Posted by Marc Hodak on February 16, 2009 under Executive compensation, Politics, Stupid laws | 
There are so many wonderful features of the executive compensation provisions of the new gigatera-spending law that I have to post them one at a time to avoid TLDR from my fans. One of my favorites is the effective elimination of pay-for-performance as a viable basis for rewarding employees.
Actually, the law reads “…each TARP recipient shall be subject to…a prohibition on any compensation plan that would encourage manipulation of the reported earnings of such TARP recipient to enhance the compensation of any of its employees.”
Let’s see if we can get this straight; in golf, the score is the number of strokes one takes to get the ball in the cup. Does compensating one based on this standard encourage cheating? How could it not? So, if golf were under TARP, the number of strokes would be forbidden from being used as a standard for rewarding any player. Under TARP, film talent would be forbidden from getting compensation based on net profit (a.k.a. monkey points, a notoriously manipulable figure). Under TARP, paying patients based on the care provided would be illegal.
I could go on, but the bottom line is that any bottom line serving as a basis for pay is a bottom line begging to be manipulated. An incentive to perform is indistinguishable from an incentive to cheat.
The tightest interpretation of this rule would imply that a company can’t use GAAP earnings as a basis for pay-for-performance, which would be bad enough. But any driver of GAAP earnings–revenue, cost control, inventory turns, etc.–could easily fall under the purview of this law.
So, TARP recipients be warned: pay-for-performance is now illegal.
Posted by Marc Hodak on February 15, 2009 under Executive compensation, Politics, Stupid laws |
…to leave the TARP program as soon as possible.
And Obama is not a happy camper. The bill that finally passed Congress yesterday included a couple of items that his advisors neither asked for nor wanted. They would have been OK with the restrictions on “unnecessary and excessive risks.” They were fine with the clawbacks and the elimination of golden parachutes. They were happy about the limits on corporate jets and office redecoration, and the imposition of “Say on Pay.” But the bonus limits caught them by surprise.
Basically, no officer can get a bonus that exceeds half of his or her salary, and that bonus can only be in the form of stock that doesn’t vest as long as the firm remains on TARP. So, Vik Pandit, who has sworn to only take $1 in salary now has a bonus opportunity of 50 cents. That will lend a whole new meaning to “fighting for that extra penny” at the end of each quarter. The bill nominally imposes these limits on up to the top 20 “most highly-compensated employees” (on top of the five “senior officers”).
Now, here is where having a logic- and math-challenged Congress really begins to hurt. Read more of this article »
Posted by Marc Hodak on February 13, 2009 under Executive compensation |
With proxy season just a few weeks away, all eyes will be on executive compensation. Different people look for different things from these disclosures.
People like me, shareholder advisors and analysts, care about materiality and incentives. Are we attracting the right people? Are corporate funds being arbitrarily siphoned off by the management? Based on the structure of variable compensation, what exactly management is being paid to do? These are literally million dollar questions.
Other people, like many critics and journalists, are much more curious about the $100,000 questions. Did the CEO use a corporate jet for personal travel? Did they have a car and driver chauffeuring them around? They want to know about the perks. The smallest minds will focus on the smallest numbers, what we call the $10,000 questions: Did the firm pay for the CEO’s tax preparation? Will it pay for their home security? Will it pay for their umbrella stand or shower curtains?
Many critics justify their obsession with the small numbers with what may be called the “window theory” of disclosure, claiming that the little things the boards gives away is a window on how they govern the firm. Are they tough with the CEO? Do they know how to say “No” when he asks to use the corporate jet to ferry his pets?
There is no evidence at all in the literature that the level of perks is correlated with how well the shareholders fare. In fact, perks may be a very cost effective form of compensation. Manhattan has a long history of people being able to be bought with trinkets.
Certain wealthy people will value a company-provided car and driver much more than they might an extra hundred thousand dollars. Key executives may ascribe a much higher value to perks for the same reason that ordinary people are pissed off by them.
