Posted by Marc Hodak on May 23, 2009 under Executive compensation, Politics, Reporting on pay | 
Congress cooking up new legislation (artist's depiction)
According to this story in Bloomberg:
Treasury Secretary Timothy Geithner called for an overhaul of compensation practices at financial companies and said the Obama administration’s plan to help realign pay with performance will be rolled out by mid-June.
“I don’t think we can go back to the way it was,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be aired tonight and over the weekend. “We’re going to need to see very, very substantial change.”
Geithner is not too clear what he means by “the way it was” in compensation practices that begs for “very, very substantial change,” so let me clarify.
1) Let’s say you work in a bank that has seven divisions. One particularly leveraged division, not the one you work in, totally screws up pushing the whole bank into a loss. Your division made money. In fact, it made enough to keep the whole bank from going under. In Geithner’s view, echoing the view of the rest of the government and the media, you should get no bonus.
2) Let’s say you work for a company that the government has more or less taken over. You have a contract with the company for your services, a contract the government in essence approved, dictating compensation to be paid later (bonus, retention payment, deferred comp, whatever). The media hates you and embarrasses the politicians. In Geithner’s view, you should get none of the promised payment.
In other words, given the mob’s inability to distinguish behavior and results within institutions, once those institutions become unpopular, the mob’s sensibilities of what other people should be paid should be made the law of the land. The mob is similarly blind to the difference among firms in an unpopular industry, as if there were no difference between Goldman and Lehman, or between JP Morgan Chase and Citi, in their need or willingness to take bailout money.
The hypocrisy doesn’t stop there:
[Geithner] said that Wall Street’s pay practices encouraged taking on short-term risk, and helped precipitate the financial crisis. What’s needed is a set of broad standards that federal regulators can use to make sure that doesn’t happen again, he said.
If we exchange “Wall Street’s pay practices” with “Congressional policies” we get a far more accurate sense about what precipitated the crisis.
Posted by Marc Hodak on May 5, 2009 under Economics, Reporting on pay |
Good bankers have an incentive to go to the places that offer them the most. That’s simple.
Banks, like all companies have a powerful incentive to keep their best producers. Right now, American banks with little prospect of soon repaying TARP are losing talent to hedge funds, foreign banks, and other non-government owned entities in droves.
The government has the incentive to avoid embarrassment about how much bankers get paid in times when banks are in trouble. Officials have necessarily focused on large institutions, especially TBTF firms, and have crafted all sorts of brain-damaged rules to try to contain the pay of bankers at those firms. However, those rules don’t distinguish good bankers from poor ones within these large institutions. That’s because compensation regulation is driven by headlines, while compensation is more complicated than headlines can capture. Which gets us to another incentive.
The media has an incentive to provide blaring headlines, which is how they sell stories. One way to do that is to tap into the deep vein of envy that exists among the masses. Most readers love to hate the “rich,” especially if they feel they can blame the rich for themselves being worse off.
This brings us full circle in the ecology of incentives. Headline-driven media does not allow fine distinctions between good and bad bankers. The compensation constraints intended to punish whole firms or industries invariably punish those that deserved their pay. These deserving ones feel the same outrage at being punished for their success that the envious masses feel about the underserving ones getting paid anything at all. In a bad environment, the best ones leave first.
Alas, there is a tension between economic news, which is sold with headlines, and economics, which is inherently nuanced. That is why readers and presidents prefer one-handed economists. Which is why only hacks do well in the media and in any administration. The good ones do their best under the constraints of politics, pick up some real world experience, and go back to the cocoon of their ivory towers.
The rest of us are left anxious and confused.
Posted by Marc Hodak on April 27, 2009 under Reporting on pay |
And partly because we wish it otherwise so much. The NYT lead is, “The rest of the nation may be getting back to basics, but on Wall Street, paychecks still come with a golden promise. Some highlights:
“I just haven’t seen huge changes in the way people are talking about compensation,” said Sandy Gross, managing partner of Pinetum Partners, a financial recruiting firm. “Wall Street is being realistic. You have to retain your human capital.”
Gross apparently trades in that human capital, so what he says may be taken with a grain of salt. What does a buyer of human capital have to say?
“We need to be able to pay our people,” said Lucas van Praag, a spokesman for Goldman, adding that the rest of the year might not prove as profitable, and so the first-quarter reserves might simply be “sensible husbandry.”
The press continues to work off of overall reported compensation expense, a very high level, messy number that includes benefits for the secretaries as well as bonuses for the honchos, and everything else compensation related. This high level number stays fairly constant as a percentage of revenue, but gets regularly misinterpreted as a harbinger of top level pay.
Still, the compensation expense is the only publicly disclosed figure related to pay at the banks, and it is the best figure for calculating pay per worker.
