Posted by Marc Hodak on February 16, 2009 under Executive compensation, Politics, Stupid laws | 
There are so many wonderful features of the executive compensation provisions of the new gigatera-spending law that I have to post them one at a time to avoid TLDR from my fans. One of my favorites is the effective elimination of pay-for-performance as a viable basis for rewarding employees.
Actually, the law reads “…each TARP recipient shall be subject to…a prohibition on any compensation plan that would encourage manipulation of the reported earnings of such TARP recipient to enhance the compensation of any of its employees.”
Let’s see if we can get this straight; in golf, the score is the number of strokes one takes to get the ball in the cup. Does compensating one based on this standard encourage cheating? How could it not? So, if golf were under TARP, the number of strokes would be forbidden from being used as a standard for rewarding any player. Under TARP, film talent would be forbidden from getting compensation based on net profit (a.k.a. monkey points, a notoriously manipulable figure). Under TARP, paying patients based on the care provided would be illegal.
I could go on, but the bottom line is that any bottom line serving as a basis for pay is a bottom line begging to be manipulated. An incentive to perform is indistinguishable from an incentive to cheat.
The tightest interpretation of this rule would imply that a company can’t use GAAP earnings as a basis for pay-for-performance, which would be bad enough. But any driver of GAAP earnings–revenue, cost control, inventory turns, etc.–could easily fall under the purview of this law.
So, TARP recipients be warned: pay-for-performance is now illegal.
Posted by Marc Hodak on February 15, 2009 under Executive compensation, Politics, Stupid laws |
…to leave the TARP program as soon as possible.
And Obama is not a happy camper. The bill that finally passed Congress yesterday included a couple of items that his advisors neither asked for nor wanted. They would have been OK with the restrictions on “unnecessary and excessive risks.” They were fine with the clawbacks and the elimination of golden parachutes. They were happy about the limits on corporate jets and office redecoration, and the imposition of “Say on Pay.” But the bonus limits caught them by surprise.
Basically, no officer can get a bonus that exceeds half of his or her salary, and that bonus can only be in the form of stock that doesn’t vest as long as the firm remains on TARP. So, Vik Pandit, who has sworn to only take $1 in salary now has a bonus opportunity of 50 cents. That will lend a whole new meaning to “fighting for that extra penny” at the end of each quarter. The bill nominally imposes these limits on up to the top 20 “most highly-compensated employees” (on top of the five “senior officers”).
Now, here is where having a logic- and math-challenged Congress really begins to hurt. Read more of this article »
Posted by Marc Hodak on February 13, 2009 under Executive compensation |
With proxy season just a few weeks away, all eyes will be on executive compensation. Different people look for different things from these disclosures.
People like me, shareholder advisors and analysts, care about materiality and incentives. Are we attracting the right people? Are corporate funds being arbitrarily siphoned off by the management? Based on the structure of variable compensation, what exactly management is being paid to do? These are literally million dollar questions.
Other people, like many critics and journalists, are much more curious about the $100,000 questions. Did the CEO use a corporate jet for personal travel? Did they have a car and driver chauffeuring them around? They want to know about the perks. The smallest minds will focus on the smallest numbers, what we call the $10,000 questions: Did the firm pay for the CEO’s tax preparation? Will it pay for their home security? Will it pay for their umbrella stand or shower curtains?
Many critics justify their obsession with the small numbers with what may be called the “window theory” of disclosure, claiming that the little things the boards gives away is a window on how they govern the firm. Are they tough with the CEO? Do they know how to say “No” when he asks to use the corporate jet to ferry his pets?
There is no evidence at all in the literature that the level of perks is correlated with how well the shareholders fare. In fact, perks may be a very cost effective form of compensation. Manhattan has a long history of people being able to be bought with trinkets.
Certain wealthy people will value a company-provided car and driver much more than they might an extra hundred thousand dollars. Key executives may ascribe a much higher value to perks for the same reason that ordinary people are pissed off by them.
Also, corporate expenditures that have a plausible benefit to the firm but can also enhance the life of their executives can be very tax-advantaged form of compensation, especially given the tax penalties imposed on firms for paying their top executives.
Like everyone else, the populist in me wonders why someone making $6.2 million a year can’t pay for their own damn country club membership. But the shareholder advisor in me doesn’t look forward to the day when it’s just all about the bucks because we can no longer bribe talented executives with trinkets. These people will usually win on the pure dollars argument.
Posted by Marc Hodak on February 12, 2009 under Executive compensation |
Bank of America had announced a deferral program for their IB bonuses this year that included stretching out payment over the next four three years.
So, BofA got bankers to work for relatively low salaries with the promise of potentially significant bonuses (the norm in investment banking). The IBs had a crappy year, so their bonuses are down by, like, 80 percent. Fair enough. Now, they’re told that their bonuses, such as they are, won’t actually get paid this year. And, they aren’t actually vested in the payout–if they leave, they forfeit them. And that instead of getting cash, they’ll be getting 30 percent of their bonus in equity. Boy, they’ll be burning the candles on both ends for that one!
