The new forums will be named Coin Return (based on the most recent vote)! You can check on the status and timeline of the transition to the new forums here.
Please vote in the Forum Structure Poll. Polling will close at 2PM EST on January 21, 2025.
Executive Compensation
Elki
get busyModerator, ClubPA Mod Emeritus
get busyModerator, ClubPA Mod Emeritus
A thread to talk about CEOs, and their evil ways.
The politics of pay
The rewards of America's company bosses face yet more scrutiny and attack
The politics of pay
The rewards of America's company bosses face yet more scrutiny and attack
The Economist wrote:NOW there is nowhere for the bosses of corporate America to hide their bulging pay packets. In spite of years of defensive lobbying, they are having to reveal all under new Securities and Exchange Commission (SEC) rules that have just begun to take effect. This burst of sunlight could not have come at a worse time for them. It coincides with a shift in the control of Congress to the Democrats and the start of the presidential election campaign, in which “overpaid†chief executives will make an easy target.
Although barely one-tenth of the 2,000 biggest American companies have yet reported under the new rules, the tally of negative headlines is already mounting. “There are already plenty of examples of firms reporting chief-executive pay packages of millions of dollars more than expected,†says Paul Hodgson of the Corporate Library, a research firm. He reckons that the firms that have already reported are a representative sample likely to provide a good indication of the overall trend. Top of the heap so far is Ken Lewis, boss of Bank of America, with total pay in 2006 valued at $114.4m.
One area of generosity is the chief executive's future pension. Another is “deferred payâ€, whereby a top executive leaves some part of his salary in the hands of the firm, as a loan of sorts. GE recently reported that Robert Wright, until recently the boss of NBC Universal, its entertainment subsidiary, has accumulated deferred pay worth $40m, the highest so far. Quite why a boss or firm should want to resort to this tactic has never been clear, although the suspicion has always been that the firms are offering managers unusually good returns at the shareholders' expense. Now the details of these arrangements are being published for the first time, so it will become clear whether that was so.
In a study of 100 firms that have reported, Mr Hodgson found that the perks given to chief executives, though relatively small, were much higher than those reported last year under the old, less exacting, disclosure rules. On average, the amounts reported in 2006 under the heading “other annual compensation†in 2006 were $192,000—131% higher than in the corresponding category in 2005. One reason for this jump was that the new rules require the disclosure of all perks worth $10,000 or more, whereas the old rules allowed firms to keep quiet about anything worth less than $50,000.
Of particular interest will be the data on personal use of the corporate jet. This is expected to decline sharply as firms start to charge the boss for personal flights in order to avoid embarrassing headlines. No company wants a repeat of the battering suffered by Tyson Foods after revelations that “friends and family†of Donald Tyson, a former boss, made undisclosed use of the corporate jet—valued at over $1m—without his even being on board.
Another likely target is the golden parachute for a departing boss, especially if he has left because of poor performance. This is increasingly a focus of activist shareholders, including hedge funds. On March 20th John Antioco, the boss of Blockbuster, a video-rental firm, announced that he would resign by the end of the year. Following a long battle over his bonus with Carl Icahn, a legendary corporate raider, he agreed to accept much less in severance than he had said he was entitled to under his contract.
The directors' cut
Boards have already started to pay greater attention to how they set the chief executive's pay and to being seen to do so in a way that serves the interests of shareholders. One reason is the requirement that compensation committees consist entirely of independent directors, introduced as a listing requirement by the New York Stock Exchange in the wake of the corporate scandals at the start of the decade. These committees must now hire compensation consultants, and many are insisting that they do no other work for the company. Previously, compensation consultants typically had other lucrative contracts, which may have swayed their judgment.
The new climate surrounding pay has already had an effect. Base salary has stabilised, though it was never the fastest-growing part of pay. Options, which even before the recent backdating scandal were losing their appeal, have been partly replaced by performance-related pay.
“Boards are being tougher with new hires, in particular, as it is hard to get a sitting chief executive to give up pay promised in his contract, at least without compensation,†says Russell Miller of Korn Ferry, a recruitment firm. Even being tough on new chief executives is not proving easy, however. Boards know that the choice of a boss can have a huge impact on a firm's performance. Executive talent is valuable. Private equity is on the prowl, offering packages with incentives that a public company can find hard to match amid all the denunciation of fat cats. Those are good reasons to expect pay to continue to grow, in spite of the outrage.