And, not a terribly useful one. Using “compensation expense” to discern projected executive bonus levels is like using the “gross revenue” line to predict sales of a small product line.
To try to blunt criticism of high pay, some banks have introduced reforms to take back bonuses from individual workers whose bets later lose money.
Your welcome. That would be our handiwork. Our method has other benefits besides blunting criticism, but, hey, whatever brings the clients to bright.
Compensation is among the most cited causes of the financial crisis because bonuses were often tied to short-term gains, even if those gains disappeared later on. Still, as profits return, banks do not appear to be changing the absolute level of worker pay — or the share of revenue dedicated to compensation.
Not saying either of these sentences is wrong, but can you see the contradiction in how they were put together? (Not even counting the foolishness of using conjectures about aggregates in order to comment on specific behaviors.)
But every dollar paid to workers is a dollar that cannot be used to expand the business or increase lending. Some of that revenue, too, could be used by bailed-out banks to pay back taxpayers.
…or support PBS, or buy me a Mojito on a Hilton Head beach… And therein is the premise behind the whole article: these dollars are arbitrarily allocated from a fixed pie among various stakeholders, with managers clearly stealing more than their “fair share,” which appears to be $1.
“The money should go to shareholders,” said Frederick E. Rowe Jr., a member of the pension board in Texas.
…i.e., a shareholder.
As usual for the bankers, Morgan Stanley’s CFO doesn’t help with this comment:
“The number of fat cats making loads of money is much less than you think.”
Not that many fat cats? That should calm reader envy just like that. (Mack, put a muzzle on your man, here.)
Finally, I don’t know how this got into the article. It kind of just pops out of nowhere near the end of the piece, as if the writer was just throwing up the rest of her notes onto the page:
If shareholders do not like compensation policies at banks, they can simply sell their shares.
Interesting. Sell their shares. Hmm.
Posted by Marc Hodak on April 22, 2009 under Executive compensation, Reporting on pay |
. ^
I’m sure we’ll be seeing a hard-hitting article this weekend by Gretchen Morgensen, but I thought I’d take a quick look at the bonuses currently shaking the liberal establishment:
I speak for a lot of people who are just amazed at the depth and breadth of the hypocrisy here — the liberal New York Times and the liberal Globe… at one point in the negotiations, the company proposed eliminating all sick days for Guild members, like an Alabama sweat shop.
That from a sweatshop worker writer at the Boston Globe, which has been told by their NYT overlords that they the Guild must find $20 million in cuts, presumably from their labor contract, or face the shutdown of their paper. And the Grey Lady is not just picking on their Boston subsidiary; all NYT employees took a 5 percent salary cut in order to avoid layoffs.
Except for the CEO. She made $5.58 million in 2008, versus $4.14 million in 2007.
Asked if the bonuses and extra executive compensation were appropriate at a time when employees are being forced to absorb salary cuts and joblessness, Catherine J. Mathis, NYT Senior Vice President for Corporate Communications, told the Huffington Post:
“With regard to shared sacrifice, please remember that for 2008, non-equity incentive compensation (which many think of as bonuses) for these folks was roughly half of what it was the year before and stock awards were down more than 80 percent in value.”
Translation: “If we can convince you to look only at certain selected parts of the compensation equation, over here (snap, snap), you’ll see they went down versus the year before.” Of course, that means other parts went up, i.e., grants of stock and options. The NYT clearly assumes that their shareholders are as innumerate as their readers, and can be lead away from the “total” numbers to just the numbers management wants to discuss. Sorry, Cathy. The equity counts, too.
Mathis cautioned that the total compensation numbers in the proxy report…
“…include the value of the compensation — not the amount of cash they received. For example, they were all granted options. But those options are of value only in the stock price increases over the exercise price…For proxy purposes a value is assigned to the options even though the executives received no cash at the time they were granted.”
Uh, yeah. Actually, the options are valuable even though they’re granted at the money. That’s how the NYT counts options when they evaluate the pay of CEOs.
Now, if the NYT’s CEO wishes, via her mouthpiece, to insist that at-the-money, or even out-of-the-money options are not really worth anything, I will gladly give her $1 for them, and she can claim to be ahead. Just mail them to…
What? She’s not interested? How about if I offer $2? She wants how much? Oh, $1.5 million. Yeah, that is how much they’re worth.
I’m used to having my intelligence insulted by the NYT, which is why I dropped my subscription a couple years ago, apparently with tens of thousands of others. The little sympathy as I have for management in this affair is barely topped by my sympathy for those wondering “if the bonuses and extra executive compensation were appropriate at a time when employees are being forced to absorb salary cuts and joblessness.”
If the cuts improve the odds of the paper becoming profitable, that is precisely the kind of thing that should be rewarded with bonuses. If management doesn’t have an incentive to push for profits, then who can the shareholders count on to make the paper viable? The unions?
