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 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 about 3.4 million 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, the Goldman CEO is really not sweating an extra 100,000 restricted shares, more or less, this particular year.
Posted by Marc Hodak on February 2, 2010 under Executive compensation, Self-promotion |
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 February 1, 2010 under Executive compensation, Invisible trade-offs, Reporting on pay |
The headline is: Bank pay gets boost on the sly.
While the perk angers some shareholders, the reality is that executives at banks and other large companies routinely collect dividends on shares they don’t own.
Let me guess which shareholders:
“People at places like Goldman Sachs are going to reap windfalls in dividends from stocks they haven’t earned yet,” says Tony Daley, an economist at the Communications Workers of America.
The union fought similar payouts at General Electric’s 2007 annual meeting after CEO Jeffrey Immelt was paid $1.3 million in dividends—equal to 40% of his salary—on shares he didn’t own. It lost.
“It makes no sense to pay people dividends on shares they don’t own,” Mr. Daley says. “Shareholders should be outraged.”
No sense? How about this: if management is awarded beaucoup restricted shares, which by definition they can’t collect for a time, their fond hope is for an appreciation of those shares until they vest. And the one lever they most directly control in that appreciation is dividends. Dollar for dollar, the less dividends they pay out, the higher the shares will go. Soooo, if those communications workers prefer dividends, they should push for the holders of restricted stock to get those dividends, too. To eliminate the perverse incentive to chop or hold back on dividends. Which is why boards began awarding dividends on unvested equity, folks.
That part of the rationale was not mentioned in the article. They didn’t ask me.
Posted by Marc Hodak on January 27, 2010 under Executive compensation, Reporting on pay |
…or else we’ll tax ‘em!
British officials have blessed the shift to higher salaries, saying they help rein in risky decision-making. But the salary increases must be permanent, or they will be taxed like a bonus. “A significant, one-off leap in salary is something we’ll be keeping an eye on,” says Paul Franklin, a spokesman for the U.K.’s tax service.
Their concern about bankers salaries is kind of touching, don’t you think. It contrasts to the obsession in the rest of this article about how banks keep trying to get more money into the pockets of their employees.
Posted by Marc Hodak on January 26, 2010 under Executive compensation, Politics, Scandal |
Last November, the Government Accountability Office released a report titled “PRIVATE PENSIONS: Sponsors of 10 Underfunded Plans Paid Executives Approximately $350 Million in Compensation Shortly Before Termination.” At the time, I was wondering: Gee, how did they pick those ten companies?
Not really. Anyone familiar with politics knows exactly what the criteria was–it was blazoned on the title of the report. The more interesting question is: What exactly is the link between unfunded pensions and executive pay that the government would consider it worth highlighting in a few hundred pounds of wasted paper?
It’s a weak link. Benefits consultant Michael Barry snaps it with some hard sense:
Obviously, out in the political atmosphere, these two things—PBGC liability and executive compensation—are connected somehow, but is there a logic to that connection?
Certainly, you’ve got to pay an executive something, and who is to say that in these circumstances this $350 million wasn’t the right amount? It’s clear that there are, anecdotally, instances that could only be called grotesque abuse. Also without doubt, there are companies out there (perhaps not these 10, which apparently all went bankrupt) with executives that are underpaid. In real life, if you want to win, you’re going to have to pay for talent.
Moreover, why exactly is executive compensation the PBGC’s problem? Couldn’t you make the same argument about corporate charitable giving? Every dollar of matching grants that these companies paid the United Way could have gone to fund the pension plan. Why pick on executives? Why not pick on the company day-care center?
Or, why not pick on regular employees? Surely there are some rank-and-file employees out there who are overpaid. According to The Wall Street Journal, the UAW jobs bank program cost U.S. automakers $1.5 billion in one year—2006. These were “employees” getting paid not to work.
Of course, there may be perfectly reasonable reasons for giving to the United Way, or providing a day-care center, or providing a jobs bank. There also may be perfectly reasonable reasons for paying executives managing companies through difficult times big salaries and bonuses. Or there may not. However, the government—is there any money being wasted on government employees I wonder?—is in no position to tell which is which.
That last point bears repeating. What standard does an outsider use to determine if a company is spending too much or too little on anything, especially something as difficult to value as senior talent?
Barry’s conclusion is not something we see in the mainstream media:
The point being—if it’s not obvious—that there is no necessary link between executive pay and unfunded benefits. The idea that there is, is simply an appeal to envy—which is, you know, a base instinct. (Some of us actually think it’s a sin.)
And some of us think envy is every bit as bad a sin as greed–much worse if it has state force behind it.
Posted by Marc Hodak on January 4, 2010 under Executive compensation, Politics, Reporting on pay |
A few top executives at AIG left on the last day of 2009, including Anastasia Kelly, general counsel and chief HR officer of AIG. By leaving then instead of after New Years, these officers, among the “Top 25″ of the firm, got to keep their rights with respect to severance and prior bonuses. While these officers were doubtlessly driven by their short-term incentives, they certainly weighed those against the potential long-term benefits of sticking with AIG, and found those prospects wanting. Kelly in particular was outspoken in critiquing the general effect of pay regulations on AIG and its ability to remain competitive for talent. Why would she want to stick with a foundering ship with little hope of getting righted?
