NYT columnist was paid 10% of NYT profit!!!

Posted by Marc Hodak on June 28, 2011 under Reporting on pay | Be the First to Comment

Gretchen Morgenson doesn’t have to disclose exactly how much she makes–she just gets to toss misleading, scurrilous barbs at those who must for her base pleasure–but it’s reasonable to assume that the Pulitzer Prize winning columnist earned, all by herself, about 10 percent of the total income from operations of the New York Times in 2008!  In fact, she earned more than the shareholders did that year!  In fact, she personally out-earned her company’s shareholders for two of the past five years!!  That’s 20% of the time!!!  What does all this mean!!!?


Not any more than the other useless comparisons she bandies around in her latest article on executive compensation, where she praises a study that compares executive pay to items like the GDP of third world countries, or random items off the income statement.  Alas, these comparisons don’t have to mean anything if their real purpose is nothing more than “to get people fired up,” which is the explicit aim of this exercise.  I have to admit, it did kind of get me riled up.

ING’s CEO tells shareholders to keep the bonus

Posted by Marc Hodak on April 10, 2011 under Executive compensation, Reporting on pay | Be the First to Comment

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.

I didn’t do it

Posted by Marc Hodak on February 5, 2011 under Executive compensation, Reporting on pay | Be the First to Comment

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.

Carping, sniping, and griping

Posted by Marc Hodak on January 28, 2011 under Politics, Reporting on pay | Be the First to Comment

In one of the more bizarre articles on bankers pay, we read:

U.S. regulators haven’t yet settled on rules governing pay. Since they don’t yet exist, U.S. rules are perceived as much more lenient than those across the Atlantic.


Despite the griping over Bank of America’s compensation structure, the company seems sensitive to the coming regulatory rules. Even though some bankers are receiving more cash, the total bonus pool for investment bankers and traders was down in 2010 as compared to 2009, said people familiar with the situation. In 2009, the pay for investment bankers and traders was more than $4 billion.

It’s as if any sentences strung together with “pay” and big figures is good enough to get published.

To the extent this article has any substance, it appears to be about the “grumbling” and “sniping” among banks due to differences in how they pay their bankers.

Bank of America Corp. intends to give some investment bankers a greater share of their bonuses in cash, the latest Wall Street compensation move roiling banking chieftains as they meet in Davos, Switzerland.

Still, multiple bankers gathered at the World Economic Forum in Davos grumbled that Bank of America would increase the cash portion of bonuses—news that traveled fast once the bank’s employees were told…The rancor is symptomatic of the heightened sensitivity to the issue of compensation, which took center stage at Davos. European bank executives gathered in the Alps this week are up in arms over the lack of similar rules governing payouts by their U.S. rivals.

“It’s not a level playing field,” said William Vereker, co-head of global investment banking at Nomura Holdings Inc.

If you know about HSBC’s marketing campaign, I.E., about how one thing can be viewed in distinctly different ways, then the following might seem ironic:

U.K. based HSBC Holdings PLC has threatened to move its headquarters elsewhere because of regulations that include compensation rules. The bank said it lost roughly a dozen employees to competitors with more lax rules on pay.

In other words, where some people see an overpaid banker whose pay needs to be curtailed, someone else might see talent ready to slip away.  As usual, the Europeans see anyone making too much money too soon as a social threat:

Such complaints are particularly acute from European bankers, which have to comply with new European Union requirements that bonuses be comprised primarily of stock or other noncash instruments and must be deferred for at least three years. The most cash that can immediately be rewarded is 20% of the overall payout.

Of course, anything that makes payouts more deferred or uncertain makes them less valuable.  If you’re serious about competing, your only alternative (besides changing continents) is to offer even higher compensation.

As the regulators squeezing the balloon on pay, it’s becoming clear that banks will increasingly have to go to their local legislators, with cash in hand no doubt, to plead for competitiveness.  If you think that home country legislators would be sympathetic to such pleas without campaign cash support, you’ve never been greeted by a big guy in an ill-fitting suit saying, “Nice business you got there.  I’d really hate to see anything happen to it.”  And as long as the mob is driven more by personal envy than common interest, these wise guys will keep getting elected, and keep playing chicken with the banking system.

Pay politics continues for banks

Posted by Marc Hodak on December 24, 2010 under Politics, Reporting on pay | 2 Comments to Read

U.S. regulators are considering new or expanded curbs on bonuses in accordance with regulations created by Chris Dodd and Barney Frank to prevent another financial crisis (I will never get over the irony that).  The law generally prescribes that compensation plans should be designed so as to not encourage excessive risk taking.  One of the key design elements to implement that mandate is the deferral of bonuses. The nominal theory is that deferral of awards will create an incentive for the traders to think beyond current period performance, thus avoiding the “swing for the fences” bets that the comp critics insisted were central to the financial crisis.

