Executive compensation

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Re: Executive compensation

Postby ghariton » 06 Jan 2010 23:15

WishingWealth wrote:Aren't we a wee bit into obsession territory here? Or playing the devil advocate again? :wink:


At the danger of going off-topic (but when did that ever stop me :wink:), let me give a few examples of what I had in mind.

Regulators established reserve requirements for banks that were totally inadequate (based on a misunderstandfing of VAR) or non-existent (some financial institutions, some new products). That facilitated excessive leverage by CEOs -- heads they won, tails, the shareholders lost. So far, who cares, except for the shareholders? But unfortunately all that risk-taking had very severe systemic effects when things unravelled, so the regulators should have cared as well. If the regulators had been on top of things, such extensive risk-taking wouldn't have been possible -- or, at any rate, it would have been more difficult -- helping the financial system and the shareholders, and, incidentally, limiting the CEOs' compensation.

Or consider deposit insurance in the U.S. Depositors were insulated from risk of loss, and so had little incentive to think about the business practices of the bank they placed their money in. As a result, such banks had one fewer restraint on the amount of risk they could take on. I believe that an effective regulator would have treated deposit insurance as just that -- insurance -- and charged banks premia that reflected the true risk of the insurance.

You have mentioned many times the lack of involvement of the investors/public at large in the governance question.


Yup. To my mind, it's the biggest single business issue facing our economy today. (If ever there was an internal contradiction in capitalism, it is separation of ownership and control, IMHO.)

Dunno what to do about it. Penalize inactive sharehoders, or at least large institutional investors who could certainly do much better? Find a set of incentives that would motivate more, and more effective shareholder activism? Get rid of securities laws that actively discourage shareholder activism? (I think the U.S. finally got rid of the one that deemed shareholders who were just talking to each other, fer chrissake, to be acting in concert, and so legally launching a take-over bid -- with all the requirements that entails. CEOs loved being able to block discussions among shareholders.)

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Re: Executive compensation

Postby brucecohen » 06 Jan 2010 23:44

ghariton wrote:Regulators established reserve requirements for banks that were totally inadequate (based on a misunderstandfing of VAR) or non-existent (some financial institutions, some new products). That facilitated excessive leverage by CEOs -- heads they won, tails, the shareholders lost.

Are you referring to Commodity Futures Modernization Act? If so, it was Congress -- not regulators -- that established the reserve requirements, or rather did not establish reserve requirements because, it was felt, the banks would police themselves within the unfettered free market. Or so Sen. Phil Gramm claimed, with backing from Alan Greenspan and Bob Rubin who steamrolled what's her name -- the head of the Commodity Futures Trading Commission -- who, based on 20 years in the derivatives business, warned of systemic collapse without effective regulation. (I've left out Cox, the SEC head who actually allowed the banks to monitor to their own risk levels with no reporting to govt, because Sorkin paints him as a hapless political toady who had no idea of what he was doing and tried as much as possible to hide while Paulson, Geithner and the bankers did their thing.) Now, of course, the banks are lobbying heavily to forestall any effective regulation of derivatives -- and using taxpayers' money to fund this campaign.
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Re: Executive compensation

Postby ghariton » 07 Jan 2010 02:46

brucecohen wrote:Are you referring to Commodity Futures Modernization Act? If so, it was Congress -- not regulators -- that established the reserve requirements, or rather did not establish reserve requirements


Yes, you're right. That was one of the examples I was thinking of, and it was the politicians who caused the trouble, not the regulators themselves.

I didn't properly distinguish the actual regulators (civil servants, etc) from the politicians, in my discussions above. :oops: The problem with the regulators per se is a lesser one: what they arfe asked to do often would often require much more information than they can possibly have. (And they generally do the best they can -- the ones I know are actually quite dedicated.) No, the major problem lies with the politicians who are overly sensitive to special interests -- but who, at the end of the day, give orders to regulators.

Now, of course, the banks are lobbying heavily to forestall any effective regulation of derivatives -- and using taxpayers' money to fund this campaign.


Not a surprise. The real question is whether the current crop of politicians will stand up to them.

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Re: Executive compensation

Postby WishingWealth » 07 Jan 2010 12:04

Should we conclude with a cry of: Aux armes citoyens!

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Re: Executive compensation

Postby squid » 08 Jan 2010 15:54

One ratio I`d like to see and quoted generally is executive compensation as percent of net income. I wonder if firms where EC% is higher would perform or outperform due to the attraction of better management.
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Re: Executive compensation

Postby brucecohen » 08 Jan 2010 17:58

squid wrote:One ratio I`d like to see and quoted generally is executive compensation as percent of net income. I wonder if firms where EC% is higher would perform or outperform due to the attraction of better management.

