What would Lloyd do?

Posted by Marc Hodak on April 7, 2009 under Executive compensation, Revealed preference | 2 Comments to Read

Pretending to be one of the culpable

Pretending to be one of the culpable

Goldman Sachs CEO shared his idea of how executive compensation should look:

•  Compensation should take into account strict adherence to a firm’s management and controls, especially with respect to a person’s judgment and exercising that judgment in terms of risk in all of its forms.  That evaluation must be made on a multi-year basis to get a fuller picture of the effect of an individual’s decisions.

•  Individual performance must not be viewed in isolation. Individual compensation should not be set without taking into strong consideration the performance of the business unit and the overall firm. Employees should share in the upside when overall performance is strong and they should all share in the downside when overall performance is weak.

•  No one should get compensated with reference to only his or her own P&L. Compensation should encourage real teamwork and discourage selfish behavior, including excessive risk taking, which hurts the longer term interests of the firm and its shareholders.

•  Compensation should include an annual salary plus deferred compensation, which is appropriately discretionary because it is based on performance over the entire year.

•  The percentage of compensation awarded in equity should increase significantly as an employee’s total compensation increases.

•  For senior people, most of the compensation should be in deferred equity.  Only the firm’s junior people should receive the majority of their compensation in cash.

•  As I mentioned earlier, an individual’s performance should be evaluated over time so as to avoid excessive risk taking and allow for a “clawback” effect.  To ensure this, all equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.

•  And, senior executive officers should be required to retain the bulk of the equity they receive until they retire.  In addition, equity delivery schedules should continue to apply after the individual has left the firm.

In other words, it should look a lot like Goldman Sach’s executive compensation plan.

Read more of this article »

“It’s about our fundamental values”

Posted by Marc Hodak on March 16, 2009 under Revealed preference | 2 Comments to Read

“How do they justify this outrage to the taxpayers who are keeping the company afloat?” Obama asked. “This isn’t just a matter of dollars and cents. It’s about our fundamental values.”

That’s President Obama on his increasingly hysterical strident attempt to force AIG to renege on its contract to it managers.

For me, this the most telling moment in Mr. Obama’s presidency.  Here is where he gets to show us his fundamental stripes.  This is his teaching moment to the nation.  His choice is as simple as it is inescapable: A or Not A:

A:  The AIG executives whose irresponsible, short-sighted behavior pushed their firm to the brink of insolvency, and who forced our nation to bail them out at an unconscionable cost, are now in a position to reap the rewards of a contract that was put into place long before anyone suspected that their mistakes would lead to disaster.  The media has been calling the payments from this contract a “bonus.”  It is not a bonus.  A bonus is something you earn for performing.  It is, in theory, forfeitable if you fail to earn it.  This contract guarantees payment.  This is like salary that has been deferred, to be paid in installments.  Calling it a bonus twists the word beyond recognition, and serves to needlessly inflame passions.

As distasteful as it to see these people receive this payment, whatever it’s called, this nation is built on people honoring their agreements.  Children learn about the basic requirements of civilization on the playground when they are rebuked for reneging on their promises, or welching on a deal.  Americans don’t welch.  Americans don’t look for excuses to welch.  We know how easy it is to find them.  Americans don’t encourage welching.

Besides, we don’t need to encourage the abrogation of a legitimate contract, no matter how ill-conceived or inopportune, in order to restore a sense of fairness in this particular situation.  The CEO of AIG, a man appointed after its collapse to help bring things under control, has determined that the people in this group, the group that destroyed the company, have many non-contractual elements to their pay.  The non-contractual elements do not have to be paid.  For the 25 top executives, their salaries, ranging from $270 thousand to $500 thousand, will be reduced to $1, largely counteracting the value of their bonuses.  Every other manager in the group will have their bonuses largely counteracted by a 10 percent reduction in their salaries.  These managers are free to leave, whereby they will forfeit their remaining bonuses.  Or they may stay on, to try to apply their talents to remedy the destruction their unit has wrought, and be paid a fair wage for doing so.

Not A:  We don’t want the company to pay these people, regardless of any agreements.  We’re angry.  We can’t let individuals who have harmed us hide behind a contract.  Paying these people would offend our sensibilities.  We will use all our power to prevent it.

