Posted by Marc Hodak on October 29, 2008 under Executive compensation | 
Andrew Cuomo is going after the Wall Street bonuses that pay his salary every which way.
First this argument, taken directly from Tony Soprano:
Now that the American taxpayer has provided substantial funds to your firm, the preservation of those funds is a vital obligation of your company. Taxpayers are, in many ways, now like shareholders of your company, and your firm has a responsibility to them.
Translation: “When your shareholders were merely institutions, pension funds, and assorted traders, widows and orphans, you could do whatever you thought was right. But with taxpayers as investors, you will do what I think is right.”
Of course, the Delaware courts have strongly ruled that shareholders can’t second-guess the board on what they think they need to pay managers in order to attract and retain their services. Which is why companies incorporate in Delaware instead of, say New York. Andy supported his threats using a New York law, a la role model Spitzer, that “permits the recovery of payments worth more than the services provided by executives.”
Excuse me, Mr. and Ms. Juror, do you think this guy was worth $763,249 last year? Here, let me explain roughly what he did… So much for business judgment.
Andy’s other ploy is another law from the code on debts:
Specifically, corporate expenditures and payments, made in the absence of fair consideration of undercapitalized firms, may well violate NY Debtor and Creditor Law 274, which deems such payments illegal fraudulent conveyances
What, you didn’t know that every dollar you paid Joe might be used to pay down your debt instead? Well, you have 10 years to think about it, with time off for good behavior.
I don’t think Mr. Cuomo talked to the Governor recently, who was in Washington begging the Federal government to save New York from massive cutbacks. Stopping some of the wealthiest, taxpaying New Yorkers from getting their full pay, and probably chasing them away, is likely to greatly help things. By “help things,” I mean Mr. Cuomo’s gubernatorial aspirations.
Posted by Marc Hodak on October 25, 2008 under Executive compensation |
I’d like to know what an “AP review” means. When I did a review of likely bonuses for a Forbes story last week, I predicted that Wall Street bonuses would be down by 30 to 50 percent. The Associated Press claims that “despite the Wall Street meltdown, the nation’s biggest banks are preparing to pay their workers as much as last year or more.”
What did the AP see that led them to this bold prediction? An “AP review” revealed that “total costs for salaries, benefits and bonuses grow by an average of 3 percent from a year ago.” They presented this to Andrew Cuomo, New York’s AG (Aspiring Governor), who summoned the outrage appropriate to an elected official:
Taxpayers have lost their life savings, and now they are being asked to bail out corporations. It’s adding insult to injury to continue to pay outsized bonuses and exorbitant compensation.
What was the AP review, and subsequent Cuomo comments based on? The pay expenses disclosed by the banks in their quarterly reports.
Uh huh.
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Posted by Marc Hodak on October 15, 2008 under Executive compensation |
As everyone knows, the U.S. Treasury has chosen to distribute it’s first $125 billion in bailout funds to the nine banks that didn’t need it–or necessarily want it. So, I’m reading all over that this forced investment comes with a $500,000 limit on CEO pay deductibility. Why is everyone saying this? Because Treasury itself said so in their announcement of the plan.
But when we look at the term sheet upon which this announcement is based, it claims the authority for requiring the compensation restrictions as Sec. 111 of the EESA. Thing is, Sec. 111, which applies when Treasury makes an investment in the firm, doesn’t include the $500,000 tax limit. That’s in Sec. 302, which kicks in only when institutions sell troubled assets to the treasury. So, what gives?
Maybe I’m looking at a wrong version of the quickly evolved EESA? Or maybe I haven’t yet learned to stop questioning Herr Paulson’s authority. He was, after all, able to wring $700 billion out of a reluctant Congress, then turn a voluntary program into a “voluntary” program.
Posted by Marc Hodak on October 13, 2008 under Executive compensation |
My prior conclusion was that no major bank would wish to directly involve themselves in the TARP program because of the compensation restrictions that came with it. It didn’t even occur to me that the healthiest banks would accept direct investment because they were healthy. Well, they did accept it…in the sense that one accepts an offer one can’t refuse.
