Posted by Marc Hodak on May 23, 2009 under Executive compensation, Politics, Reporting on pay | 
Congress cooking up new legislation (artist's depiction)
According to this story in Bloomberg:
Treasury Secretary Timothy Geithner called for an overhaul of compensation practices at financial companies and said the Obama administration’s plan to help realign pay with performance will be rolled out by mid-June.
“I don’t think we can go back to the way it was,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be aired tonight and over the weekend. “We’re going to need to see very, very substantial change.”
Geithner is not too clear what he means by “the way it was” in compensation practices that begs for “very, very substantial change,” so let me clarify.
1) Let’s say you work in a bank that has seven divisions. One particularly leveraged division, not the one you work in, totally screws up pushing the whole bank into a loss. Your division made money. In fact, it made enough to keep the whole bank from going under. In Geithner’s view, echoing the view of the rest of the government and the media, you should get no bonus.
2) Let’s say you work for a company that the government has more or less taken over. You have a contract with the company for your services, a contract the government in essence approved, dictating compensation to be paid later (bonus, retention payment, deferred comp, whatever). The media hates you and embarrasses the politicians. In Geithner’s view, you should get none of the promised payment.
In other words, given the mob’s inability to distinguish behavior and results within institutions, once those institutions become unpopular, the mob’s sensibilities of what other people should be paid should be made the law of the land. The mob is similarly blind to the difference among firms in an unpopular industry, as if there were no difference between Goldman and Lehman, or between JP Morgan Chase and Citi, in their need or willingness to take bailout money.
The hypocrisy doesn’t stop there:
[Geithner] said that Wall Street’s pay practices encouraged taking on short-term risk, and helped precipitate the financial crisis. What’s needed is a set of broad standards that federal regulators can use to make sure that doesn’t happen again, he said.
If we exchange “Wall Street’s pay practices” with “Congressional policies” we get a far more accurate sense about what precipitated the crisis.
Posted by Marc Hodak on May 19, 2009 under Executive compensation |
Shell Oil’s board has suffered one of the worst rebukes a board can bear–the slap down of their executive pay package in a “say on pay” vote.
I’m not a big fan of “say on pay,” but when a company sets up an incentive plan based on placing in the top three among a set of peers, then the company places fourth, you can’t expect to get away with:
“The difference between Shell and the third-ranking company, France’s Total SA, was marginal and Shell’s ranking didn’t fully reflect its relative performance.”
The Brits, especially, will not countenance a bonus for finishing behind the French. What was the board thinking, really?
Posted by Marc Hodak on May 18, 2009 under Executive compensation |
UBS is dealing with an outflow of its top talent by raising pay. Of course, since they’re constrained in paying bonuses, they will have to raise salaries, instead, increasing the risk of their business with higher fixed costs, and insuring that they pay more in a downturn than they otherwise would have.
Here is a scary comment on normally conservative Swiss sensibilities:
On Sunday, paper SonntagsZeitung reported the results of a poll that showed 75 percent of participants would vote in favor of government-imposed restrictions on management pay in Switzerland. Only 9 percent said they would vote against.
Don’t ask me why any country as attractive as Switzerland would want their only wealthy people to be foreigners.
Posted by Marc Hodak on May 13, 2009 under Executive compensation, Politics |
President Obama, indicating that no aspect of corporate management is beyond the direct control of government, is now proposing to establish pay standards for the entire financial industry.
The administration is discussing issuing “best practices” to guide firms in structuring pay…
Government officials said their effort, which is just beginning, isn’t aimed at setting pay or establishing detailed rules. “This is not going to be about capping compensation or micro-management,” said an administration official. “It will be about understanding what is the best way to align compensation with sound risk management and long-term value creation.”
All this fuss about alignment is built on the clear evidence of Wall Street pay being clearly insensitive to performance. For goodness sake, don’t those greedy people know that we had a crash in 2008? Why do they continue to pay themselves as if nothing happened?
Boom and bust on Wall Street
Oh, well, I guess the real question is, why did they pay themselves any bonuses at all? Well, the reason doesn’t make any difference to this discussion. This is not really about alignment or risk management. If it were, the government would look to its own incentives, and their utter disregard for the incentives they have created–and continue to create–for making key players in the financial markets completely insensitive to the downsides of the risks they take. This is really about scoring more political points against a politically vulnerable target.