A is the rule of lawNot A is the rule of men.  This, Mr. President, is where you clarify for the young people who supported you what kind of country you want them to inherit.  Which is it?

UPDATE:  This morning I added a little to his “A” speech.  He won’t mind.  We just feed it into the teleprompter…

One of the more unfortunate slurs heaped upon our Native Americans is the term “Indian giver,” which is opprobrium for someone who takes back what they give or promise to another.  It is particularly ironic that we apply it to a group to whom we have violently broken so many promises, using their rebellion and occasional crimes as an excuse, and taking shameful advantage of their political vulnerability.

McCaskill’s standard

Posted by Marc Hodak on January 31, 2009 under Revealed preference | 2 Comments to Read

Senator McCaskill has proposed a ceiling on the pay of anyone working at a company taking government money–i.e., the same as our highest paid public servant, the President.  The cap of $400,000 per year would include salary, bonus and retirement contributions.  As usual, the Senator failed to think this through.

First of all, the president will get a pension of $200,000 per year when he leaves office.  Even assuming he’s a two-term guy, the value of that retirement, if we calculate that contribution according to proxy disclosure rules, is about $400,000 per year.  So, out of the box, McCaskill is offering an apples-to-oranges standard.  Salary, bonus, plus retirement contribution for the president is about $800,000 per year, and much more if he gets the boot after just four years (so much for pay-for-performance).

On the other hand, this bill doesn’t appear to mention a limit on perks and other benefits, where an executive mimicking the president can easily begin to make up some ground.  To begin with, there is the much-maligned corporate jet.  The president has one. Actually, he has two of them, and each is tricked out with far more comforts and gadgets than the most audacious jet available to the average GM or Citibank CEO.  In addition, the CEO should be entitled to a fleet of helicopters, as well.

Then there’s a housing allowance.  To get something equivalent to Obama’s crib, a mammoth, historic mansion with sprawling acreage in the heart of a major city, would test the generosity of even the most spineless board of toadies.  But let’s throw in, say, the top floor of the newly renovated Fairmont Plaza.  Plus unlimited use of their entire staff, dining, and ballroom spaces.  If you’re an auto company CEO, I don’t think the entire city of Detroit would offer an equivalent value, not that they would take it.

And if you think the post-retirement benefits of office were extravigant for Jack Welch, they don’t compare to this guy’s.

“If only WalMart had a union, the poor guy would have lived”

Posted by Marc Hodak on November 30, 2008 under Revealed preference | Be the First to Comment

It was only a matter of time before a union official found a way to politicize the unfortunate death of WalMart employee, Jdimytai Damour, who was trampled in a Long Island store. According to the SEIU, UFCWU and assorted other XYZUs, there is not an ill in the world that would not be cured if only WalMart were unionized.

In this case, the chain of logic apparently goes like this:
– WalMart uses something close to slave labor to keep prices low (ergo, the customer throngs)
– Part of their low-cost structure includes skimping on various security measures
– A decent union would not have allowed them to skimp on these measures
– Thus, the crowd would have been more orderly, and the man would not have been trampled

This final conclusion is merely insinuated in this story, not spelled out in a manner that might require at least an iota of evidence.

It’s kind of disgusting that anyone would use a tragedy like this for political positioning, but that’s the job of members of the TIOU (Traffickers In Outrage Union). This meta-union includes politicians, organized labor leaders, and the mainstream media. Their unofficial motto: “There outta be a law!” (because, clearly, letting a free people do what they want with their own property isn’t working perfectly).

The UFCWU official in this instance asked:

“Where were the safety barriers? Where was security? How did store management not see dangerous numbers of customers barreling down on the store in such an unsafe manner?

WalMart answered that they had:

added internal security, brought in outside security, erected barricades and worked with Nassau County police in anticipation of heavy crowds.

The video of the stampede supports both WalMart’s contention, and the unusual nature of this event:

Minutes later, police trying to give Damour first aid were jostled by customers still running into the store, authorities said.

