In a warmup for the upcoming proxy season, we have the following lead in the WSJ:
On the way to bankruptcy court, Lear Corp., a car-parts supplier, closed 28 factories, cut more than 20,000 jobs and wiped out shareholders.
Still, Lear sought $20.6 million in bonuses for key executives and other employees, including an eventual payout of more than $5.4 million for then-Chief Executive Robert Rossiter.
The implication here is that the CEO was paid a bonus for slashing jobs and bankrupting the company. I suppose it would not have been as juicy a story if the lead were:
Lear Corp., an auto parts maker caught in the maelstrom that bankrupted a large swath of the auto industry, was forced to close 28 factories and shed 20,000 jobs in order to stay alive. The company survived, eventually adding back those 20,000 jobs and more, due to the difficult decisions made by its managers working through a trying time.
The employees collectively earned $20.6 million in bonuses for that effort, with the CEO earning $5.4 million of that.
The problem with the second version is that it does not support the narrative that paying a lot to turn around a company might make sense. The latter version also undermines another purpose of this article, which is to report on the allegedly widespread skirting of a law intended to prevent companies from paying “retention bonuses” to managers when the firm is in bankruptcy.
The 2005 measure—an amendment to broader bankruptcy legislation aimed mostly at changing rules for personal filings—severely restricted “retention” bonuses that reward executives for sticking with distressed companies. It was fueled by popular outrage over money paid to executives of Enron Corp. and other companies that imploded.
But in the past few years, some corporations have found perfectly legal ways to escape federal strictures on bonus pay during bankruptcy cases.
That’s because Congress can’t outlaw compensation for services. All compensation, whether it’s guaranteed (as in salaries) or at-risk (as in bonuses) have a retention element to them. So, instead of offering a “retention bonus,” those clever compensation consultants offered an “incentive bonus” with easy targets. Keep in mind, they did this with the full cooperation of the investors on whose behalf they were working. A rule that prevents people from doing what they think is right for them is always going to be tested.
So, to prop up an illogical law, the courts had to get into the business of deciding whether the incentive goals were rigorous enough to qualify the resulting pay as at-risk versus guaranteed. As the judges drew the line out, this policy began to force investors to dilute themselves even more. That’s because the more at-risk the pay actually is, the more compensation investors have to promise their managers they need to retain them. That’s because managers, like investors (or anyone else), must be rewarded for taking risks.
This rule, stemming from outrage over Enron, once again illustrates the old adage that tough cases make bad law. Of course, the people making bad laws get irritated when they feel they are being ignored.
Sen. Charles Grassley, the Iowa Republican who introduced bankruptcy-reform legislation in 2005 that later included the pay restrictions, said: “You can’t use subterfuge to get around the law. It surely needs further inquiry.”
Which is why I am quickly gravitating to the presumption that every law Congress passes is a bad law, and every attempt to improve it makes it worse.
Dick Durbin’s amendment to Dodd-Frank, capping fees on credit card transactions to 21 cents, is one of the most blatant examples of government price fixing implemented in a long time. In this article, we get a good glimpse of one of the unintended effects of this law:
Just two months after one of the most controversial parts of the Dodd-Frank financial-overhaul law was enacted, some merchants and consumers are starting to pay the price.
Many business owners who sell low-priced goods like coffee and candy bars now are paying higher rates—not lower—when their customers use debit cards for transactions that are less than roughly $10.
That is because credit-card companies used to give merchants discounts on debit-card fees they pay on small transactions. But the Dodd-Frank Act placed an overall cap on the fees, and the banking industry has responded by eliminating the discounts.
The stated intent of government price fixers is almost always to lower costs to consumers. Their premise in these matters is that particular vendors (in this case, credit card processors) charge arbitrarily high prices for their stuff, and a price cap will keep the prices from getting too high. The assumption is that sellers will simply eat the resulting losses without any other changes in their business practices, i.e., that the sellers will transfer their gains to the buyers without altering the amount or quality of what they sell.
