The compensation wars: Some battles won, still more to fight
Image by ZeroOne via Flickr
This has been a day of mixed blessings when it comes to braking runaway compensation.
On the wow-how-great side: Ken Feinberg has ruled — and boy, has he ruled right. Top execs at Citigroup, AIG, BofA, GM and Chrysler — the companies that got the biggest chunks of taxpayer dollars — will have to forfeit a huge percentage of their pay. They’ll still be making a bloody fortune, but hey, at least this is overtly saying that shareholders have a right to a major say on compensation. And they have to ask the government for permission before they can get perks like country club membership — that alone makes me grin. What a comedown for masters of the universe, they have to ask teacher for the wooden pass to go potty.
(Before you remind me that I’ve always been against the government meddling in corporate pay — I still am, i think that’s the shareholders’ job. But in these cases the government IS a major shareholder, thanx to the bailout — so it’s about time it acted like one.)
Also on the making-me-happy side of the ledger: CreditSuisse is really trying to align executive pay with performance. Here’s how the NYTimes describes it:
The Credit Suisse plan will cover roughly 2,000 employees in the United States. Top executives will receive a greater portion of their total compensation in the form of their monthly cash salaries, while bonuses will be split evenly between cash and stock.
The stock will vest over four years, and the cash portion will pay out in three. But both components will be adjusted based on the bank’s performance over that period, with a particular emphasis on its return on equity, a closely watched financial measure. The performance of an executive’s business will also be taken into account.
By tying payouts to a specific measure like return on equity, Credit Suisse will essentially be able to take back bonuses in the event the bank’s fortunes take a turn for the worse.
Goldman has made noises about a similar plan, but it has yet to do it. CreditSuisse is putting its exec’s money where their mouths (or accomplishments are). And as I’ve insisted all along, I don’t care if they make a bloody fortune, as long as the shareholders are along for the ride, and the public isn’t getting taken for one.
Okay, all that is the good stuff. But the compensation wars have clearly not been won just yet. And in fact, I’ve just found out about yet another way execs get to screw shareholders out of millions.
I got an emailed release from the American Accounting Associatioin today talking about the downside of Supplementary Executive Retirement Plans, known to us business nerds as SERPs. They’re not uncommon. What they do, in essence, is add extra pension money — a boatload of extra money — if the company had particularly fabulous returns or rises in stock prices in the last few years of the CEO’s tenure.
What the Association has discovered is that lots of CEOs with SERPs manipulated earnings so that the company would seem to be doing better than it is in their last few years — and by the time investors and others realized the deck had been stacked, the CEOs were long gone. It isn’t illegal, just totally nefarious.
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I hate war… That just make we are feel pain…
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Mr. Deutsch,
Ignoring for the moment how these companies are generating huge profits during the worst economic down turn in 80 years, what would AIG or Goldman do with these profits if they did not give them out as exorbitant salaries and bonuses? If they kept them on the books they would have to pay taxes on them. If they give it away as compensation it is now a cost. Our tax system rewards companies that give away huge compensation packages and punishes those who do not.
what would they do with the money? Either reinvest it or pay it back to shareholders, either as dividends or stock buybacks.
In response to another comment. See in context »Ms. Deutsch,
Actually AIG is not a good example. They are selling the assests that it can as fast as it can. They sold their Energy & Infrastucture Portfofio for 1.9 BUSD. They are selling their 97.57% share of Nan Shan Life Insurance Company, Ltd. for just over 2.1 BUSD. They selling other holdings for less dramatic sums. They have of course laid off a number of employees as well. AIG had been buying back stock up until February 2008 when the 4th quarter losses for 2007 were posted. That was part of the reason that they got in trouble. Further, AIG missed three quarters of dividends (if they miss a fourth the US Treasury has the right appoint a new BoD). Since AIG is still wobbling toward oblivion, the CEO earning 10 MUSD is hardly justified.
Concerns about executive compensation are not new, they have been around for years. It is only when they are being supported by TARP money that they really move to the fore. My real point is this, what would they invest their profits in? We are in the worst economic downturn in 80 years, what is a profitable investment right now? General Motors? US Steel? The US economy has been running mainly of FIRE (Finance, Insurance, & Real Estate) for the last two decades or so. What is a financial giant going to invest in that will yield a real profit, even if they were not on the verge of bankruptcy.
In response to another comment. See in context »But you are thinking only of stock market investments. Goldman has invested in wind farms in the past — why not invest in alternative energy now? What about funding startups? Lending to small businesses? There are lots of things to do with money other than lining some exec’s pockets
In response to another comment. See in context »