Obama's Executive Compensation Plan

[Ice]

I thought this article, written in question and answer format, was pretty good. Pearl seems rather knowledgeable.

Obama's pay caps: The good and bad
Executive pay expert Pearl Meyer says the limits may be politically popular, but aren't very effective at changing management thinking.
By Jennifer Reingold, senior writer
February 5, 2009: 12:26 PM ET

(Fortune) -- When it comes to executive compensation, Pearl Meyer has seen it all. She started her career more than 30 years ago, at Kraft, founding her own