures—a kind of Optics Committee—for items like office decorations and corporate jets. Clearly, these expenditures are far more material to the press and public than they are to the shareholders. Does it really matter to the shareholders if the company’s most valued employees benefit from nice offices? Sure, there is a crude sense of entitlement that drives an executive to spend a lot on lavish appointments, but such appointments tend to be personalized, which arguably creates a retention benefit, especially in situations where bonuses are otherwise being suppressed. Corporate jets might be a frivolous expense, or they may be a cost effective way to provide efficient and secure transportation to busy executives. The ARRA law leaves it up to the board to make such determinations on behalf of the shareholders, but this is a canard; boards already make these determinations. The real purpose of this clause is use public sentiment to eliminate perks on no firmer grounds than the grade school “chewing gum rule”—if I can’t have some, nobody else can.
Posted by Marc Hodak on April 6, 2009 under Executive compensation, Self-promotion | Read the First Comment
A very slick, new on-line journal has just come out tackling what is probably the biggest regulatory problem of our time: financial regulation. This journal has great stuff from David Evans and Arnold Kling. And the top compensation expert anywhere.
Posted by Marc Hodak on February 19, 2009 under Executive compensation, Self-promotion | Read the First Comment
That was my proposed title for this article just published in Forbes, but the editors there, well they have their own mind about things.
Anyway, their Bonus issue is up, and the line-up is great. It includes a colleague, client, collaborator, and competitor (quoted in one of the pieces). Enjoy!
Update: Anyone who says that print media offers the ability to offer more nuanced analysis and discussion of issues hasn’t worked in incentive compensation! My article basically says two things: you have to compete, and incentives matter. Most of the comments basically assume the opposite, which is par for the course on this emotional issue.
Posted by Marc Hodak on February 12, 2009 under Self-promotion | Be the First to Comment
I posted new paper, “The Earnings Game,” two weeks ago on SSRN. Actually, this ‘paper’ is an interactive case designed to reinforced corporate governance lessons around disclosure.
It places participants in various roles with certain incentives and constraints, and allows them to interact in a manner consistent with their respective motivations. While this case necessarily simplifies the relationship between corporate management and investment analysts, it evokes both the relevant behaviors and their emotional content in the management and evaluation of companies with respect to their earnings.
So, students get a visceral as well as intellectual understanding of what disclosure means. This has been a popular teaching tool for the last several years in my classes at NYU and USG (in Switzerland).
This paper just made Top Ten downloads in the Management Research Network case series.
Posted by Marc Hodak on November 19, 2008 under Self-promotion | Be the First to Comment
UBS is trying some new incentive plan structures. It is adopting most of the elements that our research has shown works for public companies.
One of those elements is a potentially uncapped reward. Incentive compensation has many moving parts, so it might seem counter-intuitive that a capped bonus potential actually undermines accountability to shareholders, but it’s true–both in theory and in empirical research. The article notes that the uncapped bonus aspect of the proposed plan is a sticking point for “shareholder advocacy group” Ethos. The article ends with:
“UBS does not intend to limit the variable part of the remuneration, by capping for example the bonus in terms of base salary or by setting a maximum amount of shares to be awarded under the long term incentive plan,” Ethos said.
“Consequently Ethos has concerns that the new system will not prevent UBS from paying, in the future, remunerations that could be deemed excessive.”
Ethos’s concerns are unfounded. If they understood how all the elements of the plan work together, and see how it actually works with some of our past clients, then they would see how this aspect of the plan is actually critical to preventing excessive remuneration.
Alas, we can attest that very few “shareholder advocates” or institutional shareholders or any other outsiders who have not been apprised of the plans as the board has, can really, fully comprehend them, especially if the plans involve any innovations. Yet these are the people to whom we want to give a “Say on Pay.”
