Executive compensation

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coghlan
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Post by coghlan »

Springbok wrote: When corporations cannot govern themselves, then governments have to step in and protect the public.
Looks like this is starting: http://ca.news.finance.yahoo.com/s/2210 ... aries.html

This stuff of CEOs and board members paying themselves 10's/100's of millions of dollars has simply got to stop. They get this money, not because they are worth it, but because the money is there for the taking.
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Greed

Post by Dejavu »

This link also reports on the U.S. governments attempts to "control " wages and bonuses paid to the finnancial firms that have yet to repay their taxpayer loans.
http://www.cbc.ca/money/story/2009/10/2 ... ml?ref=rss
The last sentence says, qoute
" Goldman Sachs to pay out a record $17 BILLION u.s. in wages and bonuses this year!!!!!
Where the hell do they get the nerve?
I am losing faith in the system.
GIC ladder looking better all the time.
Dejavu.
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Re: Greed

Post by deaddog »

Dejavu wrote: Where the hell do they get the nerve?
I am losing faith in the system.
GIC ladder looking better all the time.
Dejavu.
Let's not forget that these are performance bonuses. I think that GS pay something like 40% of their profit to employees.
The people who bring in the most business get the biggest bonuses.

By limiting exec pay won't the gov't be encouraging the best people to leave for greener pastures.
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Re: Greed

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deaddog wrote:
Dejavu wrote: Where the hell do they get the nerve?
I am losing faith in the system.
GIC ladder looking better all the time.
Dejavu.
Let's not forget that these are performance bonuses. I think that GS pay something like 40% of their profit to employees.
The people who bring in the most business get the biggest bonuses.

By limiting exec pay won't the gov't be encouraging the best people to leave for greener pastures.
For clarification: I think if the clients of GS dont mind paying the fees imposed, knowing that these huge bonuses are a likely outcome of those fees, so be it. Its the sheer gaul of continuing , NO, increasing these PERFORMANCE BONUSES when the taxpayer saved their collective arse from the exorbitant exceses of 2007. How can they justify performance bonuses when they all but went bankrupt. What kind of message is that?
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Re: Greed

Post by brucecohen »

deaddog wrote: By limiting exec pay won't the gov't be encouraging the best people to leave for greener pastures.
1. What greener pastures? Many, though not all, of those affected play key roles in destroying their companies. Without the govt's rescue, there would be no debate now about comp because they would not have jobs. What's the marketability of a guy who drove his company to the very brink of failure?

2. You've assumed there are no smart, younger underlings chomping at the bit to take their place.

3. Govt is not limiting exec pay. It's limiting exec salary -- the amount received for simply showing up. Companies are free to pay whatever they want in stock that's locked up for five years. If these guys are as talented as they and their defenders claim, they should be able to reap windfall gains when those shares are sold. In the meantime, their interests will now be very much aligned with those of the shareholders who employ them.
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Re: Greed

Post by Dejavu »

brucecohen wrote: In the meantime, their interests will now be very much aligned with those of the shareholders who employ them.
Bruce, I would like to very much believe that this is the case. In fact identifying companies whos management has interests closely aligned with shareholders should be an investors dream.
However I remain very sceptical that anything has changed on Wall St,
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Re: Greed

Post by AltaRed »

Dejavu wrote:Bruce, I would like to very much believe that this is the case. In fact identifying companies whos management has interests closely aligned with shareholders should be an investors dream.
However I remain very sceptical that anything has changed on Wall St,
Dejavu.
I remain skeptical too, but the rules have been changed to make the 'bonus money' not available for longer periods of time, rather than a <12month adrenalin rush. That was the objective of stock options with 5+ year vesting periods not so long ago. It is not that hard to align management interests with that of the shareholders if compensation committees have the balls to do so.
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Re: Greed

Post by brucecohen »

Dejavu wrote: However I remain very sceptical that anything has changed on Wall St,
Dejavu.
You should be. As Elizabeth Warren keeps reminding us, hardly anything has changed on Wall Street.