I don’t believe that Dick Durbin is a Marxist, nor Mssrs. Dodd or Frank or very many of the clowns who voted for this fiasco of a law, but the premise and assumption above are Marxist premises and assumptions. A market-oriented economist with an Ivy League PhD might come up with plausible exceptions to the premise that price controls create predictable distortions, that consumers will, in aggregate, pay the cost of those distortions via a net loss in economic welfare, and that those losses are likely to be concentrated on the very individuals who were promised the greatest benefits. But none of those plausible exceptions were provided in support of this legislation.
This law was passed based on raw economic ignorance ground in those Marxist assumptions, even if none of the ignorami consciously (if not publicly) espouses Marxism. They were simply, and I might add expertly, playing to the economically-challenged voting mob, or to special interests that believed they had something to gain by the careful application of the threat of police power to otherwise voluntary transactions between consenting adults.
The irony is that as the sellers begin to do what they will to adapt to this law, the law’s supporters will begin to see that response not as a market reaction to bad law, but as part of the conspiracy that made the law necessary in the first place. They will see the effects of law not as a repudiation of the premises and assumptions behind the law, but evidence of its incompleteness in its drafting, and reason that the law’s reach must be extended in order to serve it’s stated (higher?) purpose. The next Dick will carefully identify the places where the squeezed balloon has popped out, and craft amendments to push those errant bubbles back to their original form.
According to BBC News:
The government should not be setting pay rates, Mr Clegg stressed, while making clear he supported top executives being well rewarded if their companies were successful.
What does he mean? Well, we need to take that phrase in the context of the speech where he declares:
We need to get tough on irresponsible and unjustified behaviour of top remuneration of executives in the private sector…What I abhor is people getting paid bucket loads of cash in difficult times for failure.
A politician will say all those things in the same speech because he wishes to whip up the mob that loves bashing the wealthy elite, but he doesn’t want to alarm that elite by saying he actually wants to determine how much they are paid. And he can say these things without worrying that the press will call him on it, and will, more likely, lay out these points as a balanced position rather than a contradictory one.
The press won’t question that “the government ‘getting tough’” necessarily means that
the politicians in charge should use the police power of the state to get the private sector to do what the politicians want them to do. In this case, Mr. Clegg means that the British government should decide how much an executive is allowed to make in a company deemed not successful. This, in turn, means giving bureaucrats the authority to make the distinction of “successful,” which would necessarily have to be applied to every single company. Is a company that loses any market value successful? What about a company that loses value in difficult times?
In other words, having the government “get tough on pay” means having the government set pay rates, at least in some situations, and potentially for any company.
There are citizens who don’t mind the idea of bureaucrats actually setting pay rates in the private sector, and there are some who don’t mind as long as it’s not their pay. But there are many people who would bristle at the thought of government setting pay rates for anyone not in government. By threatening to “get tough” on pay but claiming that they “should not be setting pay,” a politician can have it both ways, and the print media that boasts its role as an agency of letters and, occasionally, as a public watchdog will go right along with.
Depiction of Goldman Director (not based on any facts)
Last January, when I was still updating this blog regularly, I wrote about various unions bringing suit against Goldman Sachs for their compensation practices. In particular, they objected to the firm’s longstanding formula that employees would get about 45 percent of net revenues, with the bulk of their pay being determined after the company knew what those net revenues would be, i.e., as “bonuses.” The allegation was that this program (basically a profit-sharing system) created incentives toward excessively risky and short-term behavior against the interests of the shareholders. If the latter were true, and if the board approved of such a plan knowing that were true, it would arguably constitute a breach of their fiduciary duties. Of course, there are a couple of big “ifs” in that allegation, both of them needing some substantiation before a board’s culpability could even begin to be ascertained.
Last week, the Delaware Chancery Court decided that in the absence of any substantiation whatsoever, and insisting on these things called facts, that they had to dismiss the case.
I only wish that the fiduciaries who brought this fact-challenged suit could be held accountable for the far more provable waste of their investors’ resources for their personal profit, i.e., maintaining their union sinecures. Wouldn’t some enterprising plaintiffs lawyer love to find that e-mail from a top union official that says, “I know this case doesn’t have any merit, but hiring lawyers to publicly poke Goldman’s eye would help me get re-elected.” Or at least these enterprising lawyers could allege without any facts that this was the motivation. Alas, there is no private party willing to waste their own money to bring such a frivolous suit.