Also, corporate expenditures that have a plausible benefit to the firm but can also enhance the life of their executives can be very tax-advantaged form of compensation, especially given the tax penalties imposed on firms for paying their top executives.
Like everyone else, the populist in me wonders why someone making $6.2 million a year can’t pay for their own damn country club membership. But the shareholder advisor in me doesn’t look forward to the day when it’s just all about the bucks because we can no longer bribe talented executives with trinkets. These people will usually win on the pure dollars argument.
Posted by Marc Hodak on February 12, 2009 under Executive compensation |
Bank of America had announced a deferral program for their IB bonuses this year that included stretching out payment over the next four three years.
So, BofA got bankers to work for relatively low salaries with the promise of potentially significant bonuses (the norm in investment banking). The IBs had a crappy year, so their bonuses are down by, like, 80 percent. Fair enough. Now, they’re told that their bonuses, such as they are, won’t actually get paid this year. And, they aren’t actually vested in the payout–if they leave, they forfeit them. And that instead of getting cash, they’ll be getting 30 percent of their bonus in equity. Boy, they’ll be burning the candles on both ends for that one!
Maybe BofA’s reasoning was something along the lines of, “Well, we accelerated the bonuses for Merrill employees, so if were radically defer the bonuses for our other employees, maybe the public will consider us even, you know, on average.”
Maybe this new policy led to this sign?
HT: The ever-fabulous Dealbreaker
Update: BAC apparently reconsidered, and made the deferrals slightly less back-ended (no pun intended)
Posted by Marc Hodak on February 9, 2009 under Executive compensation, Politics |
Carly Fiorina, who collected $21 million on her way out of HP to the outrage of many critics, starts a column by saying, “Americans are outraged over excessive CEO pay and perks. That outrage is justified, particularly when American taxpayers are footing the bill.”
Her answer, more transparency because, you know, we don’t yet have enough disclosure rules on executive pay, and say on pay. She also believes that CEOs should accept responsiblity for failure, unless, I suppose, the company turns around after their departure.
There’s a reason that this monograph appeared in CNN’s “Politics.com.”
Posted by Marc Hodak on February 8, 2009 under Executive compensation |
Man, I bet NYU colleague Roy Smith is stewing about that one. He wrote a terrific article explaining that you can’t argue in favor of pay-for-performance on Wall Street, then scrap its bonus system altogether, if only for senior managers. Roy doesn’t use the word “greed” anywhere in the article, yet the WSJ editors entitled his piece “Greed is Good.” Unfortunately, us writers have no say in the inflammatory headlines they give to our articles in order to sell their papers.
Anyway, here is a great insight offered by Roy, who himself was once a Goldman partner:
Henry Paulson, when he was CEO of Goldman Sachs, once remarked that Wall Street was like other businesses, where 80% of the profits were provided by 20% of the people, but the 20% changed a lot from year to year and market to market. You had to pay everyone well because you never knew what next year would bring, and because there was always someone trying to poach your best trained people, whom you didn’t want to lose even if they were not superstars.
In other words, if you have someone very talented working for you, someone who can make your firm tens or millions or hundreds of millions (or more) in a good year, then even if this wasn’t a good year for them, you may still want to pay to keep them around. It might not look good to a casual outsider, but you’d be a fool not to.
This insight is followed by my favorite line in his piece:
Warren Buffett, when he was an investor in Salomon Brothers in the late 1980s, once noted that he wasn’t sure why anyone wanted to be an investor in a business where management took out half the revenues before shareholders got anything. But he recently invested $5 billion in Goldman Sachs, so he must have gotten over the problem.
The point being that when smart people see what’s really going on, they understand how and why the situation has evolved the way it has, and can better appreciate how radical remedies may cause far more problems than they solve. Maybe that’s why the closer one gets to a subject, the more conservatively they tend to view it. I have seen this transformation many times (including with myself).