Members of the TIOU are especially good in portraying themselves as more concerned about your stakeholders than you are. If it weren’t for the law, you would poison your customers, torture your workers, and pollute your communities. There is not an ounce of shame in proclaiming these things as your stores are thronged by customers and job applicants, and as communities offer all manner of enticements to lure you.

A reasonable verdict of WalMart’s safety strategy would look at their rate of worker injuries given the number of stores they have, including the 2500+ stores that didn’t have any damage to their front doors, versus that of other retailers. Of course, such a perspective would make it extremely difficult to summon the kind of outrage that would warrant inflicting a union on all those stores on the questionable premise that a union would have prevented this kind of incident.

For my part, I’m going to keep taking my chances at WalMart based on the same commercial motives that animate the TOIU.

Disclosure: I own no shares of Citigroup

Posted by Marc Hodak on November 25, 2008 under Revealed preference | Read the First Comment

The reason for this is best expressed by my reaction when I saw the headline this weekend about separating the company into a “good bank” and “bad bank.” My first thought was, “how would one would be able to tell the difference?”

But if I were a direct Citi shareholder, I would right now be far more concerned with getting the right people in place, even if they cost a few million more, than about trying to get or keep discount executives, as our political class is insisting upon. The difference between the best and next best in leadership could easily be worth tens of billions of dollars in value enhancement of the bank’s assets. Why would I risk that over a few million in incentive compensation? Of course, silly me, I believe that sometimes you get what you pay for, and that incentives matter.

Also, I won’t invest in a bunch of insomniacs:

In similar news, AIG announced today that they will freeze salaries for their top seven executives and reduce the salary of their CEO, Edward Liddy, to $1. According to Cuomo logic, the shareholders should be ecstatic:

“We believe these actions demonstrate that we are focused on overcoming our financial challenges so AIG can return value to taxpayers and shareholders,” Mr. Liddy said in a statement…

Mr. Cuomo applauded AIG’s decision to limit executive pay, and said other companies receiving federal bailout money should follow suit…

AIG shares fell 4 cents, or 2.5%, to $1.73 in afternoon trading.

During which time the overall market increased by about 2.5%. Hmm.

What attracts our best minds?

Posted by Marc Hodak on November 7, 2008 under Revealed preference | Read the First Comment

One of the most important questions in any society is: where do your brightest minds go? I would argue that in a healthy society, those minds would go to our most productive sectors. In that context, I’m pretty pleased about what this chart says about the U.S.:

The libertarian blogs are chuckling about the chuckleheads at the bottom with a “That explains it” attitude. I look at it with a slight twist: it feels right that the lower the average IQ represented by this chart, the more likely the holder of that IQ is aiming for a government job. That’s as useful a place to store our less brilliant minds.

HT: Coyote

The Hero Syndrome

Posted by Marc Hodak on August 17, 2008 under Revealed preference | Be the First to Comment

Americans love a hero. The guy who can grab victory from the jaws of defeat. The person who can come from behind to win the title. Wow.

But the hero fetish can be a bit perverted. I was reminded of this by an article today about Michael Phelps where ESPN ranked his eight gold medals in order of “most impressive” based on a poll of readers. Setting aside the inherent silliness of such a ranking, the poll results said something interesting about people.

The victory voted “most impressive” by 60 percent of the readers was Phelps’ win in the 100m butterfly. This was the race he almost lost; the only one where he didn’t break a world record. Getting almost a quarter of the vote was the other come-from-behind victory in the 400m freestyle relay anchored by Jason Lezak. None of the other races where he or his team won convincingly by shattering world records got as much as four percent of the votes. Maybe it’s just me, but I would consider the races he dominated as pretty impressive. In sports, though, excitement often means the last second save.

The infatuation of the press and public with the “last second save” is understandable in sports, but it doesn’t translate well to business. For my money, too many American companies are built upon what I would call the “heroic management” model. They would never invest in better management systems when things are going well; they see their success as evidence that they don’t need them. When things turn south, they can’t afford advice about systems; they need (and prefer) to invest in heroic measures. If they pull out of the dive, their faith in heroics is reinforced; a company of heroes doesn’t need better systems. That’s how they think.

My attitude is that any system that depends upon heroics to succeed is a system that is designed to fail. In fact, most of the companies I work with regard “heroic management” as a retarded model. They see the need for heroics as a failure in some management process.

