Posted by Marc Hodak on July 7, 2010 under Executive compensation, Reporting on pay, Stupid laws | 
Actually, the WSJ headline was Europe to Limit Banker Bonuses. They also started the article with a tough sounding lead sure to please the politicians:
The European Parliament agreed to what officials described as the world’s strictest rules on bankers’ bonuses, capping big cash awards across the European Union in time for 2010 payouts.
Then you read the story itself:
The new law, agreed upon Wednesday, will limit upfront cash to 30% of a banker’s total bonus and to 20% in the case of very large bonuses. Between 40% to 60% of bonuses will have to be deferred for at least three years and can be clawed back if the recipient’s investments perform badly. At least half will have to be paid in stock or “contingent capital,” meaning it won’t be paid if the bank hits difficulties.
Hmm. This kind of looks familiar. Let’s see how Goldman Sachs was paying its executives before the crash of ‘08:
The Named Executive Officers received bonuses in cash and equity-based awards in the proportion of 51% cash and 49% RSUs (restricted stock units).
Well, that wouldn’t quite cut it in Europe; they’re shy of the correct proportion by one percentage point.
Shares underlying all of these year-end RSUs granted for fiscal 2006 will be delivered in January 2010.
Ah, that’s more like it; the 49% of their bonus awarded in stock is deferred for more than three years, and is at risk of loss if the bank hits difficulties. Nice.
Now, let’s look at how Lehman Brothers was paying its executives before its collapse precipitated the financial crisis:
Annual Incentives were paid in the form of cash and RSUs. Messrs. Fuld, Gregory, Russo, O’Meara and Lowitt (the five named officers) received 88%, 85%, 64%, 70% and 70% of their total annual compensation in RSUs, respectively.
So, actually, Dick Fuld and company could only collect between 12 and 30 percent of their 2007 bonuses. The Europeans would go along with that!
All of the RSUs awarded to the executive officers for Fiscal 2007 are subject to forfeiture restrictions and cannot be sold or transferred until they convert to Common Stock at the end of five years.
In other words, the remaining 70 to 88 percent of their awards could not be collected for at least three years, and much more than half was paid in “contingent capital.” The Europeans would politely applaud.
So, according to the new EU rules, those cads at Goldman were, as usual, just barely outside the boundaries of correctness, while Lehman Brothers bonus plan was A-OK! Doesn’t that just explain everything?
Posted by Marc Hodak on June 9, 2010 under Executive compensation, Reporting on pay |
Abercrombie & Fitch lost the shareholder vote for approval of their long-term incentive plan. It wasn’t close. The two comp committee members up for re-election narrowly won with only 57% and 52% of the vote, i.e., 43% and 48% withhold votes. This loss on the plan and closeness of the director election were largely the result of “negative” recommendations by ISS combined with a major union campaign against the proposal and directors.
A&F, in fact, has a lousy compensation plan. One of its main defects is well-encapsulated by this item from their proxy:
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Posted by Marc Hodak on May 19, 2010 under Executive compensation, Politics |
I’ve been following the bonus drama in Missouri as the MOSERS Board of Trustees channeled the envy and ignorance of the mindless mob in denying their retirement plan managers their bonuses just because the fund went down in 2008. Never mind that the bonus plan approved by the Trustees was rewarding managers for several years of outperformance, including during the disastrous 2008. Once the newspapers mentioned the word BONUS, the reptilian part of their brains reacted with: bonus = bad, and the board stripped the bonuses from their managers, reneging on their deal.
The board subsequently commissioned a compensation study. The study told the board that even with the bonuses, the investment staff would only be getting 92 percent of median pay. That’s below-median pay for above-average performance if they had gotten their bonuses. Via PLANSPONSOR:
The retirement system’s board of trustees commissioned the study to help set new pay levels for next fiscal year, and a compensation committee has reviewed the options. Committee chairman Bob Patterson said members will vote by e-mail this week, and the recommendation will go to the full MOSERS board in June, according to the Post-Dispatch.
So, if they follow traditional form, Missouri will end up paying their fund managers a higher total compensation than they otherwise would have by leaving the bonus plan intact, with none of that compensation in a variable form that would advantage the fund and retirees by providing the proper incentives.
I spoke to Gary Findlay, MOSERS Executive Director, when the bonus spat first broke out. He then believed that one could make the state agency work as well as a private fund. I think Gary is an honorable fool. On the other hand, it’s not like Goldman or any other private sector outperformer has been spared bonus envy.
Posted by Marc Hodak on May 10, 2010 under Executive compensation, Reporting on pay |
The press reports on the soaring value of executive equity. The lead:
America’s top CEOs are set for a once-in-a-lifetime pay bonanza. Most of them got their annual stock compensation early last year when the stock market was at a 12-year low. And companies doled out more stock and options than usual because grants from the previous year had fallen so much in value that many people thought they’d never be worth anything.
“The dirty secret of 2009 is that CEOs were sitting on more wealth by the end of the year than they had accumulated in a long time,” says David Wise, who advises boards on executive compensation for the Hay Group, a management consulting firm.