According to the bailout law, “acceptance” of this investment comes with the following constraints on pay:
– Prohibition of golden parachutes, while the government has its investment in the firm
– Elimination of incentives for “unnecessary and excessive” risk for executive officers
– Potential claw back of bonuses based on accounting results that turn out to be false
Of these items, the ‘golden parachute’ prohibition is apparently the most onerous. I say “apparently” for two reasons. First, these CEOs would have to agree to have their contracts renegotiated to eliminate their golden parachutes. It’s not clear how the government would compel this even when the investments were voluntary, but it’s even more mystifying given that they weren’t. Alas, I don’t think Jamie Dimon or Lloyd Blankfein will cause too much fuss over this. They know pretty well that JP Morgan Chase or Goldman Sachs are unlikely to risk their departures over a few extra million per year, and they can negotiate that accordingly. If they can’t get it on the back end via a golden parachute, they can get it in current or up-front pay, or somehow via the infinite devices that us compensation consultants can dream up while staying in technical compliance with the wording of this law. Folks, boards and shareholders are rarely the winners in a forced renegotiation with the CEOs they wish to keep. The ones they don’t wish to keep can leave of course…with their golden parachutes (before the investment has been made).
The second reason to use “apparently” is that the more troublesome constraint, I think, will be the elimination of ‘incentives for risk’. Incentives that create greater alignment between managers and shareholders are invariably incentives for risk. The government claims no voting rights with these preferred shares, but they will have to find some way to comply with the law. It will be interesting to see how they do it. Interesting, that is, for us non-shareholders in these semi-nationalized firms.
Posted by Marc Hodak on October 5, 2008 under Executive compensation |
This is a more up-to-date and (hopefully) better packaged version of my prior write up of the bailout…er, rescue package’s executive compensation provisions. It’s a story of consequences, some intended, some not.
Sec. 111(b)(2)(A): The Treasury Secretary is charged with eliminating “incentives for executive officers of a financial institution to take unnecessary and excessive risks” for firms in which the government has taken an investment position.
Intent: To discourage firms from overly high risk-taking on the part of senior management.
Likely effect: To discourage appropriate risk taking on the part of managers.
Analysis: The relevant consideration in this scenario is not management incentives, but board incentives. Boards are remarkably, perhaps inherently, poor at distinguishing strategic or governance risk. No government-appointed director, even a Goldman refugee who might know better, will risk a major problem arising from a strategy with significant uncertainty. The most risk averse (or economically ignorant) director will drive the board’s appetite for risk. There will be no force to stop the pendulum in the middle. The board will be happy to pay its managers like bureaucrats for bureaucratic results.
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Posted by Marc Hodak on October 2, 2008 under Executive compensation |
I was up way late last night trying to figure out what all this will mean for executive compensation, so here goes.
There are two sections dealing with compensation governance in this giant bailout bill.
Sec. 111 says that when the government makes a direct purchase of assets, then it must impose certain conditions on the compensation of “senior executive officers” (i.e., the top five NEOs).
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Posted by Marc Hodak on September 26, 2008 under Executive compensation |
Nicholas Kristof got some ink for his breathless report about Richard Fuld making $17,000 per hour in 2007. For ruining a firm! Isn’t that disgusting!? Oh noes! The greed! The folly! What kind of board would allow something like that!? They must be retarded!! Kristof playfully asks: Wouldn’t you be willing to run a firm into the ground for that kind of dough?
There’s just one little problem with that $17,000 figure. It was based largely on equity that was at risk. Just like most of the half billion that Fuld has earned, and that Kristof ridiculed the board for paying him, over his Lehman tenure. It’s safe to say that that equity value is now gone.
So, let’s see, we’re down about $500 million in 2008, but that was just in the first nine months, so per hour, using Kristof’s formula, that comes to…minus $272,000 per hour. Hmm. I think I’ll pass on that job, Nick.
I understand that when those nine months were over, Fuld in fact lost over 90 percent of his personal wealth. That doesn’t exactly leave him a pauper, and I’m not playing violins for his loss. But Nick, come on down from that pedestal and honestly answer me this, when was the last time you risked 90 percent of your personal wealth on the success of a firm that you ran? Or even for a small, uncomplicated project?
That’s what I thought.
But the real reason I don’t read the NY Times, and the reason I’m over a week late in reacting to Kristof’s column, is illustrated by that paper’s choice of “Editors Picks” from the comments section. Mr. Kristof’s article garnered over 200 sympathetic responses. According to the site, “NYTimes editors aim to highlight the most interesting and thoughtful comments that represent a range of views.” One of their six picks for this article was a “thoughtful” note that referred to CEOs as “fiscal terrorists” for whom it would be “perfect justice to see them hustled off to Guantanamo and their personal assets confiscated.” I guess Kristof knows his audience, as well as his editors.