No doubt Wall Streeters will work hard at getting around the new provisions. It remains to be seen how successful they'll be. But, at this point, a guy who will receive 80-90% or more of his comp in stock that must be held for five years will be more aligned with shareholders than he ever was before.
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Post by Dejavu »

Thx. to AltaRed and Bruce for your responses to my rant. I have just come in from my nightly walk, so between excersising and reading your insightful responses I dont feel angry anymore and a little more hopeful and thats a good thing. Dejavu.
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Re: Greed

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brucecohen wrote: 1. What greener pastures? Many, though not all, of those affected play key roles in destroying their companies. Without the govt's rescue, there would be no debate now about comp because they would not have jobs. What's the marketability of a guy who drove his company to the very brink of failure?

2. You've assumed there are no smart, younger underlings chomping at the bit to take their place.

3. Govt is not limiting exec pay. It's limiting exec salary -- the amount received for simply showing up. Companies are free to pay whatever they want in stock that's locked up for five years. If these guys are as talented as they and their defenders claim, they should be able to reap windfall gains when those shares are sold. In the meantime, their interests will now be very much aligned with those of the shareholders who employ them.
http://www.washingtonpost.com/wp-dyn/co ... 02414.html
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Re: Greed

Post by Wallace »

Rather than dispelling his five "myths", Smith simply pretends they aren't there - a very tired argument for the status quo.

Executives pull in these obcene multi-million dollar figures for only one reason - they can. And as long as boards and shareholders allow them to do so, they will.
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Re: Greed

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Wallace wrote:Executives pull in these obcene multi-million dollar figures for only one reason - they can. And as long as boards and shareholders allow them to do so, they will.
Precisely.

And, IMHO, government regulation has a very limited role. It can give shareholders (and perhaps boards) a friendlier environment in which they can better control management. But government regulation cannot substitute for shareholders' inaction.

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Re: Greed

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Wallace wrote:
Executives pull in these obcene multi-million dollar figures for only one reason - they can. And as long as boards and shareholders allow them to do so, they will.
I guess it would be tough to make a case that these guys making the big bucks are the best in the business.

I would assume that on Wall Street as in sports, acting or writing fiction that the cream rises to the top. In other words they earn what they make.

In order to lure the best and the brightest to your firm, the board has to offer the best pay package, along with all the perks. You can’t have a winning sports team with sub par players and you probably won’t survive in business very long either.

Yabut these guys almost went bankrupt. Yabut these guys are still in business because these guys had the politicians in their back pocket. Maybe that’s why they get the big bucks.

Am I beginning to sound like Blonde? :wink:
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Re: Greed

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deaddog wrote:I would assume that on Wall Street as in sports, acting or writing fiction that the cream rises to the top. In other words they earn what they make...
Not sure the the head to head comparisons are completely apt. I'd say sport compared to trading for a living is apt in that it's very much an "eat what you kill" activity so to speak. One however can write absolute dross ie Dan Brown and become a best seller dito acting and singing. At the same time talented artists of all stripes may wait tables and struggle to make a living. As for CEOs I'm inclined to lump them in with the likes of fund managers in that while they are all relatively bright it's difficult to devine skill from luck with respect to their success. To paraphrase Ken Dryden "It was easy to win the Vezina Trophy when you had the best team in hockey playing in front of you."
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Re: Greed

Post by brucecohen »

deaddog wrote: I would assume that on Wall Street as in sports, acting or writing fiction that the cream rises to the top. In other words they earn what they make.
Not a great analogy. In sports, acting and writing fiction performance and risk are both easily measured and the performer's activity has no delayed repercussions. For example, the team that hires a slugger knows precisely his number of career home runs and strike outs; players who hits lots of home runs also tend to strike out a lot. Once the game/season end, there is no shoe left to drop. Similarly, an actor is hired for a movie or stage run. The director and producers know his/her temperament and habits well beforehand. At the end of shooting for the movie or when the play closes, the actor is paid off and that's that. Much of the comp for those Wall Streeters affected by the pay cap was for one year's profits on risks that span several years, or even longer. Why should someone be paid millions in year-1 for a position or decision that goes bust in year-2 or 3?
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Post by WishingWealth »

ghariton: "But government regulation cannot substitute for shareholders' inaction. "