The assumption that perverse incentives contributed to the financial crisis is reasonable.  It does not logically follow that changing those incentives is either necessary or sufficient to prevent another financial crisis, but seeing that would require understanding the root causes of the crisis which, perversely enough, neither Dodd nor Frank had any incentive to do.

But this law assumes two other things that challenge reason:

Read more of this article »

This Years Rich List

Posted by Marc Hodak on November 15, 2010 under Executive compensation, Reporting on pay, Unintended consequences | Be the First to Comment

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 »

Wall Street bonuses and us

Posted by Marc Hodak on November 4, 2010 under Reporting on pay | Be the First to Comment

The magic words “rising Wall Street bonuses” still can command a headline.  The WSJ used that headline to report a whopping 5% rise in bonuses at “Wall Street” firms.  (Whatever that means.  I mean, is Bank of America, in Charlotte NC, a Wall Street firm?  What about the hedge funds strewn across the land, but not generally in Manhattan, which many have fled?  All of these firms were included in the survey report.)  The bulk of jobs most people most closely associate with Wall Street, i.e., stock and bond traders, apparently dragged down that average:

According to the survey, bond traders will see bonuses for 2010 decline 25% to 30% from last year, while bonuses for stock traders are expected to shrink 20% to 25%.

Not reported is the fact that most of these Wall Streeters have had substantial salary increases precisely so that their bonuses won’t be so visible.  It worked.

The most annoying point of this story is the obligatory quote from the fussbody public official who purports to speak for me:

Michel Barnier, the European Union’s financial-services commissioner, recently said that “more could be done” in the U.S. on “reforming compensation.” “If we do nothing, it means that we have not drawn the right lessons from the crisis,” he said.

“We” Mr. EU regulator?  If you are going to use that bureaucratic, aggressive, passive voice to urge government officials to grab more money and power attacking–of all things–the greed of others, hey, I’m used to that.  But kindly leave “we” out of it.

HP pays dearly for their lack of grooming

Posted by Marc Hodak on October 3, 2010 under Governance, Reporting on pay | Be the First to Comment

You have to wonder what the HP board has been doing for the last five years while Mark Hurd was their CEO.  One of the board’s main jobs is to hire a CEO, which supposedly includes succession planning, which supposedly includes the “hit by a bus” scenario where your CEO is suddenly gone as happened with Hurd in August.  The board is supposed to insure that the CEO is developing his or her bench as part of their job.  It has long been shown that CEOs hired from within tend to outperform CEOs hired from outside, especially at firms whose competitive advantage arises, in part, from their corporate culture.  One can argue that the HP Way has long since gone the way of the K-Mart blue light special, but you’d think that in five years the board would have pressed for and gotten Hurd to develop a potential replacement or two.

No.  They went outside, again, and they literally paid for it.  The MSM said they paid to the tune of $51 million, but that’s because that was the biggest number they could wring out of Leo Apotheker’s contract.  That amount may reflect multiple years or maximum amounts based on future performance–it’s not clear which from the story–but my calculation is about half that amount per year in each of the next two years if he achieves target performance.  Alas, $24 million per year is still about $10 million per year more than one might expect for an internally promoted CEO who, if he or she were well prepared, would likely have performed better than Mr. Apotheker, and not created a retention problem with every ambitious HP executive whose path to the top has suddenly gotten more rutted and overgrown.

I understand that sometimes one must go outside of the firm when it’s in trouble or otherwise in need of major change.  I don’t think too many people considered HP under Hurd to be troubled, until Hurd left.  I don’t work with HP’s board, so I don’t know if it was the board’s failure or Hurd’s failure that they couldn’t groom at least one internal replacement, or if none of their EVPs who will now be heavily recruited for CEO positions elsewhere were simply not good enough for the company in which they have performed so well.

Where else could they go? – Epilogue

Posted by Marc Hodak on October 1, 2010 under Reporting on pay | Be the First to Comment

They could go to Citigroup, as UBS found out in losing its top energy investment banker.  The upper half of the article was all about the money, which is really the only reason for such an article being on the front page.  Does the average WSJ reader care at all about Citi’s internal staffing decisions?  Finally, as the article winds down the inverted pyramid, they mention that there was actually a talent auction of sorts:

After Citigroup made a play for Mr. Trauber, UBS tried to work on a compensation package for him, but the firm was unwilling to meet several of his other proposals, which included getting 150 hours of access to a private plane annually and that a separate bonus pool be allocated for his specialized team of bankers, the people said.

We kept hearing that ridiculous question “Where else could they go?” throughout 2008 and 2009 when Joe Public began learning how much more bankers made than he did.  The sense of the articles, and the way the readers invariably perceived such high pay, was that it was arbitrarily high, and that it could be restrained by government fiat–and should be.  The utter lack of thought about the consequences of such restraint is natural if one believes that the pay level was arbitrary to begin with.  “Where else could they go?”  To the highest bidder, folks, just everything else in the market.

How much is a CEO worth?

Posted by Marc Hodak on September 8, 2010 under Executive compensation, Reporting on pay | Be the First to Comment

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