The first paragraph is a backhanded explanation of the “fixed-value” philosophy of equity grants so popular among public companies. The theory is that equity grants should make up a constant value of compensation over time. So, when share values drop from one year to the next, one should give more shares or options to the executive to remain “competitive.” Likewise, when share prices increase, we should lower the number of equity grants to keep the total value of the grants in check. Of course, this philosophy rewards management with more shares/option when the stock drops, and penalizes them when the stock price rises.
The really dirty secret, from the perspective of me and my colleagues, is that this fixed-value philosophy is favored by all the major compensation consulting firms, including, ahem, Hay Group. And their client boards say, “OK” because they don’t want to stick out on any compensation policy, however perverse its effect.
And then when we have a huge rebound, the AP writes a story about the windfall that CEOs are getting, and boards have to defend this windfall, and the major comp consulting firms we compete with shrug and say “hey, who could have predicted this?”
One can’t blame the reporters this time for making CEO pay look bad, only for not being able to identify the underlying causes. They didn’t call me because none of my clients are part of this story.
Posted by Marc Hodak on April 28, 2010 under Executive compensation, Self-promotion |
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 April 13, 2010 under Executive compensation, Reporting on pay |
People intuitively understand “you get what you pay for.” People get that, for a given price, you can either get an extra thousand square feet of space or a view of Central Park, but not both. Or, if you’re dealing with Lee Iaccoca, you can get Corinthian leather but not power doors and windows. Persuasive negotiation only gets one so far.
But when it comes to CEO pay, people pretend that trade-offs don’t exist. They presume that CEO pay is arbitrarily high based on the feckless disposition of the board, and that the perks that rile the mob so much, and presumably have value to the executive, should therefore be arbitrarily banished without a second thought. So, they pretend to be surprised when the Abercrombie & Fitch CEO was denied personal use of the corporate jet and, instead, paid more in cash:
The high-priced teen retailer amended the employment agreement of Michael Jeffries, long-time chief executive, to limit his company-covered personal use of the corporate jet to $200,000 per year. The CEO would have to reimburse the company for any use over that amount.
Previously, Mr. Jeffries was entitled to unlimited personal use. From 2006 to 2008, he booked an average of about $850,000 a year worth of personal travel on the corporate jet. In 2008 alone, he tallied roughly $1.1 million worth of personal travel on the jet. In exchange for agreeing to the limitations, Mr. Jeffries will receive a lump-sum payment of $4 million. The agreement requires Mr. Jeffries to pay back a portion of that money should he choose to leave the company before Feb. 1, 2014.
So, why would A&F’s board do this? Because if you take something away from someone you need to keep, you need to replace that with something else, and cash is a useful substitute. Now, keep in mind that when the CEO chooses to fly Delta, the corporate jet is probably sitting idle, so that “$850,000 a year” cost is partly an accounting fiction. Of, if he continues to fly on the corporate jet at the same pace as before, he will simply be paying back about 75 percent of what the company paid him. The other 25 percent equals about half of the extra taxes the executive must pay to have the company funneling this perk through his personal bank account; the shareholders, who would get no deduction for that $4 million expense, would be out well over a million bucks on this deal.*
CEOs get paid to renegotiate their agreements all the time, but the quid pro quo for that cash payment is rarely this obvious because they are normally renegotiating several terms at once. In this case, the CEO was paid to renegotiate one term, i.e., less jet usage.
Alas, this has nothing to do with the shareholders. It has to do with the “public backlash as corporate jets became a symbol of Wall Street greed,” notwithstanding the fact that A&F is not on Wall Street.
* The difference between $850K per year average use versus the $200K worth of jet use he still gets as part of his package, plus the $1MM per year average extra compensation over the next four years.
Posted by Marc Hodak on March 23, 2010 under Executive compensation, Reporting on pay |
Ford CEO Alan Mulally made the news today with a $17.9 million payday for 2009. This included a $1.4 million salary and $16.5 million in stock and options–a total of about $1 million more than Mr. Mulally made last year. The article noted, as journalists always will, that the CEO got his increase in a year when he secured significant union concessions. This brings us to the first view of his pay:
“It’s an outrage after all the sacrifices we have taken and the pay he gets,” said Gary Walkowicz, a bargaining-committee member for UAW Local 600, representing workers at Ford’s Dearborn truck plant. “His pay is coming out of our concessions.”
So, the CEO got the union to reduce their pay, and he got more pay. Ergo, his pay was coming out of their concessions.
According to this view, Ford Motors is kind of a zero-sum game; the pie is fixed, and the shareholders or the CEO get more if labor gets less, or vice versa. In this view, it’s not fair if the CEO drives down compensation to improve the profitability of the company, only to suck some of that profitability back for himself in the form of higher pay. That is the view implied by this article. It’s the view assumed by most of the readership.