Gosh that's a nice fat wiggly worm. :wink:

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Post by brucecohen »

Slate.com points out (emphasis mine):
At most companies, bonuses are paid out of profits. No end-of-year profits, no bonuses. But on the island nation of Wall Street, they're paid out of revenues. Since the 1980s, notes Brad Hintz, an analyst at Sanford C. Bernstein, it's been the standard for half of revenues to be devoted to compensation. So long as these outfits were private partnerships, that practice didn't really matter to the rest of us. But since the 1990s, when investment banks went public, compensation has evolved into a zero-sum game between employees and shareholders. Guess who lost?
So, in other words, they don't "earn what they make." They're paid for generating business without regard to whether or not that business proves to be profitable.
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Re: Executive compensation

Post by Taggart »

Research study from CCPA - Canadian Centre for Policy Alternatives

January 4, 2010

A Soft Landing

Recession and Canada’s 100 Highest Paid CEOs

by Hugh Mackenzie
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Re: Executive compensation

Post by ghariton »

Taggart wrote:Research study from CCPA - Canadian Centre for Policy Alternatives

January 4, 2010

A Soft Landing

Recession and Canada’s 100 Highest Paid CEOs

by Hugh Mackenzie
I wonder what the analysis would look like if MacKenzie substituted the 100 highest paid professional athletes for the 100 highest paid CEOs. Similarly I wonder about the relationship between the athletes' compensation and the performance of their teams.

Perhaps the exercise could then be repeated, substituting singers and other movie stars. How does Celine Dion's compensation vary when the studio she is working for has a bad year?

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Re: Executive compensation

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ghariton wrote: I wonder what the analysis would look like if MacKenzie substituted the 100 highest paid professional athletes for the 100 highest paid CEOs. Similarly I wonder about the relationship between the athletes' compensation and the performance of their teams.

Perhaps the exercise could then be repeated, substituting singers and other movie stars. How does Celine Dion's compensation vary when the studio she is working for has a bad year?

George
I didn't read the paper; I never read the CCPA's stuff. But comparing CEO compensation to that of athletes and entertainers is a mug's game.

First, the athlete/entertainer's success and failure is clearly measurable and attributable. Most sports are statistics-driven. Much the same for the entertainer. Celine is able to sell x records and fill y concert seats. Very few CEOs single-handedly affect the metrics normally used to judge a business. Even when a CEO generates on his/her own a winning/disastrous strategy, it's up to others to implement it. Athletes and entertainers would be more comparable to commissioned salespeople.

Second, the athlete/entertainer is paid for short-term performance. A golf tournament has a fixed life. The NHL has a set season. The entertainer's life is one of discrete projects. By contrast, in most cases the CEO is supposed to be building long-term value. (A turnaround would be the most notable exception.)

Third, there are no golden parachutes for athletes or entertainers. Nor are there stock options that can be repriced.

Fourth, athletes and entertainers are far less able to put lifestyle spending on the corporate tab. Solo athletes such as golf and tennis stars are self-employed, so it's their own money. Ditto for entertainers except members of bands and troupes. Athletes and entertainers who must work in teams get more or less whatever travel, food and lodging their colleagues get since efficiency rules when you're constantly on the road.

Fifth, most athletes have relatively short careers and carry substantial risk that even minor injury can materially affect their performance. Entertainers are generally less at risk, but still far more vulnerable than CEOs.

Sixth, every professional athlete's success is based on truly demonstrated talent. Ditto for many, though far from all, entertainers. What's the split between talent and political mastery in determining a CEO's success?