Posted by Marc Hodak on February 4, 2009 under Executive compensation, Politics |
So, Obama is proposing a $500K cap on executive pay for firms taking bailout money. What does $500K buy?
In some parts of the country, it can get you a nice house, with a nice yard, in a nice neighborhood. But it can’t get you a $1 million house. It can’t get you a $1.5 million house. You know you can tell the difference. The location, the views, the acreage, the amenities…a $500,000 house is not the same as a $1.5 million house. Nobody who is looking at the comparison with eye toward buying can fail to see the difference. And no matter how well you bargain or cajole or pray, you can’t get a $1.5 million house for $500,000. You just can’t.
Yet, judging from the popularity of the political clampdown on executive pay, everyone seems to think that either there is no difference between a $500,000 executive and a $1.5 million executive, or we (as co-owners of an enterprise) can get $1.5 million executives for $500,000.
Or, they don’t really think anything at all; they’re running purely on emotion. “Nobody is worth that much!” “Nobody needs that much!” “I don’t want them to make that much using my money!”
A lot of this emotion was stirred up by the big numbers reported in the media, numbers like $20 million, or $60 million, or $20 billion. But we’re not talking about a $10 million cap in pay; we’re talking about a $500,000 cap. Lots of senior executives–corporate functional chiefs, division managers of major corporations, not to mention successful traders and asset managers (many of whose assets did not blow up)–make over $1.5 million per year. These people get paid that much because they are better than $500K managers. The people making the pay decisions can see it. The $1.5 million managers are more intelligent, more experienced, more decisive, or more politically savvy than the $500,000 managers. They get things done more effectively. They inspire more confidence. But most people who know they could never buy a $1.5 million house for $500,000 seem perfectly content to believe that a company can simply offer less without any noticeable penalty.
The central lie in this scenario is that Obama and Congress are doing this to protect the taxpayers-as-shareholders. Well, as a shareholder, I don’t want discount managers running my company. I don’t want the retention risk associated with grossly underpaying the very people I need to make the kinds of tough decisions these times demand.
Maybe that’s because I’m in the market for executives every day, just as a real estate broker is in the housing market every day. You see how it works. You see it’s contours, and imperfections, and messy negotiations. But in the end, you see it’s a market. Most people who have been in the market for a home know what I’m talking about when it comes to homes. Unfortunately, few people have negotiated big pay packages, either as the buyer or seller of executive services, like I have.
For those of you who don’t believe it, please let me take back my portion of this immense investment our government is about to make on my behalf, and let me reallocate it to companies not run by $500,000 managers.
Posted by Marc Hodak on January 30, 2009 under Executive compensation, Politics |
OK, Wall Street collectively earned $18 billion in bonuses.
After the NY Comptroller’s report yesterday, BDS has come into full swing. President Obama gave a wag of his finger. Many in our anti-business media are piling on with psychobabble dressed up as analysis. Now, the Davos clique, striving for relevance, is chiming in. And check out how hot “b” can sound when enunciated by the babe in the MSNBC video.
The comptroller’s report itself did not contain the outrage it provoked. In fact, it noted that the lack of these bonuses had a material impact on the ability of the state and city to finance public services, reinforcing the truth of what P. J. O’Rourke once said about the value of the undeserving rich:
The worst leech of a M&A lawyer making $500,000 (he wrote this in 1992) will, even if he cheats on his taxes, put $100,000 into the public coffers. That’s $100,000 worth of education, charity or U.S. Marines.
What is shameful, I think, is the PR problem Wall Street has created for itself by mislabeling what it pays its producers as “bonuses.” Wall Street, like any other enterprise, depends on its talent, such as it is. And, like any other enterprise, the famous 80/20 rule applies–about 20 percent of its talent generates about 80 percent of its revenue. Rather than pay all its talent equally, they give these people base salaries that would barely keep them in a small Manhattan apartment. These folks need to earn up to their competitive level of pay through “bonuses” based on their production. So, whereas most people in the country think of a bonus as something “extra” awarded for very good performance, on Wall Street most of these bonuses resemble commissions earned by a modestly salaried salesperson. The I-banks like to call them bonuses because it sounds better to the employees they wish to attract and retain.
