Why aren’t performance shares illegal?

Posted by Marc Hodak on September 15, 2013 under Executive compensation, Irrationality | 2 Comments to Read

A pair of recent studies show that about a quarter of the compensation earned by CEOs is now paid as restricted stock. Furthermore, one of the studies notes that an increasing portion of that stock is being granted based on performance rather than automatically vested over time, and that stock price is one of the most common performance measures used to determine the number of shares granted. In other words, if the stock price goes up (or goes higher than some benchmark), then the executive would benefit from both the larger number of shares granted and the higher price per share. If the stock price goes down, the executive will get fewer shares at a lower price, or maybe no shares at all.  The governance mavens are praising this trend.

There is a lot to like about ‘performance share’ plans, and stock-based stock grants provide an exceptional level of motivation and accountability for total shareholder returns over a wide spectrum of performance over time.  So, I’m wondering:  Why is this kind of plan legal?

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Government Motors recovery strategy: Make bad loans

Posted by Marc Hodak on June 28, 2010 under Irrationality | Be the First to Comment

General Motors has an impediment to gaining greater market share:

General Motors Co. is in talks with financial institutions to broaden the availability of auto loans, a strategy that for now sets aside any plans to acquire its own lending arm, people familiar with the situation said.

The car maker has had trouble providing loans to more consumers, particularly those with weaker credit history, and views this as a barrier to winning back U.S. market share.

So, if we can only get loans to people with weak credit, we can sell more!  Hmm, where have we heard this before?

In other news, the new financial services overhaul bill–the one designed to never let poor lending practices undermine our credit markets ever again–exempts auto dealer car loans from the same regulations covering bank loans.

And you thought money was fungible

Posted by Marc Hodak on June 17, 2010 under Irrationality, Reporting on pay | Be the First to Comment

I’m still trying to distill the meaning of the following lead:

BP PLC, under intense legal and political pressure from President Barack Obama, agreed Wednesday to put $20 billion into a fund to compensate victims of the Gulf oil spill, and said it would cancel shareholder dividends for the first three quarters of this year to offset that cost.

Here is what I’ve came up with so far:  Nothing of economic consequence actually happened.

This is clearly posing as a story of economic consequence for BP, but for it is of relatively little consequence to the company how any portion of the damages actually gets distributed, only what the total damages will be, which this agreement appears to not change at all.  As noted in the post below, it is of no consequence to BP’s shareholders whether the cash left over after damages gets paid out as dividends, or gets capitalized into the share price.  All that matters to them is what the total damages will be, which this agreement appears to not change at all.

There are political consequences, but I’m not shocked that the MSM didn’t write its story around that:

The Obama administration has personally taken on distribution of $20 billion of the total damages that BP has already pledged to honor instead of letting that sum be distributed via time-tested principles under the rule of law.

If the story were written this way, though, it might not make the victims on the Gulf Coast or their insurers feel as good.

Harry Reid gets the challenger he wanted

Posted by Marc Hodak on June 9, 2010 under Irrationality, Politics | Be the First to Comment

In the Nevada Republican primary, Sen. Reid got the tea party-backed “opponent he had hoped to face.”

The Reid camp maintains that Ms. Angle holds many views that lie outside the mainstream.

That may be, but at least Ms. Angle doesn’t hold the view that taxes are voluntary.

“Bonus is poison”

Posted by Marc Hodak on January 25, 2010 under Irrationality, Politics, Scandal | Be the First to Comment

So, you offered your investment managers an extra 50 cents for every $1,000 they make you as an incentive to better performance, i.e., more money for you.  Then you got the best performing investment management in the whole industry.  They earned you an extra $6,000, for which they are entitled to a bonus of $3.  So, now you:

A)  Increase the incentive to 60 cents–maybe the extra incentive will motivate even better performance going forward;

B)  Pat your managers on the back, and keep the existing incentive in place.  No need to get greedy;

C)  Ridicule your management for being paid a BONUS, calling it “unconscionable,” try to take away what they earned, and cancel the whole incentive program, and their cost-of-living increases to boot.