Like this?

We find that, controlling for all standard controls, (CEO Pay Slice) is negatively associated with firm value as measured by industry adjusted Tobin's Q. CPS also has a rich set of relations with firms’ behavior and performance: in particular, CPS is correlated with (i) lower (industry-adjusted) accounting profitability, (ii) lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements, (iii) higher odds of the CEO’s receiving a “lucky” option grant at the lowest price of the month, (iv) greater tendency to reward the CEO for luck due to positive industry-wide shocks, (v) lower performance sensitivity of CEO turnover, (vi) lower firm-specific variability of stock returns over time, and (vii) lower stock market returns accompanying the filing of proxy statements for periods where CPS increases.


According to HuffPo the relationship between exec comp and earnings is at the heart of two lawsuits filed against Goldman Sachs.
At issue in both lawsuits is whether or not Goldman Sachs's bonuses -- including those from 2008 and the bonuses it plans to pay out in 2009 -- are artificially inflated by the government's assistance. The bank, which says it has set aside a record $16.7 billion for employee compensation thus far this year, is expected to announce its 2009 bonuses on January 18.

Citing New York Attorney General Andrew Cuomo's July report, Brown's lawsuit states that "Goldman earned $2.3 billion, paid out $4.8 billion in bonuses and received $10 billion in TARP funding." The lawsuit argues that the bank's 2008 bonuses were subsidized with taxpayer money.


One problem with judging exec comp simply against net income is that net income is highly subject to manipulation. For example, in Too Big to Fail, Andrew Sorkin writes about one prominent short-selling hedge fund manager's investigation of Lehman Brothers months before Lehman failed:
More important, Einhorn thought Lehman was not being forthcoming about a dubious accounting maneuver that had enabled it to record revenue when the value of its own debt fell, arguing that theoretically it could buy back that debt at a lower price and pocket the difference. Other Wall Street firms had also adopted the practice, but Lehman seemed cagier about it than the others, unwilling to put a precise number on the gain.

"This is crazy accounting. I don't know why they put it in," Einhorn told his staff. "It means that the day before you go bankrupt is the most profitable day in the history of your company, because you'll say all the debt was worthless. You get to call it revenue. And literally they pay bonuses off this, which drives me nuts."
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Re: Executive compensation

Postby newguy » 12 Jan 2010 07:44

Federal Reserve’s Record 2009 Earnings: $45B
....
Full earnings estimates for the central bank will be released later today. No word on if the Fed will be handing out any bonuses this year . . .
:lol:
http://www.ritholtz.com/blog/2010/01/fe ... nings-45b/

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Re: Executive compensation

Postby brucecohen » 12 Jan 2010 21:49

newguy wrote:
Federal Reserve’s Record 2009 Earnings: $45B
....
Full earnings estimates for the central bank will be released later today. No word on if the Fed will be handing out any bonuses this year . . .
:lol:
http://www.ritholtz.com/blog/2010/01/fe ... nings-45b/

newguy

WaPo says Bernanke is paid just under $200,000....with no bonus at all.
Even as the Fed comes to resemble private banks in terms of its balance sheet and its earnings power, there remains one big difference. The CEO of the Federal Reserve, Chairman Ben S. Bernanke, received a modest cost-of-living raise for 2010, despite the record earnings: He now makes $199,700, with no bonus at all.
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Re: Executive compensation

Postby WishingWealth » 13 Jan 2010 00:18

About shareholders rights/power or lack thereof.

Spitzer @ Slate: http://www.slate.com/id/2241191/

We Own You!
How technology can help stockholders take control of the corporations they own.
By Eliot Spitzer
Twitter, text messages, YouTube, and other technology transformed politics in 2008. This success raises a compelling question: Can the same technology awaken the more dormant world of corporate democracy? For decades, shareholders have abandoned their responsibility to use their votes to shape corporate behavior. But perhaps technology can revive democracy on Wall Street. Could shareholders, gathered by an emergency twitter message, soon converge on a shareholder meeting to demand a claw-back for ill-gotten bonuses? Could proxy voting in 2011 generate the same enthusiasm as actual voting did in 2008?

The importance of the issue cannot be overstated. Virtually every thoughtful discussion of corporate governance concludes that unless shareholders act like the true owners they are, all the proposed corporate reforms will fail. While there are some who claim shareholders are simply too ill-informed to participate meaningfully, this argument should carry no more weight in the corporate context than it does in the traditional political arena.
...