Not everybody is happy with the quality of the disclosures made so far. One issue is the length and complexity of the statements, which often run to 30 pages or more of opaque legalese. There are also complaints that the single number for total pay required by the SEC is misleading. “There is more than one honest answer to the question, ‘How much did you pay the chief executive?'†says Joe Grundfest, a former SEC commissioner who is now at Stanford University. The SEC requires firms to combine both the actual pay bosses receive each year and an estimate of the value of future performance-related pay, such as share options, which is calculated using a formula known as Black-Scholes. But the value of such options changes along with the firm's share price—they could even prove to be worthless. “The one certainty is that the option grant will not turn out to be worth the Black-Scholes valuation,†says Mr Grundfest. Which is why the SEC should require two totals to be published, argues Ira Kay of Watson Wyatt, a compensation consultancy. As well as saying what managers might earn, they should estimate what they have earned. Unlike the SEC's number, such “total realised pay†correlates well with firms' performance, says Mr Kay.
Such subtleties may not matter much to the headline writers. Outraged politicians in Washington, DC, smell blood. Barney Frank, chairman of the House financial services committee, is proposing legislation to require companies to seek the (non-binding) approval of shareholders for executive pay packages each year.
There may also be moves to toughen the tax treatment of executive pay, perhaps by removing tax benefits for performance-related compensation, at least above a certain level, says David Yermack, an economist at New York University. Share options and pensions may also come under fire. Given the growing number of middle-class Americans who have to pay the higher alternative minimum tax, Congress may feel that heavier taxes for corporate bosses have populist appeal. “Anything is possible in this climate,†says Mr Yermack, “so bosses may need to get used to the idea that more of their compensation will be subject to taxation.†At least they can afford it.
Elki on
0
Posts
Acutally, boards look out for the shareholders. Or they lose thier jobs. That's the nature of the game. And that had nothing to do with my question.
When there's 400 of your position, and 1 of him?
Your average Joe on the "front lines" (ha! right.) of a company would have absolutely no hope if he traded jobs with an executive.
Believe me, I agree. If you fuck up, you don't deserve your job. It's as simple as that.
I'm just afraid we're wandering down the path that "all CEOs did nothing do deserve thier job, all rich people are greedy assholes, wealth=bad" which is an assumption as ridiculous as the GPA joke.
Didn't you know? We love making generalizations and jumping to conclusions in this forum, especially if we have no fucking clue regarding the subject matter.
And if the CEO is doing his job right, it should be very hard for them to hide their chicanery. Look at Enron - it was pretty clear that things were not kosher. Yet the upper levels continuously turned a blind eye to it, and in fact took steps to nurture the mentality that produced these errors. When the head of the company is willfully or recklessly turning a blind eye, then he or she should be held culpable.
It's very rare for a CEO of a major company to get the boot from stockholders - the only two companies I recall it happening to recently are Take Two and Disney. One major reason is that while many people may own stock, they own it through mutual funds, where the votes of the shares are controlled by a manager. So while many people may own the company, the votes are under the control of a small handful. This makes it easy to control the votes, since you need only get the managers under control, and many of them are inclined to support you, being Wall Street types.
If you have a CEO who really revitalizes a company and takes them from worst to first, then yes, they deserve worthy compensation for that. But many, MANY times, CEOs don't do that. Talke a look at Jack Welsh, who was hailed for 'saving' GE. Honest postmortems have pointed out that:
- GE wasn't in as bad shape as everyone thought when he took over,
- He refused to enter into competitive fields, instead only staying where GE was a dominant player,
- Used mass layoffs as a means to increase stock price, earning the nickname "Neutron Jack",
- And did everything in his power to weasel GE out of their obligations to repair the environmental damage it had done.
Somehow, I don't think that merits being given moneyhats of cash.I'm going to venture out on a very short limb here and say that most CEOs who made far more than that did not contribute more to their companies than he did to his.
Right but how much of his own personal money is tied up with BH? He doesn't have to make that much from salary because part of his business is growing his own personal fortune along with anyone else lucky enough to strap themselves to his boots.
I can't see anything over, say, five million being reasonable.
There's a certain threshold point where wealth just becomes a gigantic phallus to wave in people's faces, with no other practical use.
Actually, I don't. I've worked with a few, and I'm not interested in what they have to go through. There's a lot of risk involved in running a company. With that risk come stress, decreased time with the family, heart attacks....I don't want that. There are more important things in my life.
But I do want people to be paid what they are worth. Because I want to be paid what I'm worth. When you start advocating the control of worth based on your standards, my pay is at risk, because maybe you think I'm overpayed, and the guy who works for me is underpaid. And like it or not, chances are you are wrong.
Then don't ever make more than five million. But don't put a five million dollar limit on my salary.
