FOBRA…I like it
They argued that a million a month is not enough to attract the execs from the financial companies to help fix up the mess. That is crap. I think a million a year is way to much.
When a company exec dies a new one is put in place. The company does not disappear. Often it gets better. The value of top execs is way over rated. Most exec decisions are determined by information gathered by subordinates. The boss just ratifies the decision that the data points to.
When pay is determined by those that receive it, it will be abusive.
I never understood the gripe about CEO pay. This IS NOT YOUR MONEY. Who are any of you to tell what companies can do with their cash? Maybe stockholders might have an issue, and they can exercise their opinion by selling their stock. But, seeing as how I see no shareholder revolts over exec pay, this might not be a problem after all. Companies that truly “abuse” (I use this term lightly) exec pay will probably not be in the game for the long run.
Regardless, the fact of the matter is that there is a real and distinct issue of people not being able to perform at the CEO level, so that causes a massive supply shortage of people with those jobs. This is true of any CxO position. Combine this with the fact that so many millions of Americans are willing to invest in a corporation, like mine which has hundreds of billions in assets, these corporations can afford to pay top dollar so that a competitor will not gain that exec talent.
How do you expect the government to counteract this “problem?” End investments and corporations? Why not just decide what everyone’s career for them and make their financial decisions for them. Or, how about a 99% tax rate where the government feels like someone is making too much cash? [/sarcasm]
Interlocks are now well tracked, and the comp committee is made up of outside directors. The Comp Committee will hire one set of consultants, and the execs will hire a second.
You can find the interlocks easily - those are not the problem. The problem is that with all of the public information out there, execs know EXACTLY how they compare to their peers. If my employees knew exactly what their equivalents were making (salary, bonus, stock) in the marketplace, I would have much higher compensation costs.
This is a case were perfect information transparency has made exec pay skyrocket.
It is interesting that tax law got in the way of this in the past. When I was gaming the system for my clients, we tried to put in vesting provisions on stock options other than time in the seat.
Most stock options vest over a period of years (20% per year is the standard). We wanted to put in a plan where the options only vested if certain milestones were hit. Unfortunately, that would have forced the company to deduct the option grants as expenses, so they could not do it.
I have written plans that gave out options with a strike price 10% ABOVE the current trading value. That made it so that the options did not have any value until the Company was trading at least 10% above its price at time of grant.
Another plan that I wrote gave the CEO a percent of the company’s return ABOVE that of the returns of peer companies. We were rewarding the CEO for beating his competitors. We also made the plan ONLY pay out in restricted stock, so that there was a double incentive on the CEO to keep the company healthy and growing.
With those types of plans the shareholders should be happy to make payments to the CEO, as he has increased shareholder value. However, they take a lot of work to build.
Regular option plans reward the CEO for just riding the wave of a good market. I don’t support those - and neither should a decent compensation committee.
Really? You have a copy of their bonus plan, and the data showing their performance against plan?
How about a crisis due to vastly over payed incompetent managers who were more interested in raping, robbing, and pillaging the little guys than in being honest and trustworthy in their business dealings.
If the executive pay cap were established by law, I would be willing to bet that they would stand still for it rather than go without a job. The numbers that I posted may be too low; that is something that could be negotiated. But, in no case should the maximum be more than 25x.
WHAT pay should be the maximum?
Salary?
Bonus?
Commissions? (I have known top sales reps that earned more cash than the CEO)
LTIP plan payouts?
Stock Option Grants? What valuation model? What if at grant they are low, but at exercise they have skyrocketed?
Restricted Stock Grants?
Can I dump all of my low-level employees, outsource their work, and only “hire” middle managers to ensure that my multiple is of a higher average?
Here is a fun exercise:
Minimum wage is $7.25. Someone working 40 hours per week for 50 weeks of the year earns $14,500. The President makes $400,000. That gives the President a 27.6x multiple of the “lowest paid” full-time worker in America.
Should we reduce the President’s pay?
I told someone this when the housing bubble burst and I’ll post it here. You only need to look at the face of President Bush and Nancy Pelosi to understand how bad it is. When they first addressed the situation they both looked like McCain when he was a POW. If you get on national TV and you look beaten down then something is seriously wrong.
So yes, I think we are in real trouble when the stock of GM is suspended from trading. That’s scary. But I remember the wage and price controls of 1972 because it was a classic example of the law of unintended consequences. You want to know what’s worse than high gas prices? Not being able to buy gas.
California went through the same thing. They put upper limits on what electrical companies could charge and the industry’s shrinkingROI showed up in a lack of reinvestment. The consumer got screwed twice because it forced electrical companies to buy outside the grid which then became a back-scratching free-for-all.
I’m against wages that are not competitively bid and as Tomndebb pointed out this is done on a CEO level through the board of directors bed-fellow association. But I can go on for hours about the unintended consequences of government interference in businesses.
A major problem is exactly the bed-fellow relationship you mention. As someone posted above, maybe it is time the boards of directors included some peons and some middle management people. Maybe it’s time for board meetings to arrange transportation and housing for those members who cannot afford to cover those expenses. And, at the same time, maybe it is time for companies to stop covering transportation and housing for those who can afford it.