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Re: Executive compensation

Postby newguy » 13 Jan 2010 08:07

brucecohen wrote:WaPo says Bernanke is paid just under $200,000....with no bonus at all.

Ah, but who's going to get higher speaking fees after forced retirement, Bernanke or Dick Fuld? At least Ben doesn't have to shave for work..hmm, I wonder if I could apply for the job. :lol:

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Re: Executive compensation

Postby Bylo Selhi » 17 Jan 2010 11:13

Probably preaching to the converted on this forum but... Money for Nothing is a book that even the WSJ thinks is worth reading.

For those with a shorter attention span...

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Re: Executive compensation

Postby brucecohen » 10 Mar 2010 09:45

So what's the board of directors to do when top executives fail to meet the established criteria for bonus eligibility?
Why, change the criteria!
NEW YORK (CNNMoney.com) -- Maybe you missed your earnings target last year or your stock was crushed. But if you're a corporate executive, that might not necessarily prohibit you from earning a generous bonus.

Following an unprecedented period of economic turmoil, a number of corporate boards appear to have taken pity on executives last year. In some instances, they handed over millions of dollars in so-called discretionary bonuses to managers.
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Re: Executive compensation

Postby tidal » 01 Jun 2010 11:28

How Much Should We Pay Banking Executives? Less
By Paul Kedrosky · Tuesday, June 1, 2010

An excerpt from Dan Ariely's new book (The Upside of Irrationality) in which he talks about some experiments he conducted on the performance effects of bonuses:
We replicated these results in a study at MIT, where undergraduate students were offered a chance to earn a very high bonus ($600) or a lower one ($60) by performing two four-minute tasks: one that called for some cognitive skill (adding numbers) and another that required only mechanical skill (tapping a keypad as fast as possible). We found that as long as the task involved only mechanical skill, bonuses worked as we usually expect: the higher the pay, the better the performance. But when the task required even rudimentary cognitive skill (as we might suppose investing and banking do), the outcome was the same as in the Indian study: a potential higher bonus led to poorer performance.

Our results led us to conclude that financial rewards are often a two-edged sword. They motivate people to work well, but when these financial rewards get very large they can be- come counterproductive and actually hurt performance. If our tests mimic the real world, then higher bonuses may not only cost employers more, but also hinder executives in working to the best of their abilities.
And what do bankers thinks of these results? Back to Dan:
When I presented these results to a group of banking executives, they assured me that their own work and that of their employees would not follow the pattern we found in our experiments.
:roll: :rofl:
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Re: Executive compensation

Postby Bylo Selhi » 01 Jun 2010 11:33

tidal wrote:How Much Should We Pay Banking Executives? Less
By Paul Kedrosky · Tuesday, June 1, 2010

See also this video: viewtopic.php?p=385356#p385356
Last edited by Peculiar_Investor on 07 Feb 2014 08:04, edited 1 time in total.
Reason: replace old domain name with www.financialwisdomforum.org to reflect new domain name effective 19-Jan-2014
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Re: Executive compensation

Postby NormR » 01 Jun 2010 11:56

Dan is about to miss out on the lucrative business lunch lecture circuit. :wink:
One might also note at the "banking" part of the title is superfluous. Really, if his work is right, all incentive payments should be stopped. Relink of the Bylo vid...

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Re: Executive compensation

Postby FinEcon » 02 Jun 2010 16:47

That 'explanation' of exec compensation is totally off base IMO.

I don't think most would disagree on the base of issue but rather how far we arc from it. You start with a high number due to a number of factors such as: competitive industry, education, experience, effort, performance, ect. but then, as a group, we ratchet the number onward and upward over time for all the reasons Buffet explained in Lessons for Corporate America. It can basically be summed up as a continually increasing side effect of the institutional imperative, basically a tit-for-tat game of one upsmanship between the players (execs) aided and abetted by incompetent compensation boards and compensation consultants whose loyalty lies with the executive.

I have no beef with paying for performance but waaayyyy to much of the variable pay is awarded on factors the exec had nothing to do with. The old, you ought to get a bonus pay for being the lowest cost producer (or some other measurable set of causative criteria) not because you were at the helm when oil went from $20 to $120. How many employees at Exxon could have run the company just as well over 2002-2008 and were/are paid less than 1M/yr? :o
You can get paid generously for perceived risk, but you don’t necessarily get paid for taking real risk

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Re: Executive compensation

Postby Peculiar_Investor » 27 Jul 2010 11:52

Oracle's Ellison Tops List of 25 Highest Paid CEOs of Decade - WSJ.com (May be $$, use Google as required).

