Posted by Marc Hodak on September 2, 2010 under Reporting on pay | 
New York Times reader
A NYT editorial today commented on the new disclosure requirement emanating from the Frank-Dodd pile that firms need to calculate and disclose the ratio between the pay of their CEO and that of their average worker.
How does the pay gap between the boss and the workers figure into performance? Are companies efficiently providing goods and services or are they being run for the enrichment of the few? Disclosure of the gap could help provide answers and in the process, help investors, policy makers and the public understand the forces that are shaping business and the economy.
That’s called an assertion without any basis in logic or fact. As someone who studies all kinds of ratios for all kinds of companies, I can assure you that no single ratio can help a serious analyst deduce a single, meaningful thing about that company’s performance, let alone the forces shaping business and the economy. What does the fact that WalMart has always had a lower profit margin than K-Mart tell you? What does it tell you that the best performing railroad in the 1990s had the worst operating ratio (a common measure in that industry)?
In all the discussions about this ratio, not one person has articulated what shareholders would get out of it. Remember the shareholders–the purported beneficiaries of these disclosures that their companies must bear the cost to prepare?
The big lie in this editorial is not that this disclosure won’t help neither investors, policy makers or the public; it is the gross omission of the real reason for this disclosure: that it’s intended use, and the sole reason it was inserted into the law, is to give the unions and their media supporters, like the NYT, another crowbar with which to beat management. Such an omission is a serious lack of disclosure.
Corporate opponents of the law insist that pay-gap disclosures would be misleading. A company that outsources its low-wage work, for example, could have a smaller gap than a company that employs low-wage workers, even though the outsourcer is not necessarily a better-run company. That misses the point. The point is to calculate, disclose and explain the gaps as they exist for the way a company does business.
I always love it when someone who is horribly missing the point says “that misses the point.”
Posted by Marc Hodak on August 9, 2010 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 29, 2010 under Reporting on pay |
Inquisitive minds want to know.
What they really want to know is if this arrangement could lead to a conflict of interest. “How much” doesn’t answer that, but “How” could. Is he being paid a flat salary, regardless of how claims are handled? Is he getting a percentage, like a typical tort lawyer (which he is)? Is there any reward for limiting the payout in any way (I doubt it, but worth asking).
Feinberg, being the stand-up, politically astute guy he is will reveal all, he says.
Posted by Marc Hodak on July 27, 2010 under Reporting on pay |
The WSJ uses the utter lack of real news to put an article on “Top Paid CEOs” on top of its front page. The decade’s champ? Larry Ellison. He “made” $1.84 bilion during the naughts.
How was this calculated?
The Journal and Mr. [Kevin] Murphy [Prof. at USC] measured “realized compensation”—how much an executive actually made during the decade.
The Journal’s totals include salaries, all bonuses, “other compensation” as listed in the proxy statement, the value of stock options at the time they are exercised and the value of restricted stock at the time it vests.
Restricted stock is included only since 2006, when the SEC required companies to report the vesting value.
As a result, some executives may have realized more compensation than the totals listed by the Journal…
The analysis doesn’t track whether executives sold shares they acquired after they exercised options or after restricted stock vested.
This is basically a recipe for highlighting folks who were highly successful founders in the prior decade, and remained as CEO for the most recent decade’ people just like, oh, Larry Ellison.
To see how skewed this is, consider two CEOs, Able and Cane. Cane grew his company from almost nothing in 1990 into a $40 billion dollar corporation in 2000. Let’s say he owned a quarter of it, and hadn’t sold any shares as of 2000. So he owns $10 billion in stock in unrealized gains. Let’s say he wasn’t paid another dime and the stock went nowhere for the next decade, bur Cane began to sell his shares; in fact, he sold $1.84 billion over those ten years. The Journal would say Cane “made” $1.84 billion in those ten years. (BTW – This is not Ellison’s story; Larry pulled down lots of new cash and shares, despite his stock going nowhere.)
Able, on the other hand was hired to lead his $10 billion company starting in 2003. He received an up front grant of stock worth about $100 million that vested over the next three years until the end of 2005. Since that grant the value of that stock has gone up over ten times, so it’s now worth about $1.1 billion. But he hasn’t sold any of it. According to the Journal, Able has made nothing. (Remember, they don’t count stock grants before 2006, or unrealized gains.)
Economically speaking, Cane didn’t make anything over the last decade; he simply realized $1.84 billion of the gains he earned in the prior decade. Able, on the other hand, has made $1 billion, but it’s still an unrealized gain.
And that’s why Larry Ellison is at the top of the list. And why 80s/90s founders Diller, Jobs, and Fairbank are also in the top five. Steve Jobs is an interesting case, though; if his stock had vested one year earlier–in 2005–he wouldn’t have made the top 25.
It’s hardly worth coming up with counterexamples given the arbitrariness of this metric. But at least the paper got some big numbers to put on the front page.
Posted by Marc Hodak on July 23, 2010 under Reporting on pay, Unintended consequences |
The headlines run amok:
– New York Times: “Federal Report Faults Banks on Huge Bonuses” (the link to this story said the headline was “Feinberg Says Bonuses Paid by Troubled Banks Were Unmerited”
– Washington Post: “Bank executives received $1.6B; Treasury: 17 banks overpaid execs while receiving billions in taxpayer-funded bailout money.”