All I know for absolute certain is that I have worked for companies where I reported directly to the President / CEO and more often than I care to remember, the person filling those exalted positions had not a clue as to what was actually happening in the manufacturing area. They had an excellent idea as to what the bottom line would be and knew almost to the penny what they could expect as bonuses and/or stock options. They knew to the penny what sales were and they rewarded the top salesmen lavishly. What they didn’t know was that the sales people, by and large, had no understanding of the technical product we were manufacturing and would often commit to specifications that were impossible to meet. In other words, guys like me slugged it out with our customer’s engineers, negotiated changes in specifications, delivery dates, etc., etc.; many of our customers had my home phone number and I often spent most of my spare time in further negotiations while the salesmen who caused the problems were playing golf with the CEO who was unaware of the problems his salesmen caused. In other words, in my experience, the top guys in the company were raking in big bucks on my back and it was on my back; I had no one to turn to and I’m not feeling sorry for myself. I suppose simple disgust might play a big part in my desire to see salary caps for people like the CEOs I was most familiar with. The simple fact was, that on a yearly basis, I saw those CEOs making more and more money without learning a damn thing about the problems besetting their engineering and manufacturing teams.
Frankly, that depends one whether you’re a strict or a loose constructionist of the Constitution. I’m appalled and detested by excessive executive compensation. At the same time I’m absolutely, categorically against imposing a legal limit on salary, so I’m personally at a loss here.
If you re-read (because I’m sure you read it already; it’s prolly just slipped your mind) my post #24 in this thread, you will see that there is plenty of justification in the Constitution as it is currently interpreted for setting a maximum pay rate, should the Congress so decide.
There is no need for a crisis, and the solution does not need to be temporary. Congress would be well within their (currently accepted) powers to do this.
And government intervention is going to make them smarter? I have my own list of grievances with union labor and a host of government peons who operate in a mental vacuum of job security.
I’ve talked with a number of consultants and engineers who witnessed a no-show rate of 25% at a local parts plant. Should the government step in and cut the wages of these slackers who get a guaranteed paycheck while the company loses money?
When I go into town to deal with city employees I see an office full of people with no apparent workload to speak of. When I set up appointments with them for inspections they repeatedly don’t show up or call. I would be fired for doing this at any job I’ve ever worked at.
This is a game we could play all night long.
To those that think CEOs are overpaid, that the system is rigged, etc: What if CEO short-term contracts were bought and sold at private auctions? That is, where the bidders are private. The contract would stipulate that the CEO’s remaining salary, if dismissed early, must be paid relative to the stock price after dismissal. So, for instance, someone wins an auction for CEO[sub]a[/sub], but hates him after a year and releases him from his contract. They are bound to pay him for four more years, but only based on proportion of the value of their stock. Does this fix incentive problems?
Huh??? What on earth does that have to do with marginal income tax rates?
While millions of jobs have been shipped out of America in the past couple of decades, I’ll be damned if I can think of a single CEO who has moved his corporate headquarters - and his own job - to, say, China.
Well, it is the money of most people with pension plans, as they are stockholders.
Each stockholder has a trivial interest to exercise oversight over the company and precious few do so. Furthermore, mutual funds are loth to put restrictions on CEO compensation, since those companies are major customers via their pension plans.
Take a look at Algher’s posts. He describes his clients as executives, not shareholders (though I see he has referred to compensation committees in a recent post).
This is the only variant that impressed me. But impressed me it did. I understand that such plans are rare.
From what I understand of the empirical literature, executive compensation is more likely a reflection of agency problems (looting, in populist parlance) than bona fide incentive management.
Interesting point about the law getting in the way, btw. My proposal for a blue-ribbon committee was an acknowledgment that thinking through the details is important (though admittedly this may in the end be a mug’s game).
eris: Dang, you really have been studying your economics. Good to see your around, btw.
Part of the current problem is stock price manipulation, so we would want to have the stock turned over to the executive after he leaves the firm at best, or at least after many years. If you wanted to be mean, I suppose you could tie compensation to the stock price following the appointment of his successor, who has every reason to air dirty laundry and badmouth his predecessor, all the better to establish a low baseline.
Yeah, that’s what I meant. Year 2 would be based on Year 2 stocks, Year 3 on Year 3 stocks, etc.
What interests me is not the notion that some are overpaid, but that some are underpaid. Auctions break politics and don’t allow collusion, if done correctly. Some really great CEOs are so great because the institution is also great, and the team and the CEO work well together. I’m not sure you can actually transplant a CEO and expect miracles. But then, its all the more important that that company wins, isn’t it? I’m hard-pressed to imagine a scenario where this auction causes problems for companies. It might cause problems for CEOs, though, who might not want to leave a company, even if he thinks he is underpaid. I doubt most CEOs are in it for the exact dollar figure.
Thanks. It’s awesome to be back.
What mechanisms are in place to keep exec pay at lower levels? Apparently none. Therefore they only go up. The pay should be linked to yearly performance of the company. When they lose money the bonus should be zero.
Why should exec pay be the only pay that is not performance rated? No matter what the company does they get raises and bonuses. The retirement and stock options are even more ridiculous.
What incentive do they have to show up ,let alone do a good job?