One would think that reviewing performance over a 10 year period would show a relationship between executive compensation and stock performance, if it exists.
Four of the 10 highest-earning executives ran companies whose shareholders lost money over the decade: IAC/InterActive, Countrywide, Capital One and Cendant Corp.
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Re: Executive compensation

Postby Peculiar_Investor » 27 Oct 2010 09:17

Didn't know whether this belongs here or the Enough to Live On Thread :lol: FT.com / Companies / Banks - UBS pushes to lift $1m cash bonus cap
Under the bank’s existing pay structure agreed last year with Finma, Switzerland’s financial regulator, the cash component of bonuses is limited to $1m, with the remainder paid out in deferred cash and share awards that vest over several years.

Those restrictions can make it difficult for top earners accustomed to big cash bonuses to meet fixed obligations such as mortgage payments and school fees, one senior UBS banker told the Financial Times.

My bold. I guess a million in cash doesn't go as far as it used to.

Someone should probably tell the Bare Naked Ladies that they might want to update their song,
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Re: Executive compensation

Postby Jo Anne » 27 Oct 2010 17:22

Peculiar_Investor wrote:

Those restrictions can make it difficult for top earners accustomed to big cash bonuses to meet fixed obligations such as mortgage payments and school fees, one senior UBS banker told the Financial Times.

My bold. I guess a million in cash doesn't go as far as it used to.


They'll have to send their wives out to work, like everybody else in the world does.
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Re: Executive compensation

Postby ghariton » 27 Oct 2010 20:48

Jo Anne wrote:They'll have to send their wives out to work, like everybody else in the world does.

But, but, but... those are trophy wives!

They're supposed to sit around, do their nails and lunch, and make the other guys green with envy. (Notice the neat zeugma, especially for parvus :wink:).

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Re: Executive compensation

Postby Peculiar_Investor » 13 Dec 2010 20:54

This just in, Ex-CEO Jim Shaw gets $5.9-million pension - The Globe and Mail
The change in his pension is disclosed in a footnote in Shaw’s latest shareholder proxy circular. According to the circular, he was eligible to receive an annual pension of $5.27-million as of the company’s fiscal year end on Aug. 31. The disclosure said he would have been eligible for a $5.8-million pension if he retired at age 65.

Instead, the board opted to pay him $5.95-million a year when he retired at age 53, more than the amount he would have been eligible to receive at the normal retirement age.

Nice of the board to go above and beyond the call of duty. :P

I'm not a shareholder, but as a customer I'm left wondering if I could get them to itemize this on my future bills.
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Re: Executive compensation

Postby AltaRed » 13 Dec 2010 21:21

That is life under a dual class share structure. Read it and weep.
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Re: Executive compensation

Postby Shine » 14 Dec 2010 03:07

It is good to be a cranky drinker at your Dad's company.
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Re: Executive compensation

Postby Peculiar_Investor » 25 Mar 2011 08:43

Think About Sin When Bonuses Are Revealed: Roger Lowenstein - Bloomberg
Because one of the biggest threats to American democracy is inequality. When people lose faith in the system, institutions suffer. People stretch to buy homes, or overuse credit to match their neighbors. And when executives earn more in a half day than teachers do in a year, talented people don’t pursue careers in education.

Executive pay shouldn’t be set by government (or by op-ed writers). It should be set by shareholders. But shareholders don’t have a real voice. And the pay system is way out of line with any rational system of incentives that would serve their interest.

It doesn't seem to be getting any better, in fact executive compensation seems to have escaped reforms during the recent events. Lowenstein's comment "And when executives earn more in a half day than teachers do in a year, talented people don’t pursue careers in education." provides a pretty good summary of the downside IMHO.
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Re: Executive compensation

Postby Descartes » 25 Mar 2011 16:29

Manulife Financial Corp. chief executive officer Don Guloien received total compensation of $9.29-million in 2010, down slightly from $9.66-million in 2009.

The dip came as the insurer failed to meet its annual financial goals of making $2.6-billion in profits and achieving a return on equity of 11 per cent. The company posted a net loss of $391-million in 2010, as it took more than $3-billion in charges related to updating its actuarial assumptions and repositioning its U.S. business.


http://www.theglobeandmail.com/globe-in ... le1956953/

I am thinking you remaining MFC shareholders should scrape together some spare change and send it along to Don. Yes, there is such a thing as accountability and there was a miss on the goal of about 3 billion dollars but, really, this seems ridiculous :P.
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