My first experience with this alternative model was at Toyota, when I went through their manufacturing training program at their plants in Fremont and Lexington. Toyota as a company, just like their auto manufacturing, is designed for continuous improvement. I have since seen and implemented similar systems at other firms that, from the outside, don’t look much different from their peers, until you see the results over many years at a time.

Still, I can see why the “heroic management” model remains so popular. Steady performance and continuous improvement are BORING. It doesn’t get you on the cover of Business Week. Bold strategies get you there, win or lose–with the shareholders often being the losers.

“We’re against killing any animals…except innocent humans”

Posted by Marc Hodak on August 4, 2008 under Revealed preference | 2 Comments to Read

In case you haven’t heard this before, it’s the serious, bona fide position of the Animal Liberation Front, a group that is legitimately referred to as domestic terrorists.

They or their compatriots firebombed the home of a UCSC researcher while he, his wife, and two children were asleep. The family had to escape from an upstairs window. The Mercury News picks up from here:

While a spokesman said he didn’t know who committed the act, the Woodland Hills-based Animal Liberation Front called the attacks a “necessary” act, just like those who fought against civil rights injustices. Spokesman Dr. Jerry Vlasak showed no remorse for the family or children who were targeted.

“If their father is willing to continue risking his livelihood in order to continue chopping up animals in a laboratory than his children are old enough to recognize the consequences,” said Vlasak, a former animal researcher who is now a trauma surgeon. “This guy knows what he is doing. He knows that every day that he goes into the laboratory and hurts animals that it is unreasonable not to expect consequences.”

The article then captures the appropriate response to such a rant:

Clark, the Santa Cruz police captain, said it was “unconscionable” for anyone to defend such acts: “To put this on par with any of the human rights issues is an absolute insult to the integrity of the people who fought and went through the human rights movement. This is what people do when they have an inability to articulate their point in any constructive way. They resort to primal acts of violence. Any reasonable person would need a logic transplant to begin to understand this level of degraded thinking.”

I’m with the police on this one.

The media, on the other hand, are due for a correction. This person they generously refer to in the present tense as a “trauma surgeon” is no such thing. He has apparently not been employable as any kind of doctor since 1998. Even the PCRM, a fairly radical, but non-violent, animal rights group, distances itself from Vlasak.

Why change Fail?

Posted by Marc Hodak on July 16, 2008 under Revealed preference | Read the First Comment

OK, so the headline isn’t a shocker: “Utah NAACP President Still Opposes Vouchers.” But the reasoning never ceases to amaze me:

It would go back to the past (before) Brown v. Board of Education. There would be segregated schools. The ones that would not have been able to afford the schools would’ve been children of color.

Because, you know, the current system is working so well for black kids, especially in those inner city schools attended by a rainbow of peacefully, coexisting races, except of course for all those black kids you see in private schools.

Pleazze, lady. The schools that our poor kids are trapped in lend a whole new meaning to “compulsory education”–a meaning where only half of the words count. It prepares far too many of them for the incarceration they will face–more than one-in-ten black males. If white society had imposed this school system upon our African-American population, it would be an outrage rivaling Jim Crow.

For once, you’d think the political leaders would actually do it for the kids. Instead, leaders like this political stooge are willing to continue sacrificing their kids en-masse on the altar of public education, just to prevent a few extra middle class white kids from going to private school.

Does this:

prepare you for this:

Congress: Give these poor girls a chance!

Posted by Marc Hodak on June 18, 2008 under Revealed preference | Comments are off for this article

Bachelor congressman Anthony Weiner (D-NY) is prompting all manner of innuendo from his proposal to give fashion models a special visa category. The editors must have worked into the night to craft this line:

Weiner introduced his proposal in the House late last year which has not yet been scheduled for a vote, though it was recently referred to the Committee of the Whole, where less rigid rules allow bills to be passed quicker.

Now, I’m actually in favor of this proposal for other than the obvious reasons. Weiner argues seductively for opening up our borders to enjoy the bountiful fruits of commerce. But why is that logic limited to fashion models, and not scientists and entrepreneurs, even if they don’t look quite so.

HT: Reason