Posted by Marc Hodak on February 3, 2010 under Invisible trade-offs, Regulation without regulators | 
So, Toyota, builder of one of the most dependable machines in history, is being pummeled in the press for a quality problem that can’t quite be isolated. The U.S. government, which is constitutionally incapable of keeping its nose out of other people’s business, is not content to let the horror of bad publicity and Toyota’s legendary engineering do the job of righting things–the politicians have to pile on:
“This is very serious,” (Transportation Secretary) LaHood said at a breakfast with reporters in Washington. “After I talk with (Toyota’s CEO), they’ll get it. We’re going to keep the pressure on.”
Mr. LaHood said Transportation Department officials flew to Japan in December to meet with Toyota executives and remind the company “about its legal obligations.” The agency, he said, “followed up with a meeting at DOT headquarters in January to insist they address the accelerator pedal issue.”
Because, if the senior U.S. transportation bureaucrat didn’t tell them to do it, Toyota would gladly continue allowing the quality issue to fester, destroying seven decades of branding as the highest quality car manufacturer in the world, and killing off customers as an added bonus.
But there is, no doubt, more to this spectacle than meets the eye.
Read more of this article »
Posted by Marc Hodak on February 2, 2010 under Self-promotion |
As I ramp up my quest for gurudom (sp?), I’ve been giving more and more talks. A young lady came up to me after my last one, and said I reminded her of one of her very favorite professors, a visiting lecturer from GMU (she went to Georgetown). Russ, Alex, et al, you’re on notice. Tyler, you’re still safe, for now. I have nothing to say about Mexican folk art.
Posted by Marc Hodak on under Executive compensation, Self-promotion |
Bulletin: If you are a public corporation, and you are still using Towers or Mercer as your comp consultant, you are now officially screwed. You are exposing yourself to all manner of legitimate shareholder concerns, and all the attendant publicity.
That is the real message behind Hewitt’s announcement to spin off its executive compensation practice from the rest of its HR consulting business. Hewitt has decided that they don’t want to deal with explaining to increasingly defensive boards how getting $100,000 for advising them on senior management pay is not a conflict with their selling that management $10 million worth of other HR services.
This was probably an easier decision for Hewitt than it would be for Towers or Mercer since Hewitt was not a particularly big player in the executive comp area. All the same, the biggest “in” you can have with a company to whom you are selling your services is a relationship with top management, which executive comp consulting certainly gives you. It’s a difficult relationship to spin off. Hewitt must have determined that, at this point, that relationship was more problematic than it was helpful.
You know Hewitt didn’t make this split out of a lofty concern for governance principles. This is being driven by an emerging consciousness among boards that this is a conflict that no “Chinese walls” can overcome. Boards need excellent, independent compensation advice.
Posted by Marc Hodak on February 1, 2010 under Executive compensation, Invisible trade-offs, Reporting on pay |
The headline is: Bank pay gets boost on the sly.
While the perk angers some shareholders, the reality is that executives at banks and other large companies routinely collect dividends on shares they don’t own.
Let me guess which shareholders:
“People at places like Goldman Sachs are going to reap windfalls in dividends from stocks they haven’t earned yet,” says Tony Daley, an economist at the Communications Workers of America.
The union fought similar payouts at General Electric’s 2007 annual meeting after CEO Jeffrey Immelt was paid $1.3 million in dividends—equal to 40% of his salary—on shares he didn’t own. It lost.
“It makes no sense to pay people dividends on shares they don’t own,” Mr. Daley says. “Shareholders should be outraged.”
No sense? How about this: if management is awarded beaucoup restricted shares, which by definition they can’t collect for a time, their fond hope is for an appreciation of those shares until they vest. And the one lever they most directly control in that appreciation is dividends. Dollar for dollar, the less dividends they pay out, the higher the shares will go. Soooo, if those communications workers prefer dividends, they should push for the holders of restricted stock to get those dividends, too. To eliminate the perverse incentive to chop or hold back on dividends. Which is why boards began awarding dividends on unvested equity, folks.
That part of the rationale was not mentioned in the article. They didn’t ask me.
Posted by Marc Hodak on January 27, 2010 under Executive compensation, Reporting on pay |
…or else we’ll tax ’em!
British officials have blessed the shift to higher salaries, saying they help rein in risky decision-making. But the salary increases must be permanent, or they will be taxed like a bonus. “A significant, one-off leap in salary is something we’ll be keeping an eye on,” says Paul Franklin, a spokesman for the U.K.’s tax service.