FWIW I'm currently reading Andrew Sorkin's bailout chronicle Too Big to Fail. Can't say he paints a particularly positive portrait of Wall Street's CEOs.
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Re: Executive compensation

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brucecohen wrote:First, the athlete/entertainer's success and failure is clearly measurable and attributable.
I was thinking of hockey, which is a team sport. Goals and assists are all very well, but cooperation and tem-building would seem to be important as well. But harder to quantify.
Second, the athlete/entertainer is paid for short-term performance.
As I understand it, both build brands. Those are relatively long-term assets, which can generate a very large portion of the athlete/entertainer's income.
Third, there are no golden parachutes for athletes or entertainers.
But there are large signing bonuses and multi-year or multi-event contracts. A large enough signing bonus must be amortized over a number of years, or the payer is out of pocket. Here, the golden-parachute is up front.
Fourth, athletes and entertainers are far less able to put lifestyle spending on the corporate tab.
I think that's relevant only for tax purposes. After-tax, what matters is the entire yearly compensation package, not its composition. As long as executive perqs are approved by the Board of Directors, they are a proper part of the compensation package.
Fifth, most athletes have relatively short careers and carry substantial risk that even minor injury can materially affect their performance. Entertainers are generally less at risk, but still far more vulnerable than CEOs.
I haven't looked up average CEO tenure lately, but I seem to remember that it has gotten quite short. Anyway, as far as I can see, this argument is irrelevant. All parties take into account their present and future prospects, including longevity, when they negotiate their compensation packages.
Sixth, every professional athlete's success is based on truly demonstrated talent. Ditto for many, though far from all, entertainers. What's the split between talent and political mastery in determining a CEO's success?
A nice question, and one which I don't have the quantitative tools to answer. But I get the impression that many celebrity entertainers are the beneficiaries of fads, huge PR campaigns, and occasionally a lot of covering up by the studios/agencies/studios. If's not immediately clear to me what talent, say, the Spice Girls had, to take one very well documented example of an agent-created success.

As for athletes, I don't know the role of puffery in the creation of stars. But rRemember, we are not talking of the presence of talent -- I assume it's necessary just to get on the team -- but of the edge that moves someone from $300,000 a year to $10 million a year.

Now let's look at a couple of other points. If a CEO has a positive impact - and I agree that this is hard to measure -- he or she will have created profits for investors, more and better jobs for workers, and better and cheaper products for many, many consumers. Most importantly, we look to the teams that CEOs appoint for innovation and productivity in our society. If they collectively fail, we will live lives that are less prosperous.

Compare that with someone whose contribution to society is put a small piece of rubber into a net (or into a hole on a green), or someone who can flash her tits more provocatively than other women. Who is contributing more to society, and who should be paid more?

Okay, I would agree that my last question can only be answered by the market. People are paid what they can command. But CEOs and star athletes and celebrity entertainers have this in common: They all have significant market power, in the sense that the demand for their specific services is very inelastic. They all exploit this market power, as we should expect them to do. What shall we do -- call the anti-trust authorities?

In passing, I would note that richly paying (or overpaying) a CEO should, in principle, motivate hundreds of thousands or youg people to enter and work hard in the business world. By contrast, richly paying hockey players or singers will only encopurage a whole bunch of young people to pursue careers in hockey, etc. Which would we prefer?
FWIW I'm currently reading Andrew Sorkin's bailout chronicle Too Big to Fail. Can't say he paints a particularly positive portrait of Wall Street's CEOs.
So we should look to golf players or actors to give us a positive role model.

Don't get me wrong. Of course there have been terrible abuses in CEO compensation. But these were not solely due to the greed of CEOs. Where were the Boards of Directors? (cronies of the CEO) Where were the activist shareholders? (free-riding -- let somebody else look at stuff like that) Where were the financial analysts? (they might not invite me to briefings with the CEO any more -- or they might ask a different firm to underwrite their next securities issue)

Most importantly, where were the government and the regulators? (in the pockets of the CEOs -- or, to be charitable, incompetent).

