Posted by Marc Hodak on November 21, 2010 under Movie reviews | 
I suppose I was expecting a reasonably complete, if not entirely coherent, exposition of the causes and consequences of the financial crisis of 2008. What I got was the Mother Jones view of the financial world, and beyond. A more appropriate title would have been “Hack Job.”
In this film, director/writer/producer Charles Ferguson spins a morality tale of capitalists rising up like a beast to devour the working class. It’s not an original story, but it is imaginatively set in the modern day, like an avant-garde King Lear production. As in any good morality tale, the villains are presented with ominous music and foreshadowing innuendo. And the villains are many. We start with Morgan Stanley, a small 1970s partnership of bond dealers reportedly earning $45,000 per year. This seemingly harmless firm transforms into a behemoth paying its tens of thousands of employees an average of hundreds of thousands per year.
Then we have Goldman Sachs, doing what bankers do best, only better–unbelievably better, in a way possible only for one who has made a pact with the devil. Read more of this article »
Posted by Marc Hodak on November 18, 2010 under Government service, Invisible trade-offs |
As the TSA begins offering U.S. citizens the choice between having their genitalia displayed on a screen or having them groped by an agent, a top TSA Administrator defends the intrusion with this question:
“If you have two planes, one where people are thoroughly and properly screened and the other where people could opt out of screening, which would you want to be on?” he asked.
Frankly, I think the choice above is a tough call because I put so little credence in the efficacy of our full-blown security theater, but I do appreciate at least some passenger screening. But the question itself is simply a TSA administrator’s leading question, a form of intellectual coercion, designed to justify the physical abuse. He could have asked his question a million different ways that would better reflect the sensibilities of the citizens whose intelligence he insults:
1) “If you have two planes, one where people are thoroughly and properly screened*, and the other where they they are screened marginally better than they were in the 1990s, which would you want to go on?“
2) “If you have two planes, one where people are thoroughly and properly screened*, and the other where they just had random bag searches and well-trained agents ready to ask additional questions, which would you want to go on?”
3) “If you have two planes, one where people are thoroughly and properly screened*, and the other where certain fliers were non-randomly selected for screening, which would you want to be on?” he asked.
I know the last alternative is an invitation to racial profiling, but as someone with somewhat Moroccan features, I might still choose an airport security system where I’m slightly delayed going through it, but I’m unlikely to be delayed behind Pa Kettle, Grandma Myrtle, and little Bobby and Susie, waiting their turn to be searched for shoe bombs and box cutters.
And if the government really had any conviction around that administrator’s question, it would allow the airlines to give their passengers a choice among screening regimes, including opting out, to test the regulators assumption that people would tolerate any intrusion in the name of safety.
* I.e., told to remove their shoes, separate their laptops from their other baggage, present their liquids in plastic bags of an approved size, and parade before a denuding apparatus…
Posted by Marc Hodak on November 15, 2010 under Executive compensation, Reporting on pay, Unintended consequences |
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 »
Posted by Marc Hodak on November 4, 2010 under Reporting on pay |
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.
Posted by Marc Hodak on October 4, 2010 under Executive compensation |
- You want a bonus for what?
United and Continental have completed a critical part of their merger, i.e., agreement on how much their surviving executives will make. The terms of those agreements are apparently newsworthy. In the case of Continental CEO Jeff Sismek, who is about to become CEO of the combined entity, he will get a salary of $975,000, a target annual bonus of $1.46 million, and a target long-term incentive of $8.4 million. United’s CEO, Glenn Tilton, will become Chairman of the combined company for two years, until Sismek takes over that job, as well. Tilton will also get a severance of about $5 million in stock over those two years. Nice consolation prize. The interesting thing is that Sismek will also get “a one-time merger incentive target of $4 million.”
Excuse me?
Many of the wounding criticisms faced by boards about how they set CEO pay have frankly been self-inflicted. A lot of it has to do with how compensation practices, and the language to describe them, have evolved over the last several decades. Back in the day, before anti-takeover statutes made it hard for corporate raiders to jump in and clean house, a CEO who lost a takeover battle was given his walking papers and told, “Adios.” When anti-takeover laws gave CEOs and effective veto over M&A deals where they might get fired, the golden parachute was born, which was effectively a bribe for executives to allow the deal to happen. You’ve invested 20 to 30 years climbing the corporate ladder to become leader of your company and, bam, the shareholders are better off selling it out from under you. Boo hoo, here’s a few million to make you feel better. Well, it was much better for the shareholders to agree to that than to possibly lose a billion dollar premium because the CEO unobservably got in the way of the deal. I get all that.
But an incentive to stay? What the heck is that about? Along the way, someone decided that if the departing CEO was going to get a consolation prize, the retained CEO should get something too. Who decided this? The compensation consultant looking to keep his or her job with the new management? The egomaniac jealous of the guy with the golden parachute? Wherever this invention began, once a few companies began doing merger incentives, it became the “norm.” One thing that fairly describes public company boards and their comp consultants today is an obsession with not sticking out, with doing what everyone else is doing no matter if you understand or not the original reason it was done.
At this point, the merger incentive–a bonus for sticking around–has somehow become acceptable compensation language. Geez-us. Couldn’t they at least call it a re-signing bonus, or a consolidation incentive, or something that doesn’t sound like a reward for keeping a job they would have paid you big bucks to give up? There may be a genuine retention risk with Sismek that the board was trying to avert. But a $4 million “merger incentive” doesn’t sound like the most pressing use of shareholder money.
Posted by Marc Hodak on October 3, 2010 under Governance, Reporting on pay |
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.
Posted by Marc Hodak on October 1, 2010 under Reporting on pay |
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.
Posted by Marc Hodak on September 30, 2010 under Unintended consequences |
McDonald’s wrote the government complaining that the loss ratio guidelines mandated by ObamaCare were uneconomical for their “mini-med” plan, and would force them to drop the plan altogether, which would leave about 30,000 of their hourly employees without health care coverage.
Last week, a senior McDonald’s official informed the Department of Health and Human Services that the restaurant chain’s insurer won’t meet a 2011 requirement to spend at least 80% to 85% of its premium revenue on medical care.
McDonald’s and trade groups say the percentage, called a medical loss ratio, is unrealistic for mini-med plans because of high administrative costs owing to frequent worker turnover, combined with relatively low spending on claims.
Democrats who drafted the health law wanted the requirement to prevent insurers from spending too much on executive salaries, marketing and other costs that they said don’t directly help patients.
McDonald’s move is the latest indication of possible unintended consequences from the health overhaul.
Unintended, perhaps, but not unforeseeable. The lawmakers were warned that not all policies could economically support an 80% to 85% loss ratio. But when the term “economically” comes up, congresspersons eyes glaze over, and they simply move on because they can. “Let the little people worry about the ‘economic’ stuff. We have financially illiterate voters to cater to, and an innumerate MSM through which to reach them.”
I used to think that Congress truly didn’t intend for “unintended consequences” to occur. I have long since realized that they either don’t care about those consequences, or they fully intend for them to occur because it will give them a political advantage. They can create economically unsustainable mandates for insurance carriers, then blame the insurance companies for dropping those lines so their CEO can make a few more bucks. And the press generally let them get away with that, if not encourages it, because greed is a much easier and better story than economic incompetence. The average reader doesn’t have to be educated on what greed is.
Posted by Marc Hodak on September 21, 2010 under Government service, Unintended consequences |
No, this isn’t a story about health care (yet):
Lillian Daniels had the walls of her home in Detroit insulated in July 2010, almost a year after she had applied. The 80-year-old retired nurse practitioner had forgotten she had requested the help by the time she received a call from the community group telling her that workers would be coming.
The whole article here is like one long joke about how the government tries to help us with our money.
The basic choice in the “stimulus” was offering tax breaks to the private sector, including targeted tax breaks to certain industries, or to funnel taxpayer dollars through various agencies and community organizations with all the constraints they must face to maintain a semblance of accountability.
The state Department of Human Services and the Detroit agency exchanged several versions of Detroit’s advertisement before its language was approved. It was January 2010, more than a year after the first advertisement had gone out, before the Detroit agency had a new one to post…
Along with the money came new rules that tripped up even officials familiar with the old program.
States were required to draft new plans detailing how they would use the extra weatherization money, which were then reviewed by the Energy Department…
Weatherization isn’t the only stimulus infrastructure project slowed by bureaucracy. Awards worth $8 billion for high-speed rail connections were announced in January, but the Federal Railroad Administration has only distributed 7% of the funds to date… Few recipients of awards to expand the nation’s broadband network have actually started laying cables; the rest are performing work such as environmental assessments and getting local approvals to attach fiber to utility poles…
Much of the blame goes to new rules pushed by organized labor:
A major reason for delays in the program was a provision in the stimulus bill to apply the Davis-Bacon Act, which requires that workers be paid the local “prevailing wage,” as determined by the Department of Labor.
Democrats have routinely sought to apply the Davis-Bacon Act to federal spending, supported by labor unions, who say that contractors would otherwise be encouraged to lower their bid prices by cutting workers’ pay. Opponents say that the act is inefficient and inflates costs.
In this case, it was far more inefficient than inflating, but it certainly increased costs for everyone involved in terms of delayed employment.
The snags in launching the weatherization effort left construction companies in limbo.
“We didn’t think it was ever going to happen,” said Darnell Jackson, owner of Detroit’s Ampro Construction, who had to lay off three of his eight workers last year. He has since hired them back, and added seven new workers.
Many other construction companies in Detroit are still expanding slowly. Some have slowed down the rate at which they take on stimulus work, because they can’t afford to pay workers weekly, another new requirement in the stimulus bill’s labor provisions…
For newly trained workers, the delays have been hard. Jennifer Wallisch, a 30-year-old former auto worker, hadn’t had a steady job since 2004. She enrolled in a course run by the non-profit WARM Training Center in January after hearing about the $30 million of stimulus dollars that Detroit was getting for weatherization.
She studied energy-saving principles, practiced drilling holes into walls and blowing in insulation, and learned how to install windows. She graduated in March, at the top of her class.
For the next four months, she couldn’t find work.
“I was hanging on by a thread,” said Ms. Wallisch. In July, she was hired for energy-conservation work funded not by the stimulus plan, but by Michigan’s utility companies.
One can go on, and the article does.
Lesson: When a private company can’t get its act together, it eventually fails, succumbing to better managed competitors. Competition raises everyone’s game. There is no competition for the U.S. Department of Labor, or Health and Human Services, or Energy. The government can’t go out of business. If the providers of government capital (i.e., taxpayers) don’t like the return they are getting, the best they can do is choose another president in a few years, or pressure the current one to appoint a different department head, call their congressperson, etc. That’s not exactly zero accountability for performance at the agency level, but it’s pretty close to it.
Posted by Marc Hodak on September 8, 2010 under Executive compensation, Reporting on pay |
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