Seriously people, it's amazing how many people want to dictate what is and is not fair for someone else to make or spend. That's creepy.
Why? What possible use could you have for more than five million dollars a year?
Is your hobby collecting Van Goghs?
Thats not what he said, he said that he couldn't think of a situation where you require 5 million dollars in compensation to justify that action. Of course that isn't the way wages work (or are supposed to work), if your CEO can get you an additional > 5+ million dollars over the alternative then it becomes worth 5+ million dollars to make sure you have him.
Which just makes the whole thing more complicated, since he doesn't necessarily have to morally deserve his salary (he isn't necessarily putting in 300+ times more work, nor is 300 times more skilled or rarer than the average guy - more skilled, rarer and possibly more devoted but not in proportion to his higher wage) he just needs to be 300 times more valuble.
The more important question is what exactly gives you the opinion you have the right to say any one person willingly giving any other person more than X dollars in exchange for something is somehow inherently wrong.
I'm the first to point any number of asshat moves businesses have made in the past (or are still making), but some sort of magic assumption of moral superiority just because what you have less money is idiotic.
You want to crunch some numbers and show they aren't actually worth hiring at that price, go for it. Any analystical look at past performance versus CEO salary, I'd love to see it. Hand waving and self-righteousness is as useless and asinine here as any other area of discussion.
That's sort of begging the question, though. People are saying that CEOs are, by and large, not worth the compensation they're commanding. If it can be shown that giving someone twenty million bucks in salary and perks results in a better company, an overall better economy, and increased prosperity, then hey, cool.
But a lot of the objections here are that ridiculous lumps of money are being handed around by an old-boy's club to existing members in order to maintain the illusion that these sums are actually reasonable. If paying a CEO twenty million dollars is going to provide greater than twenty million dollars in benefit to the company that couldn't be gained by hiring a guy for half a million, then that's money well spent. Otherwise, CEOs are just giant money sinks, and the money being paid to them is a collective drain on the economy, and a detriment to the companies in question.
I think salary caps are a stupid idea, but some means of trying to prevent money from being flushed down the toilet isn't exactly a stake in the heart of capitalism.
Tying long term performance to the executive's pay would be in general the best goal for the company's pay structure, but that can be a somewhat difficult process and likely requires the use of derivatives such as options or warrants. It can be a big problem if the CEO gets there and runs the engine too hot or kills off potential for future growth in order to get short term gains in profitability or stock value. Stock value is supposed to take into account those factors, but that value depends upon imperfect knowledge by marketers.
I was a bit amused about the discussion of Black-Scholes though and the beating around the bush of what it is.
I think if your individual presence translates into >$5M of profit you morally deserve >$5M of compensation. I'm not thinking of the faceless CEO that no one hears about until he gets a giant retirement payoff, but more the Oprah Winfrey, without-her-there-is-no-business type.
My father has quite a few friends who either used to work for Microsoft, or still do, at the management level.
Back when I was trying to decide on a major, I talked to them about their jobs. Pretty much every single one of them said, "I feel like I'm being overpaid." So some of them quit Microsoft to do other things because they felt guilty about doing so little work (and "bullshit" work, at that, their own words) and being paid so much that they were members of the upper-middle class, and in some cases, the elite class. Others started their own businesses on the sidelines so they could actually do some meaningful work and feel more fulfilled.
I'm sure there are many other white-collar managers out there that are paid way too much for what they do.
The bottom line is, it doesn't matter. Unless I came about the money by illegal means, it shouldn't matter to anyone that I make 10 million a year.
Maybe my job includes high risk, and I am only expected to work for 10 years (see: professional sports). Maybe I make music that the whole world likes, and my band is only good for two albums. Maybe I'm stretched thin, working 18 hour days for 6 days a week, neglecting my family and friends so I can retire early and provide my family with a comfortable life. Maybe it's because I've been married a dozen times and I owe alimony.
Trust me, I could put 5mil a year to good use.
Why would you say they are not worth it? The worth of something changes depending on who needs it. It's a product of the scarcity of the resource, that's all. If everyone had the ability to be a CEO, they'd be worth shit. As it stands, very few people (relative to the population) have the skill, education and ability to fill that role. Being a scarce resource, their value increases accordingly.
The market will determine their worth, though I'm not surprised that people forget this. A parallel happened in the entertainment industry a few years back, with movie stars charging ridiculous fees for movies, and people cried that it wasn't "worth it". Well, that trend ended, because the market corrected itself. Big name stars bombed, small budget films make bank, and salaries were cut at the top. The same will happen with CEOs if there is truly a problem with their worth.