Unfortunately, it sounds the same way to everyone else. The point is, no one familiar with how sales people get paid would seriously think that paying them zero commission in a bad year makes sense (except, perhaps, Barney Frank). Hey, the guy sold only half of what he sold last year, but he didn’t sell nothing. He deserves his commission, which will add up to less than he could have made in a less risky compensation structure of mostly salary.
But all this outrage leaves out the most important point of any discussion of bonuses: as long as someone has a their compensation at stake via a commission, bonus, whatever, they will perform better at the margin. Wall Street had a miserable year. Believe it or not, it could have been worse. How much worse we won’t know until we eliminate all remaining incentives to preserve, if not earn, as much revenue as possible. When you take someone off the incentive curve, however it’s labeled, they cease to care how many more billions go out the door and down the drain.
They become like congressmen.
Posted by Marc Hodak on January 29, 2009 under Executive compensation |
Actually, Carl Levin and other congressional democrats want to raise those taxes, and it looks like Geithner will go along.
What? You haven’t heard any proposals for a tax increase being bandied around by the Obama administration? Well, no, Obama is not agitating for higher corporate taxes. Neither is Geithner, per se. But Geithner did tell Levin that he would “consider extending at least some of the TARP provisions and features of the $500,000 cap to U.S. companies generally.”
That would be a $500,000 cap on the tax deductibility of all senior executive compensation. Without any exceptions. At every public company in America.
This policy is nominally intended to penalize firms for paying their top executives “too much,” the premise being that boards can pay their top people whatever they feel like, so if Congress penalizes them for paying over $500K, they’ll think twice about doing so. Nice theory.
But what if the pay of executives is actually largely set by the market? What if the market actually values their services at $1 million, or $5 million, $10 million? Sure, there are many people worth much less, some of whom pass our laws, who can’t conceive or accept that certain people can be worth that much. But what if that were possibly the case? Then corporate boards would simply have to pay it. They would have to, in accordance with their fiduciary duties to their shareholders to secure the valuable talent. And their shareholders would be left coughing up the tax money.
In other words, the greedy executives negotiating for their out-sized pay packages won’t be the ones penalized by this exercise in congressional outrage. The companies will, via a much higher marginal tax rate on compensation. This will not be the first time a congressional bullet aimed at top corporate executives ends up hitting the shareholders. When it comes to executive compensation, Congress is the gang that cannot shoot straight.
In a time when most sober economists agree that cutting corporate taxes would be the single most effective way to help our struggling economy, it’s ironic that our top economic agent in government, the Treasury Secretary, would basically be supporting higher taxes on corporations.
Posted by Marc Hodak on January 28, 2009 under Economics, Executive compensation, Politics |
OK, Andy, you can stop hyperventilating now about how much certain other New Yorkers are making. The media and politicians have been fretting about how much Wall Street bonuses would be this year. The nominees were:
1) Up three percent (!)
2) It should be zero (Barney Frank)
3) Down about 25 percent (Alan Johnson, Wall Street comp specialist)
4) Down 30 to 50 percent (yours truly)
And the correct answer is (drumroll, please): down 36.7% per worker; 44% overall
I’d like to think that our AG’s obsession with how much these bankers make has contributed a little to this comeuppance. Alas, the market’s work is swift while the wheels of justice grind on at their deliberate pace. I’m sure Andy and Co. will press ahead, however, making it as difficult as possible to pay anything to those greedy bastards on Wall Street, tamping those bonus dollars down for as long as possible. Of course, Andy’s own job is secure. It’s up to his compatriots to figure out what to do with the $1 billion in state tax revenue and $275 million in city taxes that have evaporated with those bonuses.