Politics has driven the compensation policy of this administration (as it would any administration, perhaps), especially with regards to companies that have received government funds. Fair enough. We own them; we tell them what the score is with their pay. We get to grumble about the $2.8 million in severance that Kelly was collecting for abandoning ship, even though that is what any of us would have done if we had the chance. We get to say, “Who needs her?” as if each of us had the position or wisdom to judge that, better than her CEO boss, who has also complained bitterly about his ability to retain talent under the current pay regime.
But just because we can deal with the talent issue glibly and dismissively doesn’t mean that it isn’t real. Talent is not being dealt with in a serious manner in the press. Like the utter lack of questioning about what would happen to AIG if Hank Greenberg were pushed out for political reasons, no one is getting by the big numbers that these executives make, and could expect to make anywhere outside of the government sector, and asking, “Is this really good for AIG, a giant company in which I have a direct investment, and was saved because its presumably out-sized effect on our economy?”
Posted by Marc Hodak on December 14, 2009 under Executive compensation, History |
This story about the demise of Tavern on the Green is a story of failure by a young heiress to keep alive her father’s fabulously successful restaurant. Tavern was a New York institution for 30 years run by Jennifer LeRoy’s father. When her father passed away, giving his 22 year old daughter control of the business, the first thing she did was scrap his incentive plan:
“Tavern made an incredible profit,” says Mr. Coyle, adding that top managers “earned hundreds of thousands of dollars in bonuses,” and that his bonus allowed him to purchase a Porsche.
The bonuses were based on a generous profit-sharing plan implemented by Mr. LeRoy, who was known for his excesses. Ms. LeRoy can be credited with a more fiscally conservative approach to running the business. Shortly after she took over, the bonus program was restructured. Managers were given a guaranteed amount based on their salary, not on the restaurant’s profits. It would be the first of several major moves as Ms. LeRoy put her stamp on the restaurant and grew into her role.
While there are many possible reasons that a business that had survived everything from New York’s near-brush with bankruptcy, a Central Park that could not be risked entering after dark, and everything else since, the end of the story is that she got what she paid for.
Posted by Marc Hodak on December 10, 2009 under Executive compensation, Reporting on pay |
Goldman Sachs has decided to take their usual 30/70 split of cash and stock for bonus payments this year and make 0/100 split instead. This is supposed to satisfy the mob crying out for no bonuses for bankers.
GS is either the cause or the symptom of a disease in this country, depending on your point of view. The disease has no name, as far as I know, but it is manifested by extreme anger rooted in the fear of something one does not understand. In this case, the anger comes from non-bankers (what the press insists on calling “Main Street”) directed toward bankers. What the non-bankers don’t understand is how money is being made, or, more generally, how markets work to derive so much value from the messy allocative processes that we call banking or trading. The bankers and traders, of course, don’t understand the anger directed towards them because they do understand how banks and markets work, though this esoteric knowledge is of little use or defense against the mob.
Few people understand how banks, markets, or, for that matter, “Main Street” work better than Goldman Sachs. That’s why they make so much money. The problem is that right now they aren’t allowed to pay themselves what they earn, so they are disguising it in the form of restricted, deferred stock. Same value; different form. We’ll see if the public, festooned with arbitrary distinctions about pay, will accept this one with a nod. The press seems to view this as some sort of victory.
Posted by Marc Hodak on December 7, 2009 under Executive compensation, Unintended consequences |
HR executives are rated, in good part, on their ability to retain their talent. If your best people keep leaving, you’re unlikely to see much progress If progress is making enough money to pay back, or at least get a fair return on, the $182 billion that your main investor has provided, you need all the help you can get.
So far, Kenneth Feinberg has not done well on the retention score at AIG. About half of the 25 executives whose compensation he was charged with reviewing have left the company. Another five are likely to leave pretty soon, including: Anastasia Kelly, General Counsel; Rodney Martin, head of one of AIG’s international life-insurance businesses; William Dooley, head of the financial-services division; Nicholas Walsh, vice chairman and head of AIG’s international property-and-casualty-insurance businesses; and John Doyle, head of the U.S. property-casualty business. By giving their notice and leaving before the end of the year, they get to keep their rights with respect to severance and prior bonuses.
A fair percentage of the people in the next tier of earners whose pay is subject to less stringent regulation have left as well, but about 20 of them are about to get bumped up to the top 25 category. This is a promotion that they will not relish. They will be interfacing directly with their government masters, trading off political and business considerations while having their pay scrutinized and limited.
Posted by Marc Hodak on December 3, 2009 under Executive compensation |
The basic premise of government oversight on compensation is that the owners (or some academic with apparently zero experience in the real world of business) can shovel any old thing they wish with regards to pay, and businessmen just have to eat it. Ken Feinberg is running into practical problems in applying this philosophy. This article shows the real life consequences of such a malformed premise.
So let’s spell it out one more time: What one pays affects the kind of people you get; how you pay them affects the decisions they will make.