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Re: Executive compensation

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ghariton wrote: I was thinking of hockey, which is a team sport. Goals and assists are all very well, but cooperation and tem-building would seem to be important as well. But harder to quantify.
I don't follow hockey but guess that stats are kept on penalties, speed and stuff like that.
As I understand it, both build brands. Those are relatively long-term assets, which can generate a very large portion of the athlete/entertainer's income.
Brand revenue (endorsements) certainly build over time and can dwarf direct income -- see Tiger Woods. But it's the direct income that dominates for much/most of the playing career and its consistent performance at high/excellent levels that attracts the endorsements.
But there are large signing bonuses and multi-year or multi-event contracts. A large enough signing bonus must be amortized over a number of years, or the payer is out of pocket. Here, the golden-parachute is up front.
CEOs get signing bonuses too. So they're paid lavishly for both coming and going.
I think that's relevant only for tax purposes.
No, millions spent to renovate a CEO's office are millions the company can't spend on machinery or personnel to generate profits for the shareholders.
After-tax, what matters is the entire yearly compensation package, not its composition. As long as executive perqs are approved by the Board of Directors, they are a proper part of the compensation package.
You're assuming that directors responsibly monitor and consider such spending. See the lawsuit filed last year against Chesapeake Energy.
I haven't looked up average CEO tenure lately, but I seem to remember that it has gotten quite short.
I believe it has gotten short for those highly-paid CEOs who don't deliver. And when dumped by one company, they move to another. Without ability to coach or be a broadcast analyst, a physically impaired athlete has no alternative in his/her chosen field.

All parties take into account their present and future prospects, including longevity, when they negotiate their compensation packages. But, I believe, major corporation CEOs have substantially greater longevity and get paid substantially more in any year than professional athletes except for solo athletes, and solo athletes are self-employed. Similarly, all of the big-bucks entertainers are self-employed.
A nice question, and one which I don't have the quantitative tools to answer. But I get the impression that many celebrity entertainers are the beneficiaries of fads, huge PR campaigns, and occasionally a lot of covering up by the studios/agencies/studios. If's not immediately clear to me what talent, say, the Spice Girls had, to take one very well documented example of an agent-created success.
Agreed. That's why I qualified my statement about entertainers.
As for athletes, I don't know the role of puffery in the creation of stars. But rRemember, we are not talking of the presence of talent -- I assume it's necessary just to get on the team -- but of the edge that moves someone from $300,000 a year to $10 million a year.
I'm not a sports fan at all but don't see how puffery affects advancement. My understanding is that it's the stats. A CEO has many ways to spin failure and many others to blame. When a batter hits a home run or strikes out, that's transparent.
Now let's look at a couple of other points. If a CEO has a positive impact - and I agree that this is hard to measure -- he or she will have created profits for investors, more and better jobs for workers, and better and cheaper products for many, many consumers. Most importantly, we look to the teams that CEOs appoint for innovation and productivity in our society. If they collectively fail, we will live lives that are less prosperous.
Agreed.
Compare that with someone whose contribution to society is put a small piece of rubber into a net (or into a hole on a green), or someone who can flash her tits more provocatively than other women. Who is contributing more to society, and who should be paid more?
The athlete/entertainer isn't paid big bucks for putting a small piece of rubber into a net or flashing her tits. They're paid for their ability to fill seats, sell CDs, attract viewers to commercial TV broadcasts, and to push merchandise on behalf of corporate sponsors. That too creates profits for investors, more and better jobs for workers and more -- though not necessarily cheaper -- products for many, many consumers.
In passing, I would note that richly paying (or overpaying) a CEO should, in principle, motivate hundreds of thousands or youg people to enter and work hard in the business world. By contrast, richly paying hockey players or singers will only encopurage a whole bunch of young people to pursue careers in hockey, etc. Which would we prefer?
First, consider that the skills kids are supposed to learn in sports -- discipline, teamwork, achievement, etc -- are the very skills necessary for success as a CEO. Second, I'm not aware that there's a shortage of people striving to become CEOs. Third, many -- including our own Pitz -- have lamented that Wall Street's lavish compensation has attracted too many brilliant young people to non-productive financial engineering instead of productive real engineering.

