Posted by Marc Hodak on June 14, 2007 under Executive compensation | 
The day I get back from vacation, I see this article about how much Stephen Schwarzman is worth–$7.5 billion.
Most people would think, “Wow. That’s a lot of golf balls” (or whatever). I thought, “Wow. Congress is going to see red on this one. They won’t be able to resist that bale of cash just sitting out there.” I figured that within a month, the other shoe would drop.
Well, as usual, I’m off on my timing. It took one day for Congress to react. It looks like the tax on carry is going to be amended for public PE firms. This won’t affect public partnerships of any other sort, just investment firms–the ones whose fabulously rich partners have been in the news. Yea, this measure has been considered for a while, long enough for Schwarzman to lobby for preferential treatment via a transition rule, but I can’t help but think that the pols who announced this might have taken a measure of the public mood in their timing.
Posted by Marc Hodak on May 21, 2007 under Executive compensation |
I guess it makes sense for a retailer to be the first to experiment with a bargain CEO. Sharper Image took a step advocated by many governance mavens to improve their bargaining position in negotiating for an outside CEO. They avoided identifying a single “gotta have” person, then trying to negotiate pay from a position of potentially failing to get him or her. As Pearl Meyer noted, this creates a situation where if “they find the person they think will make a difference, the cost is immaterial.” Instead, Sharper Image decided to take the pressure off themselves by identifying back-up candidates in case their first choice got too demanding. Fine so far, but then they looked at the sticker and got all Jack Benny.
Their compensation consultant conducted a peer analysis to determine that the board needed to be prepared to pay a target salary plus bonus of $1.5 million plus 150,000 options per year to attract current or past CEOs identified by the board’s search firm. Even though this was not much less than the current CEO was making, all things considered:
The potential price tag dismayed board members. “Everybody raised their eyebrows,” remembers Morton E. David, chairman of the nominating committee and former CEO of Franklin Electronic Publishers Inc. “Nobody was happy with the numbers” amid Sharper Image’s declining revenue, he explains. “Money was an issue. For some people, it was the prime issue.”
Directors decided to seek alternative candidates who had not run public concerns, and likely would cost less. Mr. David says they gave Mr. Levin [the interim CEO] authority to offer such a candidate “materially less” than a seasoned public-company chief would have demanded.
So, the board decided that brand-name was too expensive, and decided to take a chance on discount–someone less “seasoned.”
Now, I’m not one to automatically exclude the less obvious candidates for any position, but to do so for the CEO position based on price? To save $700,000 per year? Sharper Image has a $170 million enterprise value. A CEO that could bring their return on capital up to the industry median, where they were just a few years ago, would generate over $50 million per year in extra EBITDA, easily tripling the company’s market value. A merely “very good” CEO, one able to return the company to profitability, might generate a 50 or 100 percent return–not bad, but not 200 percent. In other words, the potential difference between the best and next best CEO could easily be hundreds of millions of dollars. And they’re concerned about $0.7 million per year?
Admittedly, no one can predict which candidate in the field would turn out to be the best. There is no guarantee that the guy who costs the most would actually be the best. There are many qualitative characteristics a board should consider before paying top dollar for someone who might not be a good fit, regardless of their track record. But to eliminate contender because of a cost that could easily be a fraction of value added does not seem like good governance to me.
No one can predict how this will all turn out, of course, but for what it’s worth, Sharper Image’s stock dropped 1.5 percent upon the release of this story (the market was flat), shedding about $2.5 million in market value. That would be net of the cost savings on the CEO.
Posted by Marc Hodak on May 15, 2007 under Executive compensation |
Yesterday’s WSJ had an article on what boards are doing about compensation consultants. The concern among governance critics is that a major HR firm’s executive compensation practice, which might earn $200K to $300K in a year, might be influenced by that firm’s much larger, other HR practices, which could easily earn ten times that amount. Directors should be concerned, the theory goes, that the executive comp advice they get from a consultant may be colored by his colleague’s desire to sell much larger projects, and the need to keep the top guy “happy.” So, what board experiments are currently keeping the governance critics happy?
