Posted by Marc Hodak on January 27, 2010 under Executive compensation, Reporting on pay | 
…or else we’ll tax ’em!
British officials have blessed the shift to higher salaries, saying they help rein in risky decision-making. But the salary increases must be permanent, or they will be taxed like a bonus. “A significant, one-off leap in salary is something we’ll be keeping an eye on,” says Paul Franklin, a spokesman for the U.K.’s tax service.
Their concern about bankers salaries is kind of touching, don’t you think. It contrasts to the obsession in the rest of this article about how banks keep trying to get more money into the pockets of their employees.
Posted by Marc Hodak on January 26, 2010 under Executive compensation, Politics, Scandal |
Last November, the Government Accountability Office released a report titled “PRIVATE PENSIONS: Sponsors of 10 Underfunded Plans Paid Executives Approximately $350 Million in Compensation Shortly Before Termination.” At the time, I was wondering: Gee, how did they pick those ten companies?
Not really. Anyone familiar with politics knows exactly what the criteria was–it was blazoned on the title of the report. The more interesting question is: What exactly is the link between unfunded pensions and executive pay that the government would consider it worth highlighting in a few hundred pounds of wasted paper?
It’s a weak link. Benefits consultant Michael Barry snaps it with some hard sense:
Obviously, out in the political atmosphere, these two things—PBGC liability and executive compensation—are connected somehow, but is there a logic to that connection?
Certainly, you’ve got to pay an executive something, and who is to say that in these circumstances this $350 million wasn’t the right amount? It’s clear that there are, anecdotally, instances that could only be called grotesque abuse. Also without doubt, there are companies out there (perhaps not these 10, which apparently all went bankrupt) with executives that are underpaid. In real life, if you want to win, you’re going to have to pay for talent.
Moreover, why exactly is executive compensation the PBGC’s problem? Couldn’t you make the same argument about corporate charitable giving? Every dollar of matching grants that these companies paid the United Way could have gone to fund the pension plan. Why pick on executives? Why not pick on the company day-care center?
Or, why not pick on regular employees? Surely there are some rank-and-file employees out there who are overpaid. According to The Wall Street Journal, the UAW jobs bank program cost U.S. automakers $1.5 billion in one year—2006. These were “employees” getting paid not to work.
Of course, there may be perfectly reasonable reasons for giving to the United Way, or providing a day-care center, or providing a jobs bank. There also may be perfectly reasonable reasons for paying executives managing companies through difficult times big salaries and bonuses. Or there may not. However, the government—is there any money being wasted on government employees I wonder?—is in no position to tell which is which.
That last point bears repeating. What standard does an outsider use to determine if a company is spending too much or too little on anything, especially something as difficult to value as senior talent?
Barry’s conclusion is not something we see in the mainstream media:
The point being—if it’s not obvious—that there is no necessary link between executive pay and unfunded benefits. The idea that there is, is simply an appeal to envy—which is, you know, a base instinct. (Some of us actually think it’s a sin.)
And some of us think envy is every bit as bad a sin as greed–much worse if it has state force behind it.
Posted by Marc Hodak on January 4, 2010 under Executive compensation, Politics, Reporting on pay |
A few top executives at AIG left on the last day of 2009, including Anastasia Kelly, general counsel and chief HR officer of AIG. By leaving then instead of after New Years, these officers, among the “Top 25” of the firm, got to keep their rights with respect to severance and prior bonuses. While these officers were doubtlessly driven by their short-term incentives, they certainly weighed those against the potential long-term benefits of sticking with AIG, and found those prospects wanting. Kelly in particular was outspoken in critiquing the general effect of pay regulations on AIG and its ability to remain competitive for talent. Why would she want to stick with a foundering ship with little hope of getting righted?
Politics has driven the compensation policy of this administration (as it would any administration, perhaps), especially with regards to companies that have received government funds. Fair enough. We own them; we tell them what the score is with their pay. We get to grumble about the $2.8 million in severance that Kelly was collecting for abandoning ship, even though that is what any of us would have done if we had the chance. We get to say, “Who needs her?” as if each of us had the position or wisdom to judge that, better than her CEO boss, who has also complained bitterly about his ability to retain talent under the current pay regime.
