Posted by Marc Hodak on April 10, 2011 under Executive compensation, Reporting on pay | 
Only, the audience for this announcement wasn’t the shareholders; it was the angry Dutch public:
“Regrettably, I have to conclude that the variable compensation for 2010 threatened to damage the slowly recovering confidence among customers and society,” Mr. Hommen wrote in a letter published Tuesday in Dutch daily De Volkskrant. “I hope that this shows that we take criticism on ING seriously and that we are willing to act accordingly.”
The only thing the bonuses threatened was how Jan Hommen, the afflicted CEO, looked in the media. Mr. Hommen tossed the bonuses back to the company because the mob was angry, and European leaders–both public and private–have an unfortunate history when it comes to angry mobs.
It’s hard to blame the people. They equate bonuses with good performance, and being bailed out and on the public dole with bad performance. So bailed out companies still on the dole and awarding bonuses to management does not compute in the calculus of media-driven public awareness. In the calculus of competition, which the media ignores and is largely invisible to the public, companies need talent. A big part of getting and keeping that talent is total compensation. In that context, the distinction of variable compensation, e.g., bonuses, is not very helpful–total compensation has to be enough to get the good workers. If those workers are individually performing well, even in a crappy bank, you risk losing them and making the bank crappier by failing to give them their bonuses.
Of course, one could argue that the calculus of competition means letting banks fail when they get into trouble, and you wouldn’t get any argument from me. Bailing them out and underpaying their best talent is just a way to slow the dying process, making it much costlier to taxpayers in the short run, and creates moral hazard and misallocated resources that make it far costlier to society in the long run.
Posted by Marc Hodak on February 5, 2011 under Executive compensation, Reporting on pay |
A story about Steve Eckhaus, who negotiated some of the Wall Street pay packages that made the news during the reaction to the meltdown:
Among the pay packages with Mr. Eckhaus’s fingerprints is Tom Montag‘s May 2008 deal to join Merrill Lynch, now part of Bank of America Corp. The package, which according to an SEC filing included a $39.4 million guarantee, was among those that caught the eye of regulators in the fury over pay after the financial crisis.
“It was understandable why there was anger,” says Mr. Eckhaus, but “the crisis was not caused by Wall Street fat cats. It was caused by a confluence of economic, political and historical factors.”
Unfortunately for Mr. Eckhaus, “a confluence of economic, political and historical factors” is a difficult story for a journalist to write, an uninteresting story for the average citizen to read, and does not yield an obvious scapegoat to throw to the seething mob.
So here it is one more time: highly paid people get what they can negotiate, just like any of us would in their place. The fact that we aren’t in their place is less their fault than ours.
Posted by Marc Hodak on January 23, 2011 under Executive compensation |
…performs the best. At least that was the surprise finding about Morgan Stanley in 2010:
Morgan Stanley, the come-from-behind champion of 2010 league tables, was one of the few bulge-bracket banks to swell both ranks and pay last year.
The firm added 2,048 workers, a 3.4% increase, while setting aside an additional $1.6 billion, or 11%, to pay its staff, according to its earnings release this morning.
The average Morgan Stanley employee took home $256,596, up 7.5% from $238,602 in 2009. The bank was more generous than analysts had expected. Rivals Goldman Sachs and JPMorgan trimmed per-worker pay in 2010.
Obviously, one can’t generalize to say that any firm that bumps up its pay is bound to bump up its performance. But in a year where the competition for talent in financial services took a back seat to looking good for the regulators and media, Morgan Stanley competed more aggressively, and, well I’m just saying…
Posted by Marc Hodak on November 15, 2010 under Executive compensation, Reporting on pay, Unintended consequences |
Greg Maffei comes out on top of the sweepstakes he unwittingly entered with a reported $87 million in “Total Direct Compensation.” And the corporate governance critics will be ticked off if any of that consists of company-paid security for him or his now-targeted family.
Ever since regulators decided that public display of how much certain people make was a good idea, we’ve been getting “Best Paid” lists. The SEC has gone through conniptions to get the display right, but we are still cursed by the muddle reporting that arises out of muddled thinking and the muddled board reaction to it.
The WSJ tries to guide the wonks in a “How to Read a Proxy” sidebar highlighting the “Summary Compensation Table” (SCT), from which the WSJ rankings are basically derived. As the WSJ helpfully points out with regards to two of the seven columns in that expensive proxy real estate:
[The term “bonus”] doesn’t include everything normally considered a bonus. Also look under “non-equity incentive plan compensation.”
Why is this so complex? Because before looking at a bunch numbers, it helps to know what you’re really looking for.