– Boston Post: “17 Firms Issued Excessive Pay”
– Fox Business News: “Pay Czar Feinberg Blasts Banks on Bonuses”
And it goes on like that in an MSM echo chamber.
From those headlines, you’d think Ken Feinberg was foaming at the mouth about how bad these banks were behaving against some standard of morality or reason. Alas, the whole story can be summarized thusly:
The banks made $1.7 billion in payments before the passage of pay restrictions that would not have been allowed under the pay restrictions.
That’s all he said. Feinberg did not use the terms “fault” “huge” “overpaid” “excessive” “unmerited” nor did he deliver this report in a “blasting” manner. All he was charged with doing was tallying up the total amount that had been paid that would have been impermissible under subsequent rules, and that’s what he did. All of the accusatory, judgmental, sanctimonious verbiage was added by the media.
In the last part of his report, however, Feinberg did go too far, essentially arguing for higher bankers pay in normal times.
Read more of this article »
Posted by Marc Hodak on July 20, 2010 under Reporting on pay |
In an article about the Goldman SEC settlement, the NYT reporters couldn’t help but report on how much Goldman’s in-house counsel, Greg Palm, has made at the firm.
Several people who know Mr. Palm say they were shocked that he was short on cash because he was not a lavish spender and because Goldman has paid him lavishly. Goldman has given him stock and options worth $59 million since 2002, according to Equilar, an executive compensation research firm…
Yet Goldman continued to pay Mr. Palm richly. In 2008, he didn’t get a cash bonus but he did receive a substantial package of options and stock when Goldman’s shares were trading near their lows; less than a year later the package was worth nearly $12 million, according to Equilar.
So, from this reporting, one would figure that Mr. Palm made $52 million from 2002 to 2008, and $12 million more in 2008, for a total of $64 million. That would certainly qualify as “lavish” and “rich.” That’s how it would look to the average reader unaware of the distinction between grant-date values and realizable values.
Notice that the $52 million in pay calculated by Equilar represents the grant-date values of equity. Options have a value on their grant date despite the fact that their exercise price is equal to the stock price. Regardless of whether the stock price subsequently goes up or down, although their realizable value fluctuates, their grant-date value stays the same. In Mr. Palm’s case, Goldman’s stock price dropped steeply over the 2002 to 2008 period, making his options worth very little in terms of realizable value. On the other hand, the $12 million figure provided by Equilar for the 2008 grant is not a grant-date value, but a realizable value, reflecting the fact that the stock price has actually gone up since 2008.
The reporters had a choice of providing grant-date values or realizable values for each of the two periods they mention. What if they had chosen realizable values for the first period (2002-2008), and grant date values for the second period (2008 – 2010)? Then their report would have looked like this:
Goldman has given Mr. Palm stock and options since 2002 that are currently worth about $3 million, according to Equilar (which could easily do the calculation, if asked)…
In 2008, Mr. Palm didn’t get a cash bonus but he did receive a substantial package of options and stock, worth about $2.5 million, when Goldman’s shares were trading near their lows.
Well, that doesn’t actually sound as “lavish” or “rich” as the first version. Why did the NYT not provide a consistent rendering of Mr. Palm’s pay either in grant-date terms or in realizable terms? Why did they choose the combination of methods that yielded the highest number? Well, we all know the obvious answer, but a good researcher never settles for that. A good researcher looks at the data.
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 17, 2010 under Irrationality, Reporting on pay |
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.
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:
Read more of this article »
Posted by Marc Hodak on May 10, 2010 under Executive compensation, Reporting on pay |
The press reports on the soaring value of executive equity. The lead:
America’s top CEOs are set for a once-in-a-lifetime pay bonanza. Most of them got their annual stock compensation early last year when the stock market was at a 12-year low. And companies doled out more stock and options than usual because grants from the previous year had fallen so much in value that many people thought they’d never be worth anything.
“The dirty secret of 2009 is that CEOs were sitting on more wealth by the end of the year than they had accumulated in a long time,” says David Wise, who advises boards on executive compensation for the Hay Group, a management consulting firm.
The first paragraph is a backhanded explanation of the “fixed-value” philosophy of equity grants so popular among public companies. The theory is that equity grants should make up a constant value of compensation over time. So, when share values drop from one year to the next, one should give more shares or options to the executive to remain “competitive.” Likewise, when share prices increase, we should lower the number of equity grants to keep the total value of the grants in check. Of course, this philosophy rewards management with more shares/option when the stock drops, and penalizes them when the stock price rises.
The really dirty secret, from the perspective of me and my colleagues, is that this fixed-value philosophy is favored by all the major compensation consulting firms, including, ahem, Hay Group. And their client boards say, “OK” because they don’t want to stick out on any compensation policy, however perverse its effect.
And then when we have a huge rebound, the AP writes a story about the windfall that CEOs are getting, and boards have to defend this windfall, and the major comp consulting firms we compete with shrug and say “hey, who could have predicted this?”
One can’t blame the reporters this time for making CEO pay look bad, only for not being able to identify the underlying causes. They didn’t call me because none of my clients are part of this story.