Numbers don’t tell the whole story. In fact, they don’t tell any story, which is why people are generally less interested in numbers than they are in the narratives that form around them. Steve Job’s life is full of amazing stories about form+function, mechanical beauty, and inspiration. An alien could add up the deluge of accolades in the 24 hours since his passing and infer, with good reason, that Steve Jobs was important to humanity.
But someone could also reach that conclusion by crunching a few numbers so far invisible among the accolades. Those numbers net out to $364 billion. That would be the increase in market capitalization of Apple over the times Jobs led that firm, plus the market values of Pixar and NeXT at the times he sold them, net of the relatively negligible amounts he put into them. In a narrative form, we would refer to those as the market value added of Steve Jobs.
To be sure, Jobs didn’t create that value all by himself. He had a lot of co-investors, work colleagues, and not a few Chinese factory workers helping him. Still, his vision, creativity, and energy put it all together, creating those immense opportunities for all those he led, as well as for the millions of consumers who looked at his company’s creations and went “Wow.”
Even net of the contribution of all his partners in enterprise, at an estimated net worth of $7 billion, Jobs probably captured only a tiny fraction of the value he created for society. I mention that not to suggest he was under-compensated, but to suggest that the same is probably true for innumerable other entrepreneurs with far less fame than Jobs.
But Jobs has one unique distinction among all entrepreneurs, or, for that matter, among any builder, mogul, or monarch: The enterprises under his leadership created more value than any others in history.
The fact that he did this in 56 years is today’s tragedy; what has the future lost by the random cutting of an extra 20 years of his extraordinary life–a period when many business leaders are hitting their stride?
The severance package of the fired CEO of Sara Lee’s North America division is in the news:
His package is worth about $11.3 million, based on Sara Lee’s share price of $17.10 as of 4 p.m. Eastern on Friday, according to a calculation for The Wall Street Journal by Mark Reilly, a partner at Compensation Consulting Consortium LLC in Chicago. The estimate reflects Friday’s value of his unvested equity and assumes he earns the pro-rated portion of his annual bonus. “It’s a competitve package,” Mr. Reilly said.
That last comment struck me: “It’s…competitive.” I know what the consultant was thinking when he said that. He looked at other severance packages for departing executives of similar responsibility and similarly sized firms, and saw that, on average, they were given severances with similar terms or of similar magnitude. That’s how comp consultants define “competitive.”
The authors of this article have been reporting on executive compensation long enough to learn the lingo of the comp consultants they rely on for the numbers they report. It appears that they simply bought into the notion that paying the same as everyone else is, by definition, “competitive.”
Apparently neither the writers nor the consultant (not to pick on this consultant–most comp consultants use the same lingo) thought about how the word “competitive” looks to the intelligent reader, who could very well view the departing executive’s $11.3 million pay day and ask, “who were they competing against to provide that award?” Was another company ready to offer $10 million for him to stay? Was someone calling in with an offer of $10.5 million or $11 million if he didn’t leave?
It is likely that his severance was, in fact, established by contract or policy at the time he agreed to commit to the CEO job. Severance is a reasonable component of an executive compensation package, especially to the extent that it consists largely of unvested stock or options in the context of a change in control. If an executive builds a company to the point where the shareholders can cash out in a sale or merger, they want their executives to work hard to make that situation as valuable as possible, without worrying that they are cutting themselves out of the payday through forfeiture of their now valuable, but still unvested equity. So, in a sense, the competition happened at the time the executive was hired, and the board is simply following through on a deal.
However, the average person doesn’t get millions of dollars for being fired. So when the average person doesn’t know about the deal, which is ancient history, and when fulfillment of the deal is simply referred to as “competitive,” the average person can easily be left with the feeling that the game is rigged. Then the average person ends up supporting Dodd-Frank and similar monstrosities.
August 26, 2011.
Ben Bernanke goes up to the podium, and looks around at an expectant crowd, every ear bent in his direction, wondering what he will announce to kick start the economy. He sees the cameras trained on him, ready to carry around the world his brilliant musings, and his expert prescription for what to do next. The global markets await.