Another report notes:
Options being considered by the administration and regulatory officials include using the Federal Reserve’s supervisory powers, the power of the Securities and Exchange Commission and moral suasion, the paper said, adding that officials are also looking at what could be done legislatively.
I love the part about moral suasion. The U.S. government has grabbed the moral high ground on financial management. That’s rich. But I’m looking around at my fellow citizens to see if they’re in on the joke.
Meanwhile, we in the compensation community are trying the best we can to help our clients not place themselves at risk of ending up like Dick Fuld or Jim Cayne (who, contrary to the implications of these proposed “options” really are not who Wall Street bankers aspire to emulate) while navigating the most treacherous set of incentives and constraints ever laid down by government.
Posted by Marc Hodak on April 28, 2009 under Executive compensation, Invisible trade-offs |
It had to come to this. After months of bonus baiting, with everyone asking “where else could they go?” After Andrew Cuomo invited every banker unfortunate enough to find himself in the Journal or Times into his office to ask why they made so much money. After the press smacked Geithner around like a pinata. We’re finally at the moment when it all comes down to taking responsibility for a choice:
Citigroup Inc., soon to be one-third owned by the U.S. government, is asking the Treasury for permission to pay special bonuses to many key employees, according to people familiar with the matter.
We’re talking tens of millions for certain people. Choose your outraged retort:
How can anyone be worth that much? Surely they don’t need the money.
How can they be so greedy? This is just extortion!
Why should taxpayers be paying bonuses for failure?
Why should people need incentives to do their job?
Now that you’ve gotten it out of your system, put yourself in Geithner’s shoes. Phibro generates a huge amount of profit for the Citibank. It’s not the machines. It’s not the building or furnishings. It’s not the computers. It’s the people. The people create the profit. As with anything else, it’s most likely that 20% of the people create 80% of the profit. If you don’t pay the key 20%, they walk. You lose 80% of the profit. So, we can enjoy our two minute hate, the clever rants about evil bankers, and emotional complaints about how bankers are no more special than the “working man.” Then someone has to decide what to do about bonuses.
I think the right answer may be to spin off the unit; Citibank is unwieldy and inherently unprofitable. They need to get leaner. They need to undo the failed “financial supermarket” strategy that got them here if there is any chance of creating a profitable remnant. That, or pay enough to keep the best.
But that’s the economic decision. That’s what a conscientious board mindful of their fiduciary responsibilities would likely decide. Congress is a different kind of board. What would you do?
Posted by Marc Hodak on April 22, 2009 under Executive compensation, Reporting on pay |
. ^
I’m sure we’ll be seeing a hard-hitting article this weekend by Gretchen Morgensen, but I thought I’d take a quick look at the bonuses currently shaking the liberal establishment:
I speak for a lot of people who are just amazed at the depth and breadth of the hypocrisy here — the liberal New York Times and the liberal Globe… at one point in the negotiations, the company proposed eliminating all sick days for Guild members, like an Alabama sweat shop.
That from a sweatshop worker writer at the Boston Globe, which has been told by their NYT overlords that they the Guild must find $20 million in cuts, presumably from their labor contract, or face the shutdown of their paper. And the Grey Lady is not just picking on their Boston subsidiary; all NYT employees took a 5 percent salary cut in order to avoid layoffs.
Except for the CEO. She made $5.58 million in 2008, versus $4.14 million in 2007.
Asked if the bonuses and extra executive compensation were appropriate at a time when employees are being forced to absorb salary cuts and joblessness, Catherine J. Mathis, NYT Senior Vice President for Corporate Communications, told the Huffington Post:
“With regard to shared sacrifice, please remember that for 2008, non-equity incentive compensation (which many think of as bonuses) for these folks was roughly half of what it was the year before and stock awards were down more than 80 percent in value.”
Translation: “If we can convince you to look only at certain selected parts of the compensation equation, over here (snap, snap), you’ll see they went down versus the year before.” Of course, that means other parts went up, i.e., grants of stock and options. The NYT clearly assumes that their shareholders are as innumerate as their readers, and can be lead away from the “total” numbers to just the numbers management wants to discuss. Sorry, Cathy. The equity counts, too.