Their concern about bankers salaries is kind of touching, don’t you think. It contrasts to the obsession in the rest of this article about how banks keep trying to get more money into the pockets of their employees.
Posted by Marc Hodak on January 26, 2010 under Executive compensation, Politics, Scandal |
Last November, the Government Accountability Office released a report titled “PRIVATE PENSIONS: Sponsors of 10 Underfunded Plans Paid Executives Approximately $350 Million in Compensation Shortly Before Termination.” At the time, I was wondering: Gee, how did they pick those ten companies?
Not really. Anyone familiar with politics knows exactly what the criteria was–it was blazoned on the title of the report. The more interesting question is: What exactly is the link between unfunded pensions and executive pay that the government would consider it worth highlighting in a few hundred pounds of wasted paper?
It’s a weak link. Benefits consultant Michael Barry snaps it with some hard sense:
Obviously, out in the political atmosphere, these two things—PBGC liability and executive compensation—are connected somehow, but is there a logic to that connection?
Certainly, you’ve got to pay an executive something, and who is to say that in these circumstances this $350 million wasn’t the right amount? It’s clear that there are, anecdotally, instances that could only be called grotesque abuse. Also without doubt, there are companies out there (perhaps not these 10, which apparently all went bankrupt) with executives that are underpaid. In real life, if you want to win, you’re going to have to pay for talent.
Moreover, why exactly is executive compensation the PBGC’s problem? Couldn’t you make the same argument about corporate charitable giving? Every dollar of matching grants that these companies paid the United Way could have gone to fund the pension plan. Why pick on executives? Why not pick on the company day-care center?
Or, why not pick on regular employees? Surely there are some rank-and-file employees out there who are overpaid. According to The Wall Street Journal, the UAW jobs bank program cost U.S. automakers $1.5 billion in one year—2006. These were “employees” getting paid not to work.
Of course, there may be perfectly reasonable reasons for giving to the United Way, or providing a day-care center, or providing a jobs bank. There also may be perfectly reasonable reasons for paying executives managing companies through difficult times big salaries and bonuses. Or there may not. However, the government—is there any money being wasted on government employees I wonder?—is in no position to tell which is which.
That last point bears repeating. What standard does an outsider use to determine if a company is spending too much or too little on anything, especially something as difficult to value as senior talent?
Barry’s conclusion is not something we see in the mainstream media:
The point being—if it’s not obvious—that there is no necessary link between executive pay and unfunded benefits. The idea that there is, is simply an appeal to envy—which is, you know, a base instinct. (Some of us actually think it’s a sin.)
And some of us think envy is every bit as bad a sin as greed–much worse if it has state force behind it.
Posted by Marc Hodak on January 25, 2010 under Unintended consequences |
“There oughta be a law” is the religious mantra of statists. But people habitually understate the complexity that even the simplest laws can create. The WSJ provides an object lesson in this:
The Washington, D.C., bag tax seemed simple enough: Beginning Jan. 1, grocery stores in the district would charge five cents a bag, plastic or paper. The goal was to cut down on waste and raise money to clean up the polluted Anacostia River.
But nearly a month into the program, it’s turning out that government is having trouble legislating its way out of a plastic bag
This article highlights one of the universal, and universally ignored, facts about regulation. Regulations are force. If you fail to comply with a regulation, you are subject to fines or sanctions, and ultimately confiscation or imprisonment. Therefore, regulations must make fine distinctions about what is being taxed or proscribed. You have to translate “taxing paper bags at food stores” into something that will, in every case, separate legal from illegal behavior. It’s never as simple at it sounds:
The law specifically excludes bags that “package bulk items, such as fruit, vegetables, nuts, grains, candy, or small hardware items.” It also excludes those that “contain or wrap frozen foods, meat, or fish…flowers, potted plants, or other items where dampness may be a problem.” Other exceptions include unwrapped prepared foods and bakery goods, as well as bags provided by pharmacists to contain prescription drugs, newspaper bags, door-hanger bags and laundry dry-cleaning bags. Also tax free: “Bags sold in packages containing multiple bags intended for use as garbage, pet waste, or yard waste bags.”
By law, a restaurant patron who requests a doggie bag doesn’t have to pay a nickel—as long as the bag is paper, not plastic. “When you go to a nice restaurant and you want a doggie bag, you may have already cleared the bill,” Mr. Wells said. “You don’t want to go through this whole nickel kind of relationship.”