Ben clears his throat, looks around, and begins.
“Why are you all looking at me? What the hell do you expect me to do?”
Read more of this article »
via Thom Lambert at TOTM:
Whoever would have guessed that Mr. Durbin’s valiant effort to prevent future financial crises by imposing brute price controls would have had these sorts of unintended consequences?
Thom is referring to the government’s regulation of debit card swipe fees.
Government price controls typically have three predictable (sometimes, though not always, unintended) effects. Let’s see if they apply here:
Politicization of price setting:
Ben Bernanke, who apparently doesn’t have enough on his plate, was tasked with determining banks’ processing and fraud-related costs and setting a swipe fee that’s just high enough to cover those costs. Mr. Bernanke first decided that the aggregate cost totaled twelve cents per swipe. After receiving over 11,000 helpful comments, Mr. Bernanke changed his mind. Banks’ processing and fraud costs, he decided, are really 21 cents per swipe, plus 0.05 percent of the transaction amount.
Complex market workarounds in response to “one-size-fits-all” price:
The WSJ is reporting that a number of banks, facing the prospect of reduced revenues from swipe fees, are going to start charging customers an upfront, non-swipe fee for the right to make debit card purchases. Wells Fargo, J.P. Morgan Chase, Suntrust, Regions, and Bank of America have announced plans to try or explore these sorts of fees — “Durbin Fees,” you might call them.
Economic harm to the intended beneficiaries of the law:
Fortunately for me, I can just switch to using my credit card, which will not be subject to the price controls imposed by Messrs Durbin and Bernanke. Because I earn a decent salary and have a good credit history, this sort of a switch won’t really hurt me… Of course, lots of folks — especially those who are out of work or have defaulted on some financial obligations because of the financial crisis and ensuing recession — don’t have access to cheap credit. They can’t avoid Durbin Fees the way I (and Messrs Durbin and Bernanke) can.
Thom then proposes that subsidies may be on their way to those “protected” (i.e., disenfranchised) by this law, harkening Reagan’s famous quip about government action.
I don’t get the media’s willingness to accept the politician’s definition of “ask,” as in:
“We’ll ask them to hand over their assets to government”
“We should not be asking them to make sacrifices if we’re not asking the most fortunate in our society to make some sacrifices as well.”
The first quote comes from the Zimbabwean Minister of Economic Empowerment–an Orwellian title if ever one existed–with regards to foreign owners of mines. The second quote is U.S. President Obama discussing his hope for budget cuts and tax increases. Each of those phrases is more honest if “ask” is substituted for “force.”
Actually, that substitution doesn’t work as cleanly in Obama’s statement. In the first instance of “asking,” the government is taking benefits away that it currently provides; in the second instance of “asking,” the government is taking by force resources that are nominally owned by other people. Substituting “ask” for “force, or supplanting “ask” with “from behind a gun” reveals Obama’s linguistic trick in attempting to treat these very different activities as similar.
The lesson is simple: when I ask you to do something, or you ask me, it’s a request that either of us can refuse. When the government “asks” you to do something, you can’t. Of course, every mafia don will insist that a person could refuse their requests when it comes down to it, but that insistence does as much violence to the language as it does to the person who refuses.
Gretchen Morgenson doesn’t have to disclose exactly how much she makes–she just gets to toss misleading, scurrilous barbs at those who must for her base pleasure–but it’s reasonable to assume that the Pulitzer Prize winning columnist earned, all by herself, about 10 percent of the total income from operations of the New York Times in 2008! In fact, she earned more than the shareholders did that year! In fact, she personally out-earned her company’s shareholders for two of the past five years!! That’s 20% of the time!!! What does all this mean!!!?
Not any more than the other useless comparisons she bandies around in her latest article on executive compensation, where she praises a study that compares executive pay to items like the GDP of third world countries, or random items off the income statement. Alas, these comparisons don’t have to mean anything if their real purpose is nothing more than “to get people fired up,” which is the explicit aim of this exercise. I have to admit, it did kind of get me riled up.