Read more of this article »
Posted by Marc Hodak on October 4, 2010 under Executive compensation |
- You want a bonus for what?
United and Continental have completed a critical part of their merger, i.e., agreement on how much their surviving executives will make. The terms of those agreements are apparently newsworthy. In the case of Continental CEO Jeff Sismek, who is about to become CEO of the combined entity, he will get a salary of $975,000, a target annual bonus of $1.46 million, and a target long-term incentive of $8.4 million. United’s CEO, Glenn Tilton, will become Chairman of the combined company for two years, until Sismek takes over that job, as well. Tilton will also get a severance of about $5 million in stock over those two years. Nice consolation prize. The interesting thing is that Sismek will also get “a one-time merger incentive target of $4 million.”
Excuse me?
Many of the wounding criticisms faced by boards about how they set CEO pay have frankly been self-inflicted. A lot of it has to do with how compensation practices, and the language to describe them, have evolved over the last several decades. Back in the day, before anti-takeover statutes made it hard for corporate raiders to jump in and clean house, a CEO who lost a takeover battle was given his walking papers and told, “Adios.” When anti-takeover laws gave CEOs and effective veto over M&A deals where they might get fired, the golden parachute was born, which was effectively a bribe for executives to allow the deal to happen. You’ve invested 20 to 30 years climbing the corporate ladder to become leader of your company and, bam, the shareholders are better off selling it out from under you. Boo hoo, here’s a few million to make you feel better. Well, it was much better for the shareholders to agree to that than to possibly lose a billion dollar premium because the CEO unobservably got in the way of the deal. I get all that.
But an incentive to stay? What the heck is that about? Along the way, someone decided that if the departing CEO was going to get a consolation prize, the retained CEO should get something too. Who decided this? The compensation consultant looking to keep his or her job with the new management? The egomaniac jealous of the guy with the golden parachute? Wherever this invention began, once a few companies began doing merger incentives, it became the “norm.” One thing that fairly describes public company boards and their comp consultants today is an obsession with not sticking out, with doing what everyone else is doing no matter if you understand or not the original reason it was done.
At this point, the merger incentive–a bonus for sticking around–has somehow become acceptable compensation language. Geez-us. Couldn’t they at least call it a re-signing bonus, or a consolidation incentive, or something that doesn’t sound like a reward for keeping a job they would have paid you big bucks to give up? There may be a genuine retention risk with Sismek that the board was trying to avert. But a $4 million “merger incentive” doesn’t sound like the most pressing use of shareholder money.
Posted by Marc Hodak on September 8, 2010 under Executive compensation, Reporting on pay |
Eddy Elfenbein, commenting on the market reactions to Hurd leaving HP then showing up at Oracle:
But an interesting question is, how much does a CEO really add to a company’s business? When you get right down to it, I don’t believe it’s that much. Steve Jobs, sure. But others, I’m not so sure. I think culture and where the firm and industry are in their life-cycle can also be very important.
By my judgment isn’t what counts, it’s the market’s and Oracle’s market value has increased by $8 billion today. Henry Blodget notes that that’s about half of the $14 billion that HPQ lost when they fired Hurd.
Elfenbein makes a good point about the market value impact of Hurd’s departure and arrival. Not so much about his personal sentiment that CEOs are not worth “that much,” although he expresses a widely held sentiment.
Those market value changes he cites–$14 billion drop at HP and $8 billion gain at Oracle–imply that Hurd is worth about one percent per year in return on capital to those respective organizations (Oracle happens to be about 8/14ths the size of HP). Is it possible that a CEO besides Steve Jobs can make a one percent difference in a company’s return on capital. Anyone who really doubts this (once they have the numbers in front of them) is pretty clueless about business and management.
In a rational world, knowing the reality of how much the best versus the next-best CEO can be worth should eliminate the deep concern of couch-bound critics about whether or not the board should have “given away” that last few million to keep the boss.
HT: John McCormack
Posted by Marc Hodak on August 9, 2010 under Executive compensation, Revealed preference, Scandal |
CEO pay is generally discussed and debated from the point of view of more typical kinds of employees, from minimum wage teens to well-salaried executives, who work for what seem like arbitrary sums offered by frugal or venal owners, or their sometimes clueless representatives on the board. At this level of the discussion, one loses a key distinction about pay in a market economy, i.e., that one should be paid about what they’re worth. So, a relevant question in this debate that is never asked: What is a CEO worth?
Mark Hurd’s sudden, surprise resignation at HP offers a rare hint to the answer; in after-hours trading shortly after the announcement of his dismissal, HP’s stock declined by over 8 percent.
