Executive compensation

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brucecohen
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Post by brucecohen »

Descartes wrote: However, you missed my main point: these morally outrageous executive compensations aren't really affecting the bottom line of the company
If the exec comp package is not affecting the company's bottom line, there's no reason to pay it. It's supposed to affect the bottom line -- positively. Unfortunately, a number of studies have found either no correlation or negative correlation between CEO comp and shareholder return. I don't know of any study in recent years that found positive correlation.

But the amount of the comp matters less than its structure. It's downright folly to have a comp program treat each year as a discrete performance period. Think Stan O'Neill and Merrill Lynch. Why not expose your company to undue risk when one year's bonus can support you for life? Would senior financial execs have been so eager to embrace mortgage securitzations and leveraged CDSs if most of their comp was based on multi-year periods covering a business cycle. I think not.
why do you care?
Because both shareholders and the economy in general are best served when business strives to create sustainable long-term value. Today's comp plans are structured to reward short-term thinking and even failure.
Last edited by brucecohen on 06 Apr 2009 19:16, edited 1 time in total.
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Descartes
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Post by Descartes »

Bylo Selhi wrote:
these morally outrageous executive compensations aren't really affecting the bottom line of the company so... why do you care?
Right. So Michael Sabia's 5 year tenure didn't affect BCE's bottom line and likewise had absolutely no impact on BCE's NAV :roll:
You are determined to misunderstand me :).

I said outrageous executive compensations not outrageous executives. :)

This is just my opinion, but I think people are angry about this simply because it seems unfair: "why should I scrimp and save when this poorly performing executive pulls in 50 million in bonus?"
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Post by Shakespeare »

I think people are angry about this simply because it seems unfair
How about being angry about it because it is money out of stockholder's (or taxpayer's if tax-deductable) pockets? "Unfair" puts des cartes before des horses. :wink:
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Post by Gus »

Shakespeare wrote: puts des cartes before des horses. :wink:
Drat, I was saving up a similar line to use to chastise Parvus if (if?) he was to go philosophically off-topic on a financial thread, in which case it would have been: Once again, Parvus, you're putting Descartes before the Bourse. :wink:
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Post by lilbit »

Revealing interview with the guy who wrote, "The Best Way to Rob a Bank is to Own One". http://www.pbs.org/moyers/journal/04032009/watch.html
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Descartes
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Post by Descartes »

Shakespeare wrote:
I think people are angry about this simply because it seems unfair
How about being angry about it because it is money out of stockholder's (or taxpayer's if tax-deductable) pockets? "Unfair" puts des cartes before des horses. :wink:
That's cute :).

I will desist now. I just found the virulent reaction to these compensations here interesting since it has little or no financial impact on us.

My last word will be this peace offering of a comic somewhat related to this topic:
http://xkcd.com/558/
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Post by Shakespeare »

My last word will be this peace offering of a comic somewhat related to this topic:
It's not the bailout bonuses that bother me - contracts should be honoured - but the ridiculous compensations, sometimes $100M for a single executive. Now, cashing $100M in stock because you were one of the founders is fine and not something I begrudge the least. But paying yourself $100M for running a company is nothing more than theft from that company's stockholders.
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Bylo Selhi
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Post by Bylo Selhi »

Shakespeare wrote:But paying yourself $100M for running a company is nothing more than theft from that company's stockholders.
I have no problem with paying a turnaround artist $100M for successfully turning around an ailing company, as e.g. Lou Gerstner did at IBM, however, I bristle at the idea of paying someone that sort of remuneration for failing to do what they were hired to do.

It's ironic. At lower levels people have relatively little control over their jobs. When they get fired for not doing those jobs, if they get severance at all, they often get only the statutory minimums. Yet the people in the C-suite, who have the most control over their jobs expect to be handsomely rewarded with rich bonuses, severance packages, pension credits and other golden parachute components -- even when the reason for their departure is that they fucked up badly.

P.S. Why should a turnaround artist work on a contingency basis?
1. They want to put their money where their mouth is.
2. They want to be able to look in the mirror every morning.
3. They've already made a fortune and now it's time to give something back to the business world, their industry, their fellow citizens, etc.
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Post by Springbok »

Listened to piece on CBC about Nortel employees not receiving severance. Apparently bankruptcy protection laws supersede Ontario labour laws. As a result, laid off employees are treated same as other creditors.

At Nortel, key personnel are being paid large bonuses to keep them from leaving, while those laid off don't even get the minimum severance required by the labour law, never mind that required in the employment contracts.

http://www.financialpost.com/news-secto ... id=1410185
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Post by biker »

With all this talk and action to reward employees above and beyond since they have some key knowledge that the comapny cannot operate without sends a signal to others in large companies.The game will become all about looking after yourself and doing this by hoarding information and not developing subordinates fully to advance . This could be even more damaging to companies than rewarding the successful "info" hoarders imo.
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Post by biker »

A couple of people I know well sit on the boards of of 2 of Canada's biggest companies. Since I own shares in both I can easily read about their compensation.My calculations indicate that they make about $10k per half day meeting when including the fees for committees in.That would be a rate of over $7 million a year. Both are on at least 5 company boards.They also get stock rewards and options that have accumulated into more millions. There are many other perks including travelling to very exotic places for the board meetings with the spouse.. all expences paid.Do you think these guys are going to short change the CEO when the compensation committee(which they may sit on) brings forth the reco to reward the guy who may have given them the prestigious job more than handsomely? No effin way.
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Post by Chuck »

biker wrote:Do you think these guys are going to short change the CEO when the compensation committee(which they may sit on) brings forth the reco to reward the guy who may have given them the prestigious job more than handsomely? No effin way.
I agree with you and share your disgust at the levels of executive compensation and the cronyism that allows it to happen.