Maybe BofA’s reasoning was something along the lines of, “Well, we accelerated the bonuses for Merrill employees, so if were radically defer the bonuses for our other employees, maybe the public will consider us even, you know, on average.”
Maybe this new policy led to this sign?
HT: The ever-fabulous Dealbreaker
Update: BAC apparently reconsidered, and made the deferrals slightly less back-ended (no pun intended)
Posted by Marc Hodak on under Self-promotion |
I posted new paper, “The Earnings Game,” two weeks ago on SSRN. Actually, this ‘paper’ is an interactive case designed to reinforced corporate governance lessons around disclosure.
It places participants in various roles with certain incentives and constraints, and allows them to interact in a manner consistent with their respective motivations. While this case necessarily simplifies the relationship between corporate management and investment analysts, it evokes both the relevant behaviors and their emotional content in the management and evaluation of companies with respect to their earnings.
So, students get a visceral as well as intellectual understanding of what disclosure means. This has been a popular teaching tool for the last several years in my classes at NYU and USG (in Switzerland).
This paper just made Top Ten downloads in the Management Research Network case series.
Posted by Marc Hodak on February 11, 2009 under Collectivist instinct, Irrationality, Politics |
Today was Circus Day, when “Wall Street Titans” were thrown to the lions in Congress.
First, we hear from Massachusetts Democratic Rep. Michael Capuano: “America doesn’t trust you anymore.” True enough, but rather a strange critique coming from a Congressman.
Capuano also let go with the following rant: “You come to us today on your bicycles after buying Girl Scout cookies and helping out Mother Theresa and telling us, ‘We’re sorry, we didn’t mean it, we won’t do it again, trust us.’ Well, I have some people in my constituency that actually robbed some of your banks and they say the same thing.”
Awesome.
Read more of this article »
Posted by Marc Hodak on February 10, 2009 under Politics |
My theory of the failed Bush presidency is pretty simple. Bush spent all his political capital on tax cuts and Iraq. The tax cuts were nice, except that they were accompanied by higher spending. I’m sure Bush didn’t personally care for most of that spending, but in order to maintain support for his war, he put away his veto pen. So, in the end, the cost of the war was not just defense appropriations, but also cash for wood use research and bridges to nowhere.
Obama now realizes that this spending stimulus bill MUST PASS. His nascent presidency depends on it. He will sign anything that reaches his desk, no matter what it costs, no matter how imperfect.
He may end up having to explain why, after spending four times on the recovery what Bush spent on Iraq to stop WMD, we still can’t find any signs of one.
Posted by Marc Hodak on February 9, 2009 under Practical definitions |
Bi-partisan: Democrats buying off Republicans in order to pass something that almost anyone else would consider a bad deal.
Posted by Marc Hodak on under Executive compensation, Politics |
Carly Fiorina, who collected $21 million on her way out of HP to the outrage of many critics, starts a column by saying, “Americans are outraged over excessive CEO pay and perks. That outrage is justified, particularly when American taxpayers are footing the bill.”
Her answer, more transparency because, you know, we don’t yet have enough disclosure rules on executive pay, and say on pay. She also believes that CEOs should accept responsiblity for failure, unless, I suppose, the company turns around after their departure.
There’s a reason that this monograph appeared in CNN’s “Politics.com.”
Posted by Marc Hodak on February 8, 2009 under Executive compensation |
Man, I bet NYU colleague Roy Smith is stewing about that one. He wrote a terrific article explaining that you can’t argue in favor of pay-for-performance on Wall Street, then scrap its bonus system altogether, if only for senior managers. Roy doesn’t use the word “greed” anywhere in the article, yet the WSJ editors entitled his piece “Greed is Good.” Unfortunately, us writers have no say in the inflammatory headlines they give to our articles in order to sell their papers.
Anyway, here is a great insight offered by Roy, who himself was once a Goldman partner:
Henry Paulson, when he was CEO of Goldman Sachs, once remarked that Wall Street was like other businesses, where 80% of the profits were provided by 20% of the people, but the 20% changed a lot from year to year and market to market. You had to pay everyone well because you never knew what next year would bring, and because there was always someone trying to poach your best trained people, whom you didn’t want to lose even if they were not superstars.
In other words, if you have someone very talented working for you, someone who can make your firm tens or millions or hundreds of millions (or more) in a good year, then even if this wasn’t a good year for them, you may still want to pay to keep them around. It might not look good to a casual outsider, but you’d be a fool not to.
This insight is followed by my favorite line in his piece:
Warren Buffett, when he was an investor in Salomon Brothers in the late 1980s, once noted that he wasn’t sure why anyone wanted to be an investor in a business where management took out half the revenues before shareholders got anything. But he recently invested $5 billion in Goldman Sachs, so he must have gotten over the problem.
The point being that when smart people see what’s really going on, they understand how and why the situation has evolved the way it has, and can better appreciate how radical remedies may cause far more problems than they solve. Maybe that’s why the closer one gets to a subject, the more conservatively they tend to view it. I have seen this transformation many times (including with myself).