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Posted by Marc Hodak on April 21, 2007 under Executive compensation |
Well, the Democrats have fulfilled on their populist promise to “do something” about CEO pay with the new “Say on Pay” bill passed yesterday. It’s difficult for me to add anything beyond what I already wrote when this bill was first proposed a few weeks ago, or the able commentaries of Professors Ribstein, Bainbridge, and Smith. But this is an economics, as opposed to a legal, blog, so I will make it really simple:
This bill, if passed into law, will politicize decision-making on executive compensation at public companies. Politicized decisions are rarely better decisions, so investors will suffer.
If Congress had any integrity about this proposal, the most they would do is to require all public companies to give actual shareholders the choice about adopting a “Say on pay” policy at the company level, which many companies are already doing. This measure is supposed to be for the benefit of the shareholders, right? The fact that the Democrats are choosing, instead, to end-run shareholders perfectly able to vote for themselves with a top-down, Federal law gives you a clue as to who the real intended beneficiaries are.
Anyone who believes that investor-run public companies are better than board-run public companies should invest in North Dakota firms, or in firms that have adopted their own shareholder-vote proposals, and leave the rest of us investors to choose which governance models work for us.
Posted by Marc Hodak on April 9, 2007 under Executive compensation |
Boy, the WSJ went to town on CEO pay today. Like most news stories, the writing suffers from a disturbing conflation of description and prescription. Descriptively, the rules on disclosure have changed and many companies are reacting to those changes in various ways. That’s interesting stuff for someone like me into executive compensation for professional reasons.
The prescriptive part was what you’d expect of journalists trying to rope in the non-professionals with a sensational story while pretending to offer simple answers to complex issues: a list of “Ten Things,” compiled from suggestions of various activists, experts and “daring” directors. Drum roll, please:
1. Don’t allow the board’s pay consultants to do other work for management
2. Don’t let outside CEO recruits monopolize the pay setting process
3. Don’t offer severance for anyone with a lot of equity or deferred pay
4. Make it easier to fire for cause
5. Be skeptical of “peer group” comparisons
6. Kill unjustifiable perquisites
7. Link long-term incentives with performance goals
8. Divulge precise measures for performance-based payouts
9. Conduct regular check-ups about pay practices
10. Give investors a voice in executive pay
Now, how hard could that be?
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Posted by Marc Hodak on March 13, 2007 under Executive compensation |
The W$J gave front-page prominence to executive compensation, again. Today’s article highlighted five “players” and the groups they represent. Jesse Brill, “The Networker.” urged a tally sheet for directors. Lucian Bebchuk, “The Professor,” is known as the main academic proponent of the “managerial power” thesis of why pay has grown. “The Bureaucrat” is Meredith Miller, assistant treasurer of the state of Connecticut. “Mutual Fund Trustee” John Hill, from Putnam Funds represents institutional investors. Finally, “The Union Leader,” Edward Durkin, helps oversee the giant pension fund of the United Brotherhood of Carpenters and Joiners.
Other than having nicknames strongly reminiscent of a 70s heist flick, these “players” share an interest in what the authors call shareholder activism on executive compensation. But what interest, exactly, does each player have? What type of activism does each player promote? When you get into the article, it turns out that their interests and methods only partly overlap. The point of overlap, of course, is reducing the perceived abuses of CEO pay. But they define the scope and nature of thoses abuses differently, and pursue correspondingly different policies to rectify them.
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Posted by Marc Hodak on March 12, 2007 under Executive compensation |
For many governance critics, the level and growth of CEO pay suggests something is broken with the way boards oversee their companies. The idea that there is a problem, of course, attracts the idea that we need a political solution. Thus, a bill to allow shareholders a direct vote on executive compensation has been introduced by Barney Frank (D-MA). The proposal sounds sensible. The shareholders, after all, own the firm. In a perfect world, shareholders should decide exactly how their companies are run, including compensation policies.
In the real world, shareholder involvement in corporate operations, including human resource decisions, is simply infeasible. That’s why we have boards. Boards can study the issues in depth, consult with relevant experts, and bring their often-considerable operational experience and judgment to bear on key decisions affecting the value of the firm. Increased shareholder involvement would do little to address the underlying drivers of executive compensation. It would, however, create new agency costs of unpredictable magnitude regarding board oversight.
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