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 25, 2010 under Unintended consequences |
Everyone knows the economic theory, right? Price floors reduce demand for the artificially expensive item. If the New York Times were forced to raise its subscription price, it would expect to see a reduction in the volume of subscriptions. If the young, who tend to have minimal work skills or experience, were forced to significantly raise the wage at which they must be hired, we would expect to see a reduction in youth employment. Over time, that is exactly what we see.
Well, apparently everyone doesn’t know the economic theory. And even those that do are willing to argue that, just in the case of labor markets, it doesn’t really apply.
But the results keep coming in.
In fairness to math, the WSJ link is the weakest since correlation does not equal causation. But when one compares the drop in employment among adults versus teens (instead of the increase in unemployment, which suffers from a serious base-rate bias), then one would more clearly see how we are eating our young with this silly policy.
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 19, 2010 under Politics, Scandal |
Prof. Larry Ribstein on the Goldman ‘Abacus’ settlement. He predicts that the end result will be confusion about what big banks must disclose:
[W]hat lesson should Wall Street take away from this case? What, exactly, does a bank in Goldman’s position have to disclose to a customer? The identity of another customer on the other side, as the complaint suggests? Only when that customer is somebody like Paulson. What does that mean? Only if the customer has selected the portfolio? What does that mean? Many deals are put together with buyers in mind. Suppose ACA (the collateral manager) assembles the portfolio here with Paulson in mind, and then Paulson says, “that’s for me. Now I’ll invest.” Is this more “material” than having Paulson take the initiative? Suppose they collaborate in putting the portfolio together?
Get ready for even more fine print in our ever less readable disclosure regime.
On the other hand, why bother. If the government targets you, no amount of disclosure will save you.
And, yes, Barry, Larry is a lawyer.
Posted by Marc Hodak on July 15, 2010 under Invisible trade-offs |
That’s the problem with conservatives. They just don’t get it with the stimulus.
Holland, Mich., where Mr. Obama visits Thursday, has seen a big infusion of cash from the president’s economic stimulus plan: hundreds of millions of dollars for new automotive battery plants, tens of millions for schools, as well as millions more for housing, small businesses, university research and transportation.
Yet many in the region of 260,000 people, struggling with 12% unemployment, are skeptical the federal spending has made an impact.
“I wish he’d save his money and not come to Western Michigan,” said Becky DeWind, co-owner of a company that received nearly $95,000 in stimulus money to neutralize radioactive contamination in groundwater—her only U.S. business in a year. “They were just swiping a Chinese charge card for it anyway, and my kid’s got to pick up the tab.”
See? They just aren’t seeing the benefits of all that stimulus cash, even when it’s right before their eyes!
“I just don’t know if people are seeing it yet as fully as I’m seeing it,” said Michigan Gov. Jennifer Granholm, a Democrat, referring to effects from the stimulus.
Actually, Ms. DeWind is seeing it more fully–too fully. She’s not only seeing the immediate, visible benefits of the spending; she’s also looking ahead at how the bill will get paid. Ms. DeWind’s problem is that she isn’t appreciating the stimulus through the eyes of a wastrel, as someone happy to get the cheese if her kids are picking up the tab.
“This is one instance where you can see job creating coming from it, but again…at what cost?” said Republican Jay Riemersma, a former pro-football player who is running for Mr. Hoekstra’s House seat. “People don’t want government stimulus and government spending…In their mind we’re mortgaging their future and their grandchildren’s future.”
Of course, Ms. DeWind and Mr. Riemersma are not entirely correct. They are overstating their case. Their kids and grandkids are on the hook for only a portion of those sums spent on her particular business or community. Really, it’s other people’s kids who will have to pick up the rest. So even Ms. DeWind and Mr. Riemersma are not seeing things as fully as possible. They aren’t just missing the wastrel view of things, they’re also missing the thieving mentality needed to fully embrace the stimulus.
So, what are the Democrats doing to combat this deficient view?
Faced with such opinions, the White House and Democrats say they must keep pressing their points—one town and one project at a time.
This, of course, misses the point. That’s the strategy you follow if the benefits of the stimulus were invisible to these people. That’s the strategy assuming these people are too stupid to see what’s right before their eyes. Wrong strategy. They see the benefits, but they also see the costs.
“Sometimes you go into a conversation knowing someone’s going to come out with a certain perspective, no matter what you put before them,” Gov. Granholm said, expressing frustration. “You’re not going to be able to resolve that in one session.”
True enough, Jen. True enough.
Posted by Marc Hodak on July 12, 2010 under Practical definitions |
Let’s look at how the term is used by John Walke, clean-air director at the Natural Resources Defense Council:
“The acid-rain market continues to be relevant to the debate over CO2 because it is a successful model.”
This quote finished off an article about the collapse of the acid-rain market:
The acid-rain market has been considered a success, helping to reduce sulfur-dioxide emissions by half. Permits to emit sulfur had once traded for $1,600 a ton.
But in 2008, in response to lawsuits filed by a handful of utilities and North Carolina, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the EPA had overstepped its authority… Prices of allowances fell in response, and trading dwindled.
In response to the ruling, prices for the pollution allowances plunged to $130 a ton. Utilities held off on projects to clean up their plants…
Last week, the EPA issued new rules to comply with the court’s decision. The new program will limit the use of the market and instead require most of the emission reductions to come from changes at the plants themselves. And millions of allowances that utilities now hold can’t be used under the new program, which will issue its own allowances.
“It really feels like prices are going to zero quickly,” says Peter Zaborowsky, a managing director of Evolution Markets Inc., a White Plains, N.Y.-based provider of environmental brokerage services for utilities and investors. Allowances traded at times at less than $3 last week…
The market’s collapse shows how vulnerable market-based approaches to reducing air pollution are to government actions. That could scare off investors, who won’t commit to a market where the rules can change at any minute.
So, that’s one definition of “successful.” Another player in the acid rain market has another take:
“It is tragic,” says Gary Hart, an analyst at ICAP Energy LLC based in Birmingham, Ala., who has worked on environmental markets for two decades. “It is something that worked so well.”
Until it didn’t.
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 under Politics |
From today’s news, regarding how far down the income scale that tax increases are going to hit:
Sen. Byron Dorgan, D-N.D., who chairs the Senate Democratic Policy Committee, said he didn’t think there was “any magic” in $250,000. Sen. Dianne Feinstein, D-Calif., noted “you could go lower … why not $200,000? With the debt and deficit we have, you can’t make promises to people.”
Se. Feinstein, who voted for Medicare expansion and ObamaCare, did not intend irony.
Posted by Marc Hodak on under Economics, Patterns without intention |
The first approach is counting on government to do it from the center, as reported a few weeks back:
Don’t laugh, but Uncle Sam wants to teach you how to manage your money.
Tucked into the new financial-overhaul bill that Congress is working to finish is a new Office of Financial Literacy to help consumers learn about savings, debt and credit scores.
There is an obvious irony in a debt-laden, budget-challenged government offering financial education. But there is a deeper problem: While nearly everyone agrees that Americans of all ages and income levels could be more financially astute, no one has a good plan for making it happen.
(Raising my hand.) Oh, I have a great idea! Choose me! Choose me!
Why not just ask all those government run schools to teach financial literacy alongside reading, writing, and math, and before inorganic chemistry and trigonometry. If a school really wants to go whole hog, they have only to look at a great example of what works.