Posted by Marc Hodak on September 24, 2008 under Executive compensation |
OK, it’s an increasingly debatable point that the Paulson plan will actually save the economy. But given the market’s reaction, it seems that about a trillion dollars is at stake over coming up with a viable solution to our credit crisis, and various Congressman are willing to hold it up over…a few million of CEO pay.
That’s right, our inept Congress is trying to balance a duck against a building, and call it statesmanship. Actually, what they’re doing is playing chicken with the White House in a game of brinkmanship. Their specific proposals show how truly cynical these populists are:
– Congressman Barney Frank (D-MA), chairman of the House Financial Services Committee, wants the government to restrict the bailout to firms that deny their top people golden parachutes. He probably knows that most of those pay features are contractually obligated. That means he knows that the shareholders will end up losing almost as much fighting to keep those sums as they would otherwise pay out. And they would likely pay them out anyway. Because you see, dear Congressman, in this country the government still does not have the authority to abrogate contracts by fiat.
Frank also wants to institute a “clawback” rule to revoke bonuses paid for “bogus gains,” which will more likely create bogus litigation whose costs far exceed anything the shareholders could hope to recoup.
– Sen. Max Baucus (D-MT), chairman of the Finance Committee, is proposing tax penalties on the compensation of top executives who earn more than the U.S. president ($400,000). That’s right, for every dollar that the shareholders pay to attract a person capable of running their complex, multi-billion corporation above the wage of your average division head, those shareholders will also pay the federal government an additional 35%. Mr. Baucus may be fool enough to think that the executives will be paying that tax, but then again, he may not care, as long as he ends up with the taxes for his committee to fritter away on the next fiasco.
Rep. Jack Kingston (R-GA) says, “Clipping executive compensation is easy right now — everybody wants it.” And, of course, anything that people want, Congress believes it can do with a magic wand. Like fix the economy.
Many of these public servants are making these proposals under the misimpression that lazy, stupid, or corrupt boards are giving up shareholder money beyond reason or obligation. They believe that most of these CEOs are being treated differently from their rank and file. No, Mr. Frank, we don’t take back lawfully earned income from people when they exit a firm. No, Mr. Baucus, the shareholders don’t appreciate a hidden tax increase as a result of misguided attempts to have them pay their senior officers like civil servants.
Posted by Marc Hodak on June 27, 2008 under Executive compensation |
After years of being the poster boy for greed, the whipping boy of the New York media and political establishment, for having the temerity to accept what he was paid by his bosses, Dick Grasso can finally smile. The New York Court of Appeals basically affirmed the business judgment rule by affirming the dismissal of four of the six charges against him originally brought by then-AG Elliott Spitzer. It’s highly unlikely that the new AG, left to clean up his predecessor’s mess, will be able to prevail on the remaining counts.
While some will no doubt grouse about fair pay, I will be wondering about the headlines that weren’t written about this story on C1:
“Grasso Gets to Keep What He Was Paid”
“Court Dismisses Spitzer’s ‘Attempt to Circumvent Law'”
“We’re Sorry For Sullying Grasso’s Good Name”
Instead it sounds like a triumph of technicality: “Grasso Wins Appeal in Pay Lawsuit” on the WSJ “Deal and Deal Makers” page. What a deal.
Larry Ribstein, predicting this outcome, wrote:
It likely will be recognized as the bald-faced political gambit that it was.
Unfortunately, I doubt this outcome will be recognized at all. The gambit worked. Spitzer won the governorship.
A state’s attorney can get away with “attempting to circumvent the law” with impunity. In fact, he can be rewarded for leading a crusade supported by shameless, moralistic enablers.
When Spitzer got tossed out of the Governor’s mansion, it wasn’t for doing something that should be illegal, but isn’t; it was for something that shouldn’t be illegal, but is.
Alas, most people are more bothered by the idea of sleaze in making a buck, even if that turns out not to be true, than they are about sleaze in winning high office, even when that turns out to be true.
Update: Now it’s game, set, and match.
Posted by Marc Hodak on June 11, 2008 under Executive compensation |
Well, that was the headline, anyway. Actually, he is simply backing the “Say on Pay” bill, which will require a shareholder vote on CEO pay and severance. Because, you know, democracy works so well in producing optimal outcomes.