The state of Missouri chose C.

The title of this post is attributed to Gary Findlay, head of the investment management team that had performed so well, only to be berated for it by his ignorant, spineless bosses.

Addendum:  My wife considered the last comment unusually harsh for a sober blog.  I am willing to admit that I overstated my critique of Findlay’s bosses.  He has at least one who is not ignorant or spineless.

“By any objective standard, MOSERS is the best fund in the country,” said Senator Jason Crowell, a Cape Girardeau Republican who cast the lone dissenting board vote, according to the AP. He said the board should not change its policy based on “newspaper articles and political speeches,” and said taxpayers could ultimately lose money if the system’s rate of return fell because talented staffers left.

Thanks, Sen. Crowell, for standing up for reason against the thankless mob.

Because this strategy worked so well before

Posted by Marc Hodak on December 3, 2009 under Irrationality | Be the First to Comment

The news from GM is that Edward Whitacre, Chairman and now CEO of GM, is going to push for market share.  We’ve seen this picture before.

“Is this America?”

Posted by Marc Hodak on October 30, 2009 under Irrationality, Politics | 2 Comments to Read

Floyd Norris makes a good case that bankers get paid so much mainly because banks make so much money.  So, he reasonably contends, if you want to reduce banker’s pay you have to reduce bank profits.

Personally, I don’t have much animus about other people’s pay or profits, but I think Norris raises a good question about whether the profits of our larger banks are large for good or bad reasons.  He suggests that the increasing concentration of capital in fewer, larger banks we have seen over the last couple of decades is not necessarily a good trend for the economy, that our economy would benefit from less concentration in the banking industry.  (And bankers would make less!)

Without judging the normative aspects of that claim, it’s worth asking whether all the political brainpower going into reforming our financial services industry will have the net effect of making it more or less competitive.  Will a slew of new regulations, for an industry that is already among the most regulated, reduce or increase barriers to entry?  Will new oversight into the formation of banks encourage or discourage new entrants?

I can answer from personal experience that the trend is not good.  I have a friend who tried to create a new bank.  After getting all the paperwork for state and federal authorities, after raising over $100 million in capital, and after all the other headaches and sacrifices of a start-up that took up 18 months of his life, a single bureaucrat in the FDIC said he would reject his application.  This man would give no reasons for his rejection, which in any case would have been difficult because this very same FDIC bureaucrat promised my friend about a year earlier that if he got all his forms in order that he would certainly be approved.

My friend got his congressman, who is on the finance committee that oversees the FDIC, to ask for an explanation of the rejection.  This congressman forwarded the response he got, which was full of the kind of mealy-mouthed bureaucratese that explained nothing in three pages, including a comment that “there were other reasons besides those spelled out here.”

So, that $100 million has not been allowed to capitalize the nearly $1 billion that could have been lent out to the small businesses that desperately need it.  My friend, instead of contributing his entrepreneurial energies to our economy, is looking for other work now.  And the big banks, despite their own frustrations with the bureaucrats, have one less competitor nipping at their heels.  And their executives are, in fact, doing better for it.

And my friend, who ironically immigrated from France and became a citizen here because he couldn’t stand their stifling bureaucracy asks, “Is this America?”

Congressional bloodlust

Posted by Marc Hodak on August 24, 2009 under Irrationality, Politics, Reporting on pay | Comments are off for this article

Kenneth Feinberg is contemplating the serious issue of whether or not to disclose the names and compensation of the highly paid executives whose pay he is reviewing.  On the one hand, there are personal privacy and security issues:

“One of my clients makes $25 million a year and drives a Honda,” said Eckhaus, of Katten Muchin Rosenman LLP. “He tries to lead a fairly modest life and he would be horrified if what he makes appeared in the paper. Not only would his neighbors know, but his kids would know, and it would affect his ability to raise his kids. These are people, not a circus sideshow.”

Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution think tank in Washington, said releasing names and salaries of top executives could be intrusive and would not serve a public good.

“When you turn it into specific names, it’s kind of voyeurism,” Elliott said. “It’s not the principles anymore, and I think it does violate their privacy.”

He also said too much disclosure could prompt top executives to resign, harming companies as they try to recover and repay the government.

Very good points all.  On the other side, you have Democratic Representative Alan Grayson:

Grayson told Reuters he is unsympathetic to the argument that the pay czar should not name names.

“If this is the same top talent that caused their firms to be destroyed and put the entire U.S. economy at risk, I wish they would leave the firms and leave the country,” he said.

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A parody of seigniorage

Posted by Marc Hodak on June 2, 2009 under History, Irrationality | 2 Comments to Read

On a recent trip to D.C., I got some change from a vending machine, and thought, “Damn, someone managed to get a fake coin into the change box.”  It looked like a casino token.  I was pissed.  When I looked more closely, I got confused.  It’s markings said United States of America and indicated a value of $1.  I shrugged and put it in my pocket.  Shortly afterward, I saw a sign on the wall that read:

I read that one line twice:  “They Save the Nation Money.”

Once upon a time, the currencies of choice were gold or silver.  These precious metals had many properties that made them especially useful as currency– they were scarce, portable, and divisible into any useful denomination of coin.  People using such coins in exchange could be reasonably certain that the next person in the chain of commerce would accept it at an equivalent value for which they received it.  The only problem was that these metals had to be weighed for each transaction.

Monarchs exploited the opportunity to create greater trust in commerce by minting uniform denominations with the seal of the sovereign stamped on the coin.  The stamp assured its value.  To enhance the credibility of that stamp and protect the value of the coin, the sovereign threatened penalties to anyone representing a debased version of the coin as the real thing.

Eliminating the need for scales in every transaction was a huge advance in commerce, equivalent to the replacement of cash and checks with credit cards.  The monarch capitalized on the value of his stamp by selling officially minted coins to banks for slightly more than they were nominally worth in bullion, which banks were willing to pay because the demand for the coins was high.  This profit was called seigniorage.

Alas, monarchs didn’t enforce anti-counterfeiting laws against themselves.  When they began to debase their coins, their currency suffered from inflation, and their people began reverting to other trusted coins, or to bullion and scales.  To enforce their debasement, governments began forcing their people to use the debased currency via legal tender laws.  The history of how seigniorage transformed from a game of narrow spreads into a large-scale, legal counterfeiting operation is long and sordid, but it has finally, apparently come to this:

The U.S. government now advertises that the coins it wishes the public to circulate have minimal intrinsic value.

I understand that the government is promoting this as a savings versus paper bills, which cost less per dollar to produce, but must be replaced more frequently, making their overall cost higher than the equivalent currency in coin.  Still, I’m astounded that minimizing the intrinsic value of what is in circulation is being sold as a public benefit.  I’m not yet sure how it’s being bought, but I can see a whole bunch of otherwise thoughtful people nodding, “That makes sense.”

Exploding a couple of hedge fund myths

Posted by Marc Hodak on May 11, 2009 under Irrationality, Politics | Be the First to Comment

Myth 1:  Hedge funds attract the best and the brightest

Not more so than any other industry.  In fact, it attracts its fair share of cranks and fools.  Case in point:  One can accuse a president of many things.  Keeping his campaign promises isn’t one of them:

A top Obama fundraiser and hedge fund manager said: “I’m appalled at the anti-Wall Street rhetoric. It was OK on the campaign but now it’s the real world. I’m surprised that Obama is turning out to be so left-wing. He’s a real class warrior.

Which brings us to the second myth.

Myth 2:  Hedge fund managers are a bastion of Republicanism

Most people mistakenly think of Wall Street in general as pretty Republican.  Most people, as usual, are wrong.