That said, a number of black leaders -- including Obama -- have lamented that too many black kids are overly focused on professional sports, rather than education, as their way out of poverty. A totally valid concern.
So we should look to golf players or actors to give us a positive role model.
Not in terms of personal behavior. But they still perform the jobs they're supposed to perform. According to Sorkin's account, the Wall Streeters not only abdicated their responsibility to prudently assess and manage risk but then, with few exceptions, proved incapable of measuring the depth of the holes they had dug. Then, when directed by Paulson and Geithner to work together in developing and implementing private sector solutions, they failed again. Ultimately, again with few exceptions, they wound up as marionettes with Paulson pulling the strings. At least according to Sorkin. (And, if we believe Elizabeth Warren, their business conduct and strategies today are no different than they were before the crash.)
Don't get me wrong. Of course there have been terrible abuses in CEO compensation. But these were not solely due to the greed of CEOs. Where were the Boards of Directors? (cronies of the CEO)
Aye, there's the rub. And why any analogy between CEO and athlete comp fails. CEOs have benefited handsomely from a closed society. CEOs and directors are not only members of the same club culturally, but serve on each other's boards -- and even on each other's compensation committees.
Most importantly, where were the government and the regulators? (in the pockets of the CEOs -- or, to be charitable, incompetent).
Before TARP, what authority did regulators have over CEO comp? Notwithstanding that, I agree that too many are in thrall to CEOs and/or downright incompetent. And, of course, too many legislators are in hock to PACs funded by corporations and unions.

Unfortunately, lavish CEO comp is now a permanent fixture, deserved or not. I'm sure Mackenzie's paper pointed out that North American companies were more profitable years ago when there was a much smaller gap between the top of the house and the corporate median/average. But those days are gone and I don't see how they can be brought back.*

* IIRC US senior execs are paid much more than their foreign counterparts. As foreign entities such as sovereign wealth funds buy more of corporate America, I wonder if they might move to rein in executive comp.
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Re: Executive compensation

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Re: Executive compensation

Post by ghariton »

brucecohen wrote:Before TARP, what authority did regulators have over CEO comp?
Direct or indirect?

Let me give just one little example. Originally, granting of stock options weren't expensed when granted, i.e. they didn't show up on the income statement until exercised. CEOs liked it that way. The lack of transparency helped hide from investors (although not, presumably, from Directors) how much they were really getting.

FASB rightly considered this to be deceptive accounting, and in 1993 it voted unanimously to require companies to record stock options at fair value, when issued.

Corporations were furious. Their lobbyists persuaded Congress to hold hearings to condemn the FASB proposal. The charge was led by Senator Joe Lieberman. He intr4oduced legislation to bar the SEC from enforcing the stock-option rule. It would also strip FASB of authority by requiring the SEC to ratify every FASB recommendation. There was also an implicit threat that FASB itself could be terminated.

FASB backed down.

(All this is from Arthur Levitt's book, Take on the Street, pages 210 to 216. Levitt was Chair of the SEC at the time, and the book is something of a self-justification. But I think he is accurate on these matters.)

More generally, regulation created opportunities for CEOs to profit mightily from successful bets, while suffering few if any losses from unsuccessful ones. I believe that contributed significantly.

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Re: Executive compensation

Post by WishingWealth »

George:
More generally, regulation created opportunities for CEOs to profit mightily from successful bets, while suffering few if any losses from unsuccessful ones. I believe that contributed significantly.
The better part of your post is about some regulation that could have avoided a problem but it did not get passed.

Yet your conclusion is the excerpted quote above.
Aren't we a wee bit into obsession territory here? Or playing the devil advocate again? :wink:

BTW: You have mentioned many times the lack of involvement of the investors/public at large in the governance question. It's a bit disingenuous when you think that a person such as Bogle (just to name one) has tried for decades to clean up the mess that is, the take over of the corporations by the CEO & accomplices; and AFAIAC he has little to show for all that work he's done in that respect.

And many many thanks to you and Bruce for the long comments on the pros and cons in regards to that important issue.

WW
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