Posted by Marc Hodak on April 13, 2009 under Executive compensation, Reporting on pay, Unintended consequences |
The NYT provides a good story about how the Wall Street pay restrictions may be having its effect. Some of the remaining glib tropes we’ll undoubtedly to hear:
– “So what? How much can these people have been worth to companies they helped drive under?”
– “They don’t need these people. The industry had to shrink anyway.”
– “These people are just being greedy, looking for other ways to get rich doing useless things.”
In the meantime, we taxpayers will reap the ‘benefits’ of our government’s politically driven HR policies at institutions completely dependent on the quality of their human resources. What we’ve saved from not “wasting” money on compensation, what we’ve cathartically gained from “tough talk” to the bankers, we will lose a thousand-fold from sub-optimal bank earnings and, in New York’s case, crippled tax collections. Hopefully, the NYT will run a story on those items when they happen, as well.
Posted by Marc Hodak on April 3, 2009 under Reporting on pay |
Hope this parachute isn't golden
Finally, an article that looks at CEO pay from a more aggregated perspective, rather than out-of-context or anecdotal “can you believe how much this guy made?” stories. Particulars are as follows:
The median salaries and bonuses for the chief executives of 200 big U.S. companies fell 8.5% to $2.24 million
Including the value of stock, stock options and other long-term incentives, total direct compensation for the CEOs dropped 3.4% to a median of $7.56 million
Everyone reports “cash” versus “equity” compensation as a relevant distinction because that’s the distinction mandated in disclosures, because that’s how they evolved historically. I think it distorts the discussion to call equity “long-term incentives.” Incentives implies motivation to do something, other than pray for the value to go up. No managers, up to the CEO, are meaningfully ‘incented’ by equity in the sense of drawing a line between their behaviors and the results.
To me, the more relevant distinction is fixed versus variable. When the company chooses to give you $2 million each year in restricted stock, no matter how the company has performed, that looks like fixed compensation, every bit as much as salary. If the amount of stock granted is based on performance, it looks like a bonus, except paid in equity rather than cash.
While median CEO salaries grew 4.5%, bonuses fell 10.9% as profits decreased by a median 5.8%
So bonuses (or at least cash bonuses) dropped twice as fast as profits–a pretty good pay-for-performance sensitivity.
CEO compensation decreased more sharply at banks and brokerages, long the source of some of the biggest paychecks. Median annual cash compensation for CEOs in the financial industry fell 43%, to $976,000. Total direct compensation fell 14.2%, to a median $7.6 million.
Well, when you have Lloyd, Jamie, Mack, and others going from a eight-digit bonuses to zero, that’s going to have some impact on the industry’s averages.
Posted by Marc Hodak on March 9, 2009 under Reporting on pay |
An article appeared today titled “Top-exec pay train runs full steam ahead.” Apparently, companies are paying fat bonuses to their CEOs even though their firms failed to achieve their targets.
“Executive pay is the ultimate shell game,” says Richard Ferlauto, a longtime critic of corporate compensation practices and director of pension investment policy at the American Federation of State, County and Municipal Employees. “Boards come up with all sorts of new ways to pay people whose performance shows they don’t deserve it.”
That Dick Ferlauto, he’s always good for a soundbite. He also says, “What does ‘pay for performance’ mean if you ignore performance?” Yeah!
But wait. Another article today said that “CEO bonuses are falling fast: study.” That story says that bonuses for CEOs fell over 19 percent last year, and that was after a 4.5 percent decline from the year before. What gives? Both headlines can’t be right, can they?
It turns out that the first story was written based on exactly three examples. Somehow, all three of those examples illustrated the promise of the headline. Actually, one of the three stories doesn’t even do that–the company paying the bonus actually performed well. The complaint about the third company was that they awarded their CEO a golden coffin benefit. The headline in the first article implies that that “Top-exec pay train” applies to a entire class of executives, a significant number of people. The fact that it doesn’t, that applies to just three people, kind of makes that headline suspect, to say the least.
The second story was, as implied by the headline, based on a study. In fact, it was based on a random sample of 173 companies in an Equilar analysis. In other words, this story was based on empirical research that ended up countering the anecdotally supported claims.
If two points make a trend, I would say the lesson here is to ignore any story that does not include a study to back up the anectdotal claims implied by selected examples.
For better or worse, though, headlines are an art, not a science. Their art is purely and simply to get you to literally buy the story. If I were half as liberal as the average reporter in the mainstream media, I might suggest that the government mandate that stories be labeled “anectdotal” vs. “study” so I could save some of time reading time. But I understand regulatory behavior enough to know that as soon as I create that distinction, the market will work furiously to blur it as completely as possible, so paper can continue selling their sometimes false stories under often false pretenses.