Ladies and gentlemen, that’s over $9 billion dollars in market cap.
So, while various pundits might claim that every CEO is replaceable, the question remains: at what cost? The answer isn’t found in the much vaunted proxy disclosures on executive compensation.
That $9 billion figure is a discounted future cash flow assessment of Mr. Hurd’s value. In other words, in the apolitical judgment of equity investors, the only people with the incentive to make this collective judgment correctly, the company would have been better off paying about $2 billion a year for the next five or six years to keep Mr. Hurd than to lose him.
In fairness to the board, the Mr. Hurd they let go, the man who broke the HP ethics code he had done so much to champion, was not quite the Mr. Hurd the investors thought they had before the Friday announcement. There was a legitimate concern that the expense-fudging Mr. Hurd could no longer govern with the same authority he had before this unfortunate news came out. But that’s not the point here.
The point is that the buttoned-down guy atop his Silicon Valley perch that HP’s investors thought they had was worth far more than the mere tens of millions that the media (check out the comments) and good governance types have regularly derided.
Update: Stephen Bainbridge weighs in. Larry Ribstein offers his take.
Posted by Marc Hodak on under Executive compensation, Reporting on pay |
The numbers in the papers: $28 million to $40 million.
The right number: $12.2 million
That is the amount he is entitled to under the company’s pre-negotiated “Severance Plan for Executive Officers of Hewlett-Packard Company.” All the rest is money he has already earned, and doesn’t deserve to be called “severance.” Severance is what a company pays someone to shut up and go away. It’s not what someone has already earned but not yet taken out of the company, generally for tax reasons. The media gets this wrong all the time.
Posted by Marc Hodak on July 7, 2010 under Executive compensation, Reporting on pay, Stupid laws |
Actually, the WSJ headline was Europe to Limit Banker Bonuses. They also started the article with a tough sounding lead sure to please the politicians:
The European Parliament agreed to what officials described as the world’s strictest rules on bankers’ bonuses, capping big cash awards across the European Union in time for 2010 payouts.
Then you read the story itself:
The new law, agreed upon Wednesday, will limit upfront cash to 30% of a banker’s total bonus and to 20% in the case of very large bonuses. Between 40% to 60% of bonuses will have to be deferred for at least three years and can be clawed back if the recipient’s investments perform badly. At least half will have to be paid in stock or “contingent capital,” meaning it won’t be paid if the bank hits difficulties.
Hmm. This kind of looks familiar. Let’s see how Goldman Sachs was paying its executives before the crash of ’08:
The Named Executive Officers received bonuses in cash and equity-based awards in the proportion of 51% cash and 49% RSUs (restricted stock units).
Well, that wouldn’t quite cut it in Europe; they’re shy of the correct proportion by one percentage point.
Shares underlying all of these year-end RSUs granted for fiscal 2006 will be delivered in January 2010.
Ah, that’s more like it; the 49% of their bonus awarded in stock is deferred for more than three years, and is at risk of loss if the bank hits difficulties. Nice.
Now, let’s look at how Lehman Brothers was paying its executives before its collapse precipitated the financial crisis:
Annual Incentives were paid in the form of cash and RSUs. Messrs. Fuld, Gregory, Russo, O’Meara and Lowitt (the five named officers) received 88%, 85%, 64%, 70% and 70% of their total annual compensation in RSUs, respectively.
So, actually, Dick Fuld and company could only collect between 12 and 30 percent of their 2007 bonuses. The Europeans would go along with that!
All of the RSUs awarded to the executive officers for Fiscal 2007 are subject to forfeiture restrictions and cannot be sold or transferred until they convert to Common Stock at the end of five years.
In other words, the remaining 70 to 88 percent of their awards could not be collected for at least three years, and much more than half was paid in “contingent capital.” The Europeans would politely applaud.
So, according to the new EU rules, those cads at Goldman were, as usual, just barely outside the boundaries of correctness, while Lehman Brothers bonus plan was A-OK! Doesn’t that just explain everything?
Posted by Marc Hodak on June 9, 2010 under Executive compensation, Reporting on pay |
Abercrombie & Fitch lost the shareholder vote for approval of their long-term incentive plan. It wasn’t close. The two comp committee members up for re-election narrowly won with only 57% and 52% of the vote, i.e., 43% and 48% withhold votes. This loss on the plan and closeness of the director election were largely the result of “negative” recommendations by ISS combined with a major union campaign against the proposal and directors.
A&F, in fact, has a lousy compensation plan. One of its main defects is well-encapsulated by this item from their proxy:
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