Posts
"How does this happen? How are shareholders hoodwinked so thoroughly? I can describe the legal corporate theft by insiders in 5 simple steps. The scam goes something like this:
Five Steps to Shareholder Wealth Transfer
1. The Board of Directors, usually cronies of the CEO (often hand picked by him) forms a compensation committee. To appear “objective,” the committee hires an outside compensation consultant.
2. The compensation consultants are themselves well paid whores, who rather than turning tricks outside the Holland tunnel, offer up absurdly generous comp package. They deliver what they are paid to: They provide cover for the boards to make an otherwise indefensible giveaway of shareholder monies in the form of cash and stock options. It is typically called “Pay for Performance,” but that is a horrific misnomer, as we see in step #3. The comp committee approves the consultants’ nonsense, forwards it to the Board, who rubber stamps it.
3. Here’s where things get interesting: If the stock price rallies, the exec can exercise and cash out, risk free. If the stock price falls, the exec requests a new round of options — or even easier, asks for a repricing of the old ones.
4. After the options are repriced, the exec simply waits. Whether the market rallies or falls . . . you simply go back to step three. Repeat until stock options are in the money. There is no risk or outlay of cash on the part of execs.
5. True “performance” is not a factor. Stock prices can rally for a vast range of reasons having nothing whatsoever to do with management or CEO performance. The market can rally, a sector can come into favor, or even when the Fed can cut rates.
This is not pay for performance, it is pay for stock price volatility.
Actual performance would look at factors such as peer profitability, sector performance, SPX index gains. Bonus payments and stock option exercise should be for gains OVER AND ABOVE these factors — but sadly, rarely if ever are."
How do you feel about CEO pay? Obviously, there has been a lot of outrage over highly paid CEOs at TARP banks. But what about other businesses?
What about the argument that we need to pay them a lot or they will leave to manage foreign companies? I've heard this one a lot, would love to hear what everyone thinks.
http://www.ritholtz.com/blog/2010/04/american-pastime-overpaying-ceos/
While I think labeling compensation consulatants as "well paid whores" is a little extreme I do believe that there is a problem with how CEOs are compensated. I don't understand how these CEOs could accept large bonuses in the middle of the current financial crises. By continuing to pay these large bonuses corporations are only encouraging CEOs to continue their high-risk behaviors. Whether the final outcome is positive or negative, these executives still get paid.
ReplyDeleteI agree with Chloe that the language used to describe the compensation consultants was quite extreme. Additionally, I feel that the people who work up into the top of corporations often deserve large salaries (maybe not multimillion dollar ones)because they have proven through experience their usefulness to the companies they work for (or they would not have been hired in the first place). This is simply what our capitalist system and darwinism is all about...and I personally would not want a hold placed on the amount of salary I could earn.
ReplyDeleteHowever, I do feel that it is incredibly unethical to accept, propose, or distribute large bonus packages when a company is in debt or not doing well economically.
I don't know, I think that CEOs get paid because they don't have the easiest job in the world. They have to manage huge multi-national corporations and they are the face that people see and talk about in relation to the corporation. They get scrutinized more than your average worker, and although I think they get paid a little too much I'm not so sure I'm that against it.
ReplyDeleteI agree with Chloe Ashlee in the sense that CEOs are often well over-compensated but Kelsey has a good point as well. I think in times that are profitable it is okay to give bonuses since the CEO is clearly leading the company in the right direction and doing a good job managing people. However, I think before the financial crisis we saw many examples of companies giving bonuses and high salaries in a time where money could have been properly distributed elsewhere. Look at GM and the bonuses, high salaries, and G5 jets in a time where they were taking losses and hard hits from competition. I think there is more incentive for CEOs if their compensation reflects the firm's financial and profit status. Besides, a lot of that money given to CEOs could possibly be given out as dividends to stock holders to ensure better loyalty and confidence in them. Rewarding the shareholders can have a large benefit for your company...
ReplyDeleteThis piece seems really bitter. In reality I think there is often good reason for high compensation for a small number of employees especially as long as that is a relatively small percent of the revenue of the company. CEOs unquestionably have very high stress high pressure jobs and truly lack, in many cases, the job security of many of their employees. During this current crisis we have heard a LOT about the CEOs at a few companies (mostly Fortune Ten companies) like Goldman Sachs or whatever; but consider Alan Mulally who has taken Ford from a failing company like GM to the most profitable American automaker. Not anyone could have done; I would say executives can be worth every penny (Mulally makes about $13M/year).
ReplyDelete