However, I don't think the government should get involved (other than via accounting rules and regs).

What puzzles me is why shareholders and particularly large institutional shareholders let them get away with it. One would think they are supposed to be looking out for the shareholders best interests, but it does not appear that way.
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Post by kcowan »

If the CEO decides to get rid of a specific board member, (s)he can usually get it done. Are you going to be the board member that raises hell about the compensation?
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Post by Peculiar_Investor »

Manulife CEO bows to critics
Dominic D'Alessandro has decided to forgo most of his 2009 compensation unless Manulife Financial Corp.'s stock price rebounds.

The outgoing chief executive officer, who is less than three weeks from retirement, said in an interview Friday that he was caught off guard by the reaction to the $12.5-million (U.S.) pay package he was awarded for the 18 weeks that he will work in 2009.

“I'm doing this because the money is worth much less to me than the taste that's being left in people's mouths,” he said.
I've always appreciated Mr. D'Alessandro's management style and business sense. He was one of the reasons that I became a Manulife shareowner. Hopefully (not holding my breath) others will follow this example.
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Post by ghariton »

kcowan wrote:If the CEO decides to get rid of a specific board member, (s)he can usually get it done. Are you going to be the board member that raises hell about the compensation?
If you are not, are you really earning your directors' fees?

A lot has been written about financial institutions' managers running out of control because the regulators were ineffective. There is certainly some truth in that.

But where was the Board of Directors, and the shareholders mopre gebnerally, especially the large shareholders such as the pension plans? Aren't they suppoed to exercise control over management? And if their incentives aren't sufficient to motivate them to do so, shouldn't we try to change their incentives?

Limited liability is one of the great innovations of the nineteenth century. But perhaps we have to revisit it in these more complicated times. I don't mean to abolish limited liability. But Perhaps we can modify it so as to restore some incentives to shareholders, and especially directors, to take more care.

There's a nice institutional design challenge for someone.

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Post by Chuck »

linked article wrote:Prior to making his decision, Mr. D'Alessandro spoke to a number of Manulife's major shareholders. Shareholders “could care less” if the CEO gets paid as long as they are also making money, he said.
Wow. Mr. D'Alessandro just called his major shareholders complete idiots. And he is right.

In summary, I think what he is saying is that he has been robbing shareholders blind for years during the good times, so now he is willing to make a minor sacrifice for 18 weeks of "bad times". What a saint.
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Post by Peculiar_Investor »

From Jason Zweig at WSJ, CEOs Need to Bring Investors Along for the Ride
From 2006 through 2008, the 10 largest financial companies in the U.S. awarded their chief executives a cumulative total of more than $560 million in cash, stock and options. Those firms -- some of which are no longer among the 10 biggest -- have lost a total of nearly $1 trillion in market value since the end of 2006.

Is it any wonder that investors are angry at CEOs like Bank of America's Kenneth Lewis?
As a shareholder, I'm glad to see the pendulum swing towards more responsibility and accountability on this important issue. However, I cannot help but wonder if the horse has left the barn. Far too often the press picks up issues after the fact and shareholders only express concern when the damage has been done.
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Post by WishingWealth »

Don't want to turn this into yet another political thread but I would think that the CEOs & al should be the first ones interested into 'taking care of the golden goose'.

Anecdotal: There are more and more talks about some turn to a much harder left; IMO this would be our loss and it would have been of their (CEOs of the pigs species) own making.

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Post by Bylo Selhi »

WishingWealth wrote:Anecdotal: There are more and more talks about some turn to a much harder left; IMO this would be our loss and it would have been of their (CEOs of the pigs species) own making.
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Post by lilbit »

Recently I heard comparisons of CEO pay in other parts of the world. Their pay is a pittance compared to the average in the U.S.
The percentage increase has mushroomed over the last several years, too, from 40 times a regular employee's pay, to 400 times the same employee's pay.
Absurd.
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Post by ghariton »

A little history may be worth while.

Once upon a time -- say a hundred years ago -- companies were largely run by their owners. When JP Morgan or Henry Ford decided on his compensation, he mostly consulted himself, because what he paid himself in salary and bonuses, largely came out of his pocket as shareholder.

But as the twentieth century wore on, companies grew bigger and more complex, and the heirs of the founders didn't want to be bothered with running things any more. So was born a new class of professional managers. They had the missing skills, by and large.