A takeout sandwich shop, however, has to charge unless it has chairs and tables, in which case it doesn’t have to charge as long as the bags are paper, 100% recyclable, made of at least 40% post-consumer recycled content and say something like “Please Recycle This Bag” in highly visible type on the outside of the bag. Banned altogether at food and drink establishments: plastic bags that can’t be recycled (the opaque plastic kind).
There are many other exceptions and clarifications, and they continue to grow because the line of demarcation between what is and isn’t taxed is not as black and white as the legislators originally thought. It never is. The point is that something as simple as taxing bags, something legislators can deal with by some wordsmith and a show of hands, can turn into a bureaucratic morass for everyone else involved.
Politics & Prose, a well-known local bookstore, sold one food item—mints—including a variety that came in a tin with Barack Obama’s likeness. To be safe, and avoid charging every customer who bought a book five cents a bag, the store dropped the mints. “It’s all been a little bit unclear,” says Tracey Filar Atwood, general manager. “Those items are not really at the core of our business. It was a very easy decision to make not to stock them,” she says.
For many other stores, the decision is not so easy. But this “simple” tax will cause a major realignment of commerce into stores that sell food versus those that sell none at all. Nobody pretends that this realignment would be of the least benefit to anyone.
If a social engineering project as simple as a 5 cent tax on bags can create this much confusion, bureaucracy, and pointless market realignment, consider what havoc a massive experiment like cap and trade or health care reform would wreak.
Posted by Marc Hodak on under Irrationality, Politics, Scandal |
So, you offered your investment managers an extra 50 cents for every $1,000 they make you as an incentive to better performance, i.e., more money for you. Then you got the best performing investment management in the whole industry. They earned you an extra $6,000, for which they are entitled to a bonus of $3. So, now you:
A) Increase the incentive to 60 cents–maybe the extra incentive will motivate even better performance going forward;
B) Pat your managers on the back, and keep the existing incentive in place. No need to get greedy;
C) Ridicule your management for being paid a BONUS, calling it “unconscionable,” try to take away what they earned, and cancel the whole incentive program, and their cost-of-living increases to boot.
The state of Missouri chose C.
The title of this post is attributed to Gary Findlay, head of the investment management team that had performed so well, only to be berated for it by his ignorant, spineless bosses.
Addendum: My wife considered the last comment unusually harsh for a sober blog. I am willing to admit that I overstated my critique of Findlay’s bosses. He has at least one who is not ignorant or spineless.
“By any objective standard, MOSERS is the best fund in the country,” said Senator Jason Crowell, a Cape Girardeau Republican who cast the lone dissenting board vote, according to the AP. He said the board should not change its policy based on “newspaper articles and political speeches,” and said taxpayers could ultimately lose money if the system’s rate of return fell because talented staffers left.
Thanks, Sen. Crowell, for standing up for reason against the thankless mob.
Posted by Marc Hodak on January 14, 2010 under Politics, Reporting on pay |
Could a so-called news report begin with any louder bias than this?
The fat cats were supposed to get their comeuppance.
If we’re going to assume that the market for talent doesn’t exist, which this entire article does, then, sure, I can see the problem in banks refusing to simply cut back on what they pay their people. But why not assume that the market for real estate is arbitrary, too, and lament the fact that banks are still paying almost the same rents as they did in 2007? Or that the market for loans is arbitrary, and lament the fact that banks could simply charge less interest to everyone?
One thing that apparently doesn’t change is the market for envy, which is counted in circulation and votes. If you can tap into that ever more profitably, you’re considered quite a fine fellow.
Posted by Marc Hodak on January 11, 2010 under Politics |
The Central Laborers Pension Fund, an Illinois pension, is suing Goldman Sachs over the approximately $20 billion that the firm is looking to pay out in bonuses for 2009. Their rationale:
Defendants’ conduct shows that, even though Goldman is supposedly owned by public shareholders, defendants have scant regard for the interests of those shareholders.
This suit shows that the Illinois pension fund has scant regard for the evidence to the contrary regarding how Goldman Sachs’ takes care of its shareholders. Before 2008, in a decade of market outperformance, the firm paid out nearly 50 percent of net revenues in a combination of cash and shares to its employees, most of it in so-called bonuses. In 2008, when Goldman Sachs underperformed the entire financial services sector by about 10 percentage points, they paid their senior executives zero. In 2009, when they outperformed the financial services sector by nearly 100 percentage points, they intend to pay out 40 percent of net revenues in bonuses, all of it in the form of restricted shares.
Given these facts, it’s hard to see this lawsuit as anything but a waste of money by this pension fund’s leadership, who appear to be using their pensioners’ cash to indulge in political grandstanding. Who is breaching their fiduciary responsibility here?