But, to be far, if I was made CEO of a fortune 500 company, I might commit suicide out of the stress.
I could follow that logic if I saw proof that it was an industry-wide phenomenon. There's a lot of high-profile stuff on CEOs these days, and I've seen it happen too often where select individuals are held up as representative of the population of CEOs. I just don't buy it. There are tens of thousands of CEO positions in this country, and I've seen nothing to show that even a significant minority of these positions are filled by people who were failures in their previous roles. It strikes me as hype, easy to push because of the money involved. These people are often made into supervillians.
Definitely an interesting hypothesis. I might postulate it's the opposite though. They aren't given the pay to become risk-averse, but they are risk-averse because the pay is good.
Uh... those are both the same. In either case, the cause is high pay and the result is risk-aversion.
Although, to be clear, I'm referring specifically to the huge sums of money given to CEOs after they're forced out, not to their salaries.
The idea that someone is "worth" a given amount of money is dependent on two things. First, their skill set has to be genuinely rare, such that others can't do it. And second, all people have to be given a fair shot at getting that position.
Say Bob is hired by his uncle Walt to serve as a floor manager for Walt's shoe store. Only Bob is given a chance for the job, and he is paid $300k a year, because he happens to be Walt's son-in-law, and damned if his daughter is going to be married to someone middle-class. I really hope you wouldn't assert that Bob is "worth" $300k per year in any meaningful capacity.
What others are saying, and what you've failed to refute, is that the situation with CEOs may well closely parallel this instance of blatant nepotism. CEOs are paid large sums of money because they're selected by a pool of individuals who want to ensure that, if and when they become CEOs, they also get lucrative salaries. They could just as easily hire some other guy who could do just as well for a quarter of the cost, but they don't. Not because it helps the companies, but because it helps them, personally, as high-powered executives.
This may not be the case, but shouting "Free Market!" louder and louder doesn't exactly prove your point.
The example you used doesn't hold since it's not a publicly traded company but a family run business. Apples and Oranges, my friend.
As for the assertion that I haven't refuted it, I don't need to. I've stated above that I've seen no evidence that the insider trading being alleged here is rampant, or even common-place amongst CEOs of public companies. You hear about the high profile ones, but they are not the norm, but rather sensationalism set up as representative. I have seen no statistics showing the recycling of failed executives into other positions, just people pointing out what I believe are exceptions to the rule.
I guess it might be a point, but thats exactly what Landsburg is hypothesizing.
That's the main dichotomy that gets me. If the company is in the red and executives are asking everyone else to sacrifice to ensure that the stock goes up, even if this means 'downsizing' at rather large scales...well, why shouldn't they need to sacrifice as well?
Iacoca wrote a book regarding this lately IIRC. I should take a look at it after I finish up my urban planning read. Moses can wait a little longer.
I hear Japanese CEOs have taken pay cuts and such when the company is in a rough patch, but that's just hearsay and conjecture.
A guy out west who built up a chain or hardware stores that competes profitably with Lowe's and Home Depot was given a very generous package by the board of the company. IRS said his pay was double Home Depot's CEO and more than double Lowe's CEO, thus it was invalid and a tax dodge. Hammered him hard for it to.
If they're doing something unique or challenging they can make a ton of money. But CEO's of most companies are pretty small time, do little more than join a local country club and lease a nice car. It's the Fortune 100 guys that get all the press and make people think they make too much money, even though a Fortune 100 CEO is running a company with annual revenues comparable to a small country.
Meh, it's dime store classiness. If you're handed five million bucks in shares of the company, you can afford to waive the $150k salary without even noticing it. Your salary is a rounding error on your bank statement.
It's good PR, but it doesn't impress me.
My point is that the fact that someone is making X dollars doesn't mean that X dollars is reasonable. It's not like all the stockholders vote on the CEO in a meaningful way - the CEO is selected by a board of rich guys. If the rich guys are all making sure to scratch each others' backs, then we wind up in a situation where AppleCorp LTD is pretty darned comparable to Walt's Orange Shack.
This sort of brings us back to my original post in this thread - it would be really nice if we had some solid data to go on. You admit that there are instances of impropriety, but you maintain those are isolated cases. Fine, but we still just have a battle of anecdotes. We know that CEO salaries are on the rise, and it's uncertain why exactly. I'm skeptical that the performance of companies is increasing proportionally to the skyrocketing CEO salaries, and the risks of CEO-dom don't seem to have really increased lately. It's a mystery wrapped in an enigma wrapped in corporate malfeasance.