But they didn't have an ownership stake. As Berle and Means recognized as early as the 1930s, there was a huge corporate governance problem. What was to stop managers from pursuing their own private interests, rather than the interests of the shareholders (and of other security-holders)? Shareholders couldn't monitor tightly enough. After all, it was precisely because they were not ready to devote that much effort that the professional managers were hired in the first plase. And even if managers could be constrained, that would remove their discretion. They would no longer have the flexibility to take advantage of new opportunities or react to changes in the market.

So from the 1910s through the 1970s, shareholders lived with managers who delivered enough profit not to incur a shareholder revolt (which was unlikely anyway), and mainly spent their time building private empires -- or relaxing on the golf course. Industry in those days was not very competitive -- indeed, competition was a dirty word for many years after the Great Depression -- and mediocrity was acceptable, as long as investors did not actually lose their investment.

Many things happened starting in the 1960s, including takeovers and buy-outs, since many corporations were such tempting targets. But one of the things that happened was the thought that maybe, just maybe, top management would perform better if their incentives were better aligned with those of shareholders. Michael Jensen at Harvard, and others, preached the theory. Venture capitalists, and their predecessors, illustrated the practice. It was very simple: make executive compensation dependent on how well shareholders did.

One way was to oblige top management to own a significant number of shares in the company. But a rising executive might not have that much money. And so a way was invented to tie compensation to share price without requiring a larger investment up front -- stock options.

It is important to stress that granting stock options was a solution to a real and pressing problem -- how to align executives' ince4ntives with those of shareholders, and get out of the trap that Berle and Means had identified fifty years earlier.

Unfortunately, executives quickly learned how to "game" the compensation plans. This ranged from rapid vesting, to repricing options when the stock price fell -- instead of letting the options expire worthless, as had been intended -- and so on.

Why did this happen? First, boards of directors were captured by management, and shareholders seemed not to care. Even if they had cared, management as a whole had succeeded in getting various legislatures to pass laws that made it extremely difficult for shareholders to act. Not that that mattered much anyway -- widely dispersed investors have no incentive to monitor management and take any action.

So we got rid of one problem -- passive management that took actions contrary to shareholder interest, out of self-aggrandizement or sheer inertia. And we substituted another problem -- hyperactive management that has a time horizon equal to the vesting of their stock options, or bonuses, etc.

In my view, the problem is that we still haven't learnt to set up effective corporate governance mechanisms. The solution is not to return to some mythical golden age when all executives were virtuous and integrity ruled the land. The solution is to give shareholders sufficient incentives, and instruments, to get involved.

Of course, some are sceptical that shareholders, or indeed boards of directors, will ever exercise any control over management. Jonathan Macey, in an excellent book, recommends two measures instead

(1) Make hostile takeovers easier. Inparticular, take away management's ability to block takeover bids without getting shareholder approval for such measures. (Ironically, Recommendations 38 and 39 of the Final Report of the Canadian Government's Panel on Competitiveness -- the major driver of this government's industrial strategy (sic) -- wants to make takeovers harder.)

(2) Encourage hedge funds and private equity, hoping that large or concentrated shareholders will take an interest in what management is doing.

Both of these approaches are worth trying, in my opinion. Preaching a return to virtue is not.

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Post by NormR »

ghariton wrote:(1) Make hostile takeovers easier. Inparticular, take away management's ability to block takeover bids without getting shareholder approval for such measures. (Ironically, Recommendations 38 and 39 of the Final Report of the Canadian Government's Panel on Competitiveness -- the major driver of this government's industrial strategy (sic) -- wants to make takeovers harder.)
Or any takeover for that matter . . .
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Post by ghariton »

NormR wrote:Or any takeover for that matter . . .
Fair enough.

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Post by kcowan »

ghariton wrote: (2) Encourage hedge funds and private equity, hoping that large or concentrated shareholders will take an interest in what management is doing.

Both of these approaches are worth trying, in my opinion. Preaching a return to virtue is not.

George
This second one is scary. These guys are famous for doing short term things like ratcheting up debt to levels that threaten the viability of the company.

BTW a great post IMHO George. 8)
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Post by ghariton »

Alan Blinder in the WSJ:
Despite the vast outpouring of commentary and outrage over the financial crisis, one of its most fundamental causes has received surprisingly little attention. I refer to the perverse incentives built into the compensation plans of many financial firms, incentives that encourage excessive risk-taking with OPM -- Other People's Money.

What, you say, hasn't huge attention been paid to executive compensation -- especially those infamous AIG bonuses? Yes. But the ruckus has been over the generous levels of compensation, or the fact that bonuses were paid at all, not over the dysfunctional incentives that inhere in the way many compensation plans are structured.

<snip>

The source of the problem is really quite simple: Give smart people go-for-broke incentives and they will go for broke. Duh.

Amazingly, despite the devastating losses, these perverse pay incentives remain the rule on Wall Street today, though exceptions are growing. For now, excessive risk-taking is being held in check by rampant fear. But when fear once again gives way to greed, most traders and CEOs will have the bad old incentives they had before -- unless we reform the system.
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