Another view is that Ford is part of a market. Several markets, actually:
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Posted by Marc Hodak on March 16, 2010 under Executive compensation, Reporting on pay |
UBS is once again paying competitive levels of compensation to try to stanch its exodus of talent, and replace it with similar talent. Their top-earner last year, pulling down $12 million, was their co-head of investment banking Carsten Kengeter. UBS lured him from Goldman Sachs in 2008, and his division narrowed its losses in 2009 by about $25 billion, and is now on a path to profitability. One might think it not unreasonable that his bosses could judge that he made a $12 million difference. But the people who are paid to carp at other people’s pay had another view:
“It’s strange that only more than a year after UBS’s biggest crisis, the bank is once again paying huge bonuses in an area that caused the most trouble,” said Roby Tschopp, director of Swiss activist group Actares. “It shows that under Chairman [Kaspar] Villiger, the bank has lost its sense to act in the interest of the people.”
The latter comment lays bare the difference in mission. UBS’s top management, assumed by the press and critics to be looking for ways to pad the pockets of management, is acting remarkably as if it cares about the bank and its shareholders. The “Swiss activist” organization that is advising shareholders wants the bank to act “in the interests of the people,” as if those interest are somehow served by a bank that suffers for lack of competitiveness.
As usual, the press ignores or glosses over this difference between the managers and the critics. It swallows whole the activist’s premise that the board and managers are working against the shareholders’ interests, and that those interests would be much better served if their managers were paid what the activists think they should be paid or, better yet, if their pay were put up to a popular vote.
Posted by Marc Hodak on February 10, 2010 under Executive compensation |
AIG’s CEO Robert Benmosche has implemented a forced-ranking system whereby people get a grade from 1 (you’re a star) to 4 (you suck). Only 10 percent of the people can be stars. 20 percent can get a 2 (you’re good). 50 percent get a 3 (you’ll do), and 20 percent must get a 4 (fail). The amount of variable pay one receives would, of course, depend on their ranking.
Some years back, Benmosche heard that GE did this, liked the sound of it, and implemented it at MetLife when he was the boss there. (GE used to tell their bottom 10 percent that they had to leave the firm. AIG can’t afford that attrition, having just gotten rid of its top 10 percent via a government-approved bonus scheme.)
At MetLife, some staffers there “hated” the system, says Mr. Benmosche.
Well, there are three reasons staffers might hate a forced-ranking system:
- Obvious one: People hate hearing that they aren’t stars, even slackers who are obviously not stars, but have been able to hide behind squishy, Lake Wobegon ratings (everybody is above average). Benmosche doesn’t want slackers to hide anymore. Fair enough.
- Less obvious, unless you’re been there: People hate to give honest feedback to anyone who is not a star. Figuring out which seven of your ten people are going to get less than a 2 is a difficult intellectual exercise. Actually giving those seven people the news can be excruciating, especially for the inevitable borderline cases. Tears are not uncommon.
- Frighteningly subtle: Forced rankings can kill teamwork. You’re basically letting people know that if your cube-mate gets a 1 or a 2, you’re highly unlikely to get rated well. You might as well give people swords and shields and throw them into a cage.
A forced-ranking system can change a corporate culture and “help drive consistency across large organizations,” says Ravin Jesuthasan, leader of the talent-management consulting practice for Towers Watson. [Towers Watson did not implement this system at AIG.]
A powerful incentive to make other people look worse than you can certainly change a corporate culture. People will step on each other to get to the top. Managers within divisions will furiously fight to keep their quiet, but competent people from getting trashed in a political “rank and yank” debate. It can get ugly.
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Posted by Marc Hodak on February 7, 2010 under Executive compensation, Reporting on pay |
Like many others in the blogosphere, I have said it before and will say it again: Lloyd Blankfein is a mensch. Except that I say it without sarcasm.
I was invited last week onto one of the networks to participate in the TV game “What will Lloyd get!” or “Do you want to tee (up) a millionaire!” I had another speaking engagement that night, which is unfortunate because I had a sure-fire strategy to win this game. I was going to hear what everyone else said, then go $100 below the lowest guess. Folks, I was willing to go down to zero.
My reasoning is that LCB was too. Blankfein doesn’t need the extra $30 or $40 million that he might be entitled to in a pre-2008 universe. He already has more than he knows what to do with, and he doesn’t strike me as someone who really cares about the extra that he wouldn’t know what to do with. People may want to project their image of insatiable greed onto him, but that’s their problem, not his.
Blankfein’s problem is how does he get himself and his firm off the front pages as the poster-child of finance capitalism run amok. If he can navigate Goldman through these rapids without crashing on the rocks of public envy and political hubris, the firm can go back to printing cash for its shareholders, employees and, yes, the tax collector, in peace. And if Goldman can grow its shareholder value, Blankfein makes out even better. Because while everyone else is deer-staring into the bright lights of tens of millions in bonuses, Blankfein is steadily looking at his personal portfolio of GS shares, realizing that with the ups and downs of the market, his personal net worth is fluctuating by an average of $10 million per day. Trust me, with 3.4 million shares already in his portfolio, Blankfein is really not sweating an extra 100,000 restricted shares this particular year versus being allowed to take care of the stock he has without walking around with a bulls-eye on his head.