Mathis cautioned that the total compensation numbers in the proxy report…
“…include the value of the compensation — not the amount of cash they received. For example, they were all granted options. But those options are of value only in the stock price increases over the exercise price…For proxy purposes a value is assigned to the options even though the executives received no cash at the time they were granted.”
Uh, yeah. Actually, the options are valuable even though they’re granted at the money. That’s how the NYT counts options when they evaluate the pay of CEOs.
Now, if the NYT’s CEO wishes, via her mouthpiece, to insist that at-the-money, or even out-of-the-money options are not really worth anything, I will gladly give her $1 for them, and she can claim to be ahead. Just mail them to…
What? She’s not interested? How about if I offer $2? She wants how much? Oh, $1.5 million. Yeah, that is how much they’re worth.
I’m used to having my intelligence insulted by the NYT, which is why I dropped my subscription a couple years ago, apparently with tens of thousands of others. The little sympathy as I have for management in this affair is barely topped by my sympathy for those wondering “if the bonuses and extra executive compensation were appropriate at a time when employees are being forced to absorb salary cuts and joblessness.”
If the cuts improve the odds of the paper becoming profitable, that is precisely the kind of thing that should be rewarded with bonuses. If management doesn’t have an incentive to push for profits, then who can the shareholders count on to make the paper viable? The unions?
Posted by Marc Hodak on April 21, 2009 under Executive compensation |
According to Special Inspector General Barofsky, buyers or assets in the PPIP program “could be subject to the executive compensation restrictions.”
Barofsky’s boss, Geithner, disagrees. But Geithner is not the house lawyer.
If Barofsky is right and Congress refuses to clarify that buyers won’t be subject to the comp constraints, PPIP is dead. At this point, even if Congress has to act because of the way the law is currently written, a lot of potential buyers will be scared away.
HT: Megan
Posted by Marc Hodak on under Executive compensation, Self-promotion, Stupid laws |
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 13, 2009 under Executive compensation, Reporting on pay, Unintended consequences |
The NYT provides a good story about how the Wall Street pay restrictions may be having its effect. Some of the remaining glib tropes we’ll undoubtedly to hear:
– “So what? How much can these people have been worth to companies they helped drive under?”
– “They don’t need these people. The industry had to shrink anyway.”
– “These people are just being greedy, looking for other ways to get rich doing useless things.”
In the meantime, we taxpayers will reap the ‘benefits’ of our government’s politically driven HR policies at institutions completely dependent on the quality of their human resources. What we’ve saved from not “wasting” money on compensation, what we’ve cathartically gained from “tough talk” to the bankers, we will lose a thousand-fold from sub-optimal bank earnings and, in New York’s case, crippled tax collections. Hopefully, the NYT will run a story on those items when they happen, as well.
Posted by Marc Hodak on April 7, 2009 under Executive compensation, Revealed preference |
Pretending to be one of the culpable
Goldman Sachs CEO shared his idea of how executive compensation should look:
• Compensation should take into account strict adherence to a firm’s management and controls, especially with respect to a person’s judgment and exercising that judgment in terms of risk in all of its forms. That evaluation must be made on a multi-year basis to get a fuller picture of the effect of an individual’s decisions.
• Individual performance must not be viewed in isolation. Individual compensation should not be set without taking into strong consideration the performance of the business unit and the overall firm. Employees should share in the upside when overall performance is strong and they should all share in the downside when overall performance is weak.
• No one should get compensated with reference to only his or her own P&L. Compensation should encourage real teamwork and discourage selfish behavior, including excessive risk taking, which hurts the longer term interests of the firm and its shareholders.
• Compensation should include an annual salary plus deferred compensation, which is appropriately discretionary because it is based on performance over the entire year.
• The percentage of compensation awarded in equity should increase significantly as an employee’s total compensation increases.
• For senior people, most of the compensation should be in deferred equity. Only the firm’s junior people should receive the majority of their compensation in cash.
• As I mentioned earlier, an individual’s performance should be evaluated over time so as to avoid excessive risk taking and allow for a “clawback” effect. To ensure this, all equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.
• And, senior executive officers should be required to retain the bulk of the equity they receive until they retire. In addition, equity delivery schedules should continue to apply after the individual has left the firm.
In other words, it should look a lot like Goldman Sach’s executive compensation plan.
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