But just because we can deal with the talent issue glibly and dismissively doesn’t mean that it isn’t real. Talent is not being dealt with in a serious manner in the press. Like the utter lack of questioning about what would happen to AIG if Hank Greenberg were pushed out for political reasons, no one is getting by the big numbers that these executives make, and could expect to make anywhere outside of the government sector, and asking, “Is this really good for AIG, a giant company in which I have a direct investment, and was saved because its presumably out-sized effect on our economy?”
Posted by Marc Hodak on December 14, 2009 under Executive compensation, History |
This story about the demise of Tavern on the Green is a story of failure by a young heiress to keep alive her father’s fabulously successful restaurant. Tavern was a New York institution for 30 years run by Jennifer LeRoy’s father. When her father passed away, giving his 22 year old daughter control of the business, the first thing she did was scrap his incentive plan:
“Tavern made an incredible profit,” says Mr. Coyle, adding that top managers “earned hundreds of thousands of dollars in bonuses,” and that his bonus allowed him to purchase a Porsche.
The bonuses were based on a generous profit-sharing plan implemented by Mr. LeRoy, who was known for his excesses. Ms. LeRoy can be credited with a more fiscally conservative approach to running the business. Shortly after she took over, the bonus program was restructured. Managers were given a guaranteed amount based on their salary, not on the restaurant’s profits. It would be the first of several major moves as Ms. LeRoy put her stamp on the restaurant and grew into her role.
While there are many possible reasons that a business that had survived everything from New York’s near-brush with bankruptcy, a Central Park that could not be risked entering after dark, and everything else since, the end of the story is that she got what she paid for.
Posted by Marc Hodak on December 10, 2009 under Executive compensation, Reporting on pay |
Goldman Sachs has decided to take their usual 30/70 split of cash and stock for bonus payments this year and make 0/100 split instead. This is supposed to satisfy the mob crying out for no bonuses for bankers.
GS is either the cause or the symptom of a disease in this country, depending on your point of view. The disease has no name, as far as I know, but it is manifested by extreme anger rooted in the fear of something one does not understand. In this case, the anger comes from non-bankers (what the press insists on calling “Main Street”) directed toward bankers. What the non-bankers don’t understand is how money is being made, or, more generally, how markets work to derive so much value from the messy allocative processes that we call banking or trading. The bankers and traders, of course, don’t understand the anger directed towards them because they do understand how banks and markets work, though this esoteric knowledge is of little use or defense against the mob.
Few people understand how banks, markets, or, for that matter, “Main Street” work better than Goldman Sachs. That’s why they make so much money. The problem is that right now they aren’t allowed to pay themselves what they earn, so they are disguising it in the form of restricted, deferred stock. Same value; different form. We’ll see if the public, festooned with arbitrary distinctions about pay, will accept this one with a nod. The press seems to view this as some sort of victory.
Posted by Marc Hodak on December 7, 2009 under Executive compensation, Unintended consequences |
HR executives are rated, in good part, on their ability to retain their talent. If your best people keep leaving, you’re unlikely to see much progress If progress is making enough money to pay back, or at least get a fair return on, the $182 billion that your main investor has provided, you need all the help you can get.
So far, Kenneth Feinberg has not done well on the retention score at AIG. About half of the 25 executives whose compensation he was charged with reviewing have left the company. Another five are likely to leave pretty soon, including: Anastasia Kelly, General Counsel; Rodney Martin, head of one of AIG’s international life-insurance businesses; William Dooley, head of the financial-services division; Nicholas Walsh, vice chairman and head of AIG’s international property-and-casualty-insurance businesses; and John Doyle, head of the U.S. property-casualty business. By giving their notice and leaving before the end of the year, they get to keep their rights with respect to severance and prior bonuses.
A fair percentage of the people in the next tier of earners whose pay is subject to less stringent regulation have left as well, but about 20 of them are about to get bumped up to the top 25 category. This is a promotion that they will not relish. They will be interfacing directly with their government masters, trading off political and business considerations while having their pay scrutinized and limited.
Posted by Marc Hodak on December 3, 2009 under Executive compensation |
The basic premise of government oversight on compensation is that the owners (or some academic with apparently zero experience in the real world of business) can shovel any old thing they wish with regards to pay, and businessmen just have to eat it. Ken Feinberg is running into practical problems in applying this philosophy. This article shows the real life consequences of such a malformed premise.
So let’s spell it out one more time: What one pays affects the kind of people you get; how you pay them affects the decisions they will make.
Posted by Marc Hodak on November 8, 2009 under Executive compensation |
Bruce Yandle’s modest proposal:
But the chief concern is not with presidents and vice presidents of too-big-to-fail banks and other bailed-out enterprises. As large as they are, they are small potatoes relative to the big generators of systemic risk. The critical concern is with top government executives who can create national and international panic, lay the groundwork for international inflation or deflation, and just by voting and writing regulations can change the risk profile of entire industries.
Similar in spirit to my earlier proposal here.
Posted by Marc Hodak on October 29, 2009 under Executive compensation |
Every now and then, and outsider can see something that the insiders overlooked. Kenneth Feinberg, Treasury’s “pay czar” replaced cash salaries with something he’s calling “stock salaries,” which is shares of the company that vest immediately, but is paid out over three years. This is a kind of restricted stock where the restrictions are on the payout rather than the vesting. There are two nominal benefits to trading cash salary for this kind of “stock salary”: to give the manager an incentive to get the stock price going up, and to stick around to make sure their efforts result in sustainable improvements.
I give kudos to Feinberg for equating stock and cash from the perspective of a salary equivalent. Salary is referred to as “fixed pay” since it represent the guaranteed, time-based portion of managerial income. Most people in the compensation industry view stock as “variable” compensation because its value varies over time. I believe it’s more realistic to view stock as somewhere in between. It’s “fixed” insofar as there is a guaranteed value on the date it is granted, and it’s “variable” insofar as it does, indeed, vary in a manner that is arguably, somewhat influenced by managerial effort.
My view is that stock is more salary-like than bonus-like, even with the restrictions. The problem with “stock salary” is that the restrictions simply make the stock grant less valuable. The easy remedy is to replace stock for cash with a higher value of stock than is surrendered in cash, and Feinberg appears to have done something like this for many of the managers. He was able to get his headline that he “cut salary by 90%,” while giving managers a risk-adjusted salary-equivalent to try to keep the good ones around.
I think, however, that it’s a mistake to think that stock has any incentive effect on managers, besides the incentive to pray it goes up. Most managers simply cannot relate their day-to-day decisions and activities to the overall company stock price. It’s kind of like expecting them to use a globe to navigate between nearby towns.
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Posted by Marc Hodak on October 28, 2009 under Executive compensation, Reporting on pay |
The headline reads that pay czar Kenneth Feinberg increased base pay while cutting total compensation in half. As the reporter puts it:
The move reflects the complexity of regulating something that mixes politics and economics.
Actually, this move reflects the need to include politics in what is otherwise an economic trade-off between the three governance objectives of compensation:
– Attraction and retention of management talent
– Incentives that align managements’ interests with the owners’
– Control of total compensation costs
This trade-off is universal. It applies equally to any business one is charged with overseeing: auto companies, banks, drug companies, drug stores, and drug dealers.
Here is how this story characterizes Mr. Feinberg’s trade-offs for the Sorry Seven:
The Treasury Department assigned him the job of tying more compensation at the companies to long-term performance and cutting pay deemed “excessive.”
Government officials say Mr. Feinberg met that objective. All 136 employees and executives working at the seven companies under his review will earn much less this year than in 2008, even after accounting for the rise in regular salaries, also known as base salaries.
So, Treasury says he did fine, and this story does nothing to question that. Let’s see how he did against the universal governance objectives for compensation:
– Attraction and retention of management: Well, management talent is running for the exits at the Sorry Seven. The best have fled, leaving their belongings behind. Citibank sold off one of their most profitable units simply to avoid having to record that they paid that unit’s chief $100 million. Those that remain are doing best they can, I’m sure.
– Alignment incentives: Well, when you substitute bonuses for salary, dramatically reducing the overall level of pay, you take away a lot of incentives to perform. I’m not saying that people need 80 percent of their total compensation to be variable in order to get their attention, but it doesn’t hurt. Of course, how that variable portion of total compensation varies is hugely important, and devilishly tricky to get right, but I’m sure the Pay Czar or the Fed will make sure the companies do that right.
– Cost control: check!
Looks good to Treasury.
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