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 30, 2010 under Unintended consequences |
At least the guy at the head of the organization does:
The U.S. Education Department this summer proposed regulations that would tie access to federal aid programs to graduates’ success in paying off loans.
“They aimed at the bad actors and they wound up scoring a direct hit on schools that service low-income students,” Mr. Graham said in an interview. “That cannot be what the Obama administration wants.”
Is it possible that the Obama administration doesn’t understand all the consequences of its proposals?
Posted by Marc Hodak on under Collectivist instinct, Patterns without intention |
From a speech today:
“Every single day, I’m pushing this economy forward, repairing the damage that’s been done to the middle class over the past decade and promoting the growth we need to get out people back to work,” Obama said.
No statement better reflects the fatal conceit.
Contrast with this, from one of Hayek’s discliples:
There were two great triumphs, two things that I’m proudest of. One is the economic recovery, in which the people of America created — and filled — 19 million new jobs.
Good god, what a difference.
Posted by Marc Hodak on August 18, 2010 under Revealed preference, Unintended consequences |
Theory: Ranking employees, and letting them know where they rank, inspires a competition to improve one’s performance, or to continue to excel.
Experimental result: Not
[Professor] Barankay [of Wharton] randomly divided workers into two groups — a control group receiving no ranking and a treatment group receiving feedback with a ranking. He then sent an e-mail to all of the workers inviting them to return to do more assignments. The content of all the e-mails was the same, except that individuals in the treatment group found out how they ranked in terms of their answers’ accuracy. The aim was to determine whether giving people feedback affected their desire to do more work, as well as the quantity and quality of their work. Of the workers in the control group, 66% came back for more work, compared with 42% in the treatment group. The members of the treatment group who returned were also 22% less productive than the control group.
Prof. Barankay also offered workers either a job where they would be ranked or one where they wouldn’t be.
[T]he job without the feedback attracted more workers — 254, compared with 76 for the job with feedback.
“This was a surprising outcome, but it speaks to the paradigm of revealed preferences,” he notes. “Economists are usually very skeptical about what people say they will do. We focus on what people actually choose to do. Their choices convey information about what they care about. In this case, it seems that people would rather not know how they rank compared to others, even though when we surveyed these workers after the experiment, 74% said they wanted feedback about their rank.”
So, people generally don’t like to be ranked against their peers, even though they say they do, and rankings appear to encourage the high performers to slack off and the poor performers to give up. Contrary to theory, it also encourages high performers to leave and poor performers to stay. High performers are given the confidence to go out and find new challenges, while poor performers appear to get demoralized, and may have fewer options besides.
This research stands in contrast to research on tournaments, which appear to motivate more productive behavior. Thus, the research indicates that it depends on how the feedback and reward mechanisms interact. Competition can breed excellence, and competition includes comparisons and consequences. But comparison alone can breed complacency or demoralization.
Posted by Marc Hodak on August 16, 2010 under Invisible trade-offs, Unintended consequences |
David Leonhardt suggests that “The part of the [financial services overhaul] law that will directly affect the most people will be the new Consumer Financial Protection Bureau, which has already been the subject of heated debate. And the central question facing the bureau will be how to distinguish between corporate malfeasance and consumer frailty.”
This is how I would expect a NYT columnist to see the central question, i.e., as a distinction that experts must make about when a financial instrument or transaction goes from being merely too hard for someone understand to being deceptive. While many pundits and readers no doubt share this view of “the central question,” I think it distracts us from far more interesting questions:
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Posted by Marc Hodak on August 10, 2010 under Government service, Stupid laws |
New, higher disclosure standards for executives
Imagine that one of your large customers, say you’re a supplier to Target or Whole Foods, wants you to disclose how much you and your senior officers make? You’re a private company, you may not even tell your kids or siblings how much you make, but these strangers want to know, and they want to place that information on the Internet. How would you feel about that?
Well, that is exactly what the Federal government is requiring of its contractors and sub-contractors via rules in the Federal Acquisition Regulation (FAR).
Posted by Marc Hodak on August 9, 2010 under Executive compensation, Revealed preference, Scandal |
CEO pay is generally discussed and debated from the point of view of more typical kinds of employees, from minimum wage teens to well-salaried executives, who work for what seem like arbitrary sums offered by frugal or venal owners, or their sometimes clueless representatives on the board. At this level of the discussion, one loses a key distinction about pay in a market economy, i.e., that one should be paid about what they’re worth. So, a relevant question in this debate that is never asked: What is a CEO worth?
Mark Hurd’s sudden, surprise resignation at HP offers a rare hint to the answer; in after-hours trading shortly after the announcement of his dismissal, HP’s stock declined by over 8 percent.
Ladies and gentlemen, that’s over $9 billion dollars in market cap.
So, while various pundits might claim that every CEO is replaceable, the question remains: at what cost? The answer isn’t found in the much vaunted proxy disclosures on executive compensation.
That $9 billion figure is a discounted future cash flow assessment of Mr. Hurd’s value. In other words, in the apolitical judgment of equity investors, the only people with the incentive to make this collective judgment correctly, the company would have been better off paying about $2 billion a year for the next five or six years to keep Mr. Hurd than to lose him.
In fairness to the board, the Mr. Hurd they let go, the man who broke the HP ethics code he had done so much to champion, was not quite the Mr. Hurd the investors thought they had before the Friday announcement. There was a legitimate concern that the expense-fudging Mr. Hurd could no longer govern with the same authority he had before this unfortunate news came out. But that’s not the point here.
The point is that the buttoned-down guy atop his Silicon Valley perch that HP’s investors thought they had was worth far more than the mere tens of millions that the media (check out the comments) and good governance types have regularly derided.
Update: Stephen Bainbridge weighs in. Larry Ribstein offers his take.
Posted by Marc Hodak on 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 under Patterns without intention, Unintended consequences |
A frequent complaint about standardized tests as a measure of scholastic achievement is that teachers, who know the general content, can simply “teach to the test,” i.e., they will focus on those content areas to the exclusion of others in order to maximize the performance of their students so that they, as teachers, look good. This is not good. It limits the range of inquiry to those that are bureaucratically mandated, and can actually inhibit real learning.
If the teachers know the particular content of a test, then you get a double distortion: On top of the inhibition on real learning, you will now also get artificially high scores that don’t reflect any learning at all. And if the teachers are being paid or selected based on their students achievements on such tests, then the teachers must teach to the tests as a matter of personal career survival–a real and legitimate sore point for teachers and their unions.
The problem is that we can’t generally know when a teacher is teaching to the test. In certain extreme cases, one can use statistical analysis to see if a teacher is actually cheating. But generally, it’s hard to see in a sea of “gains” how illusory those gains are, and how much of them were the result of teaching to the test rather than real learning, even learning limited to the content of the content areas to be covered by the test.
Well, now we know the answer for New York State. By slightly increasing their standards, proficiency in English went statewide dropped from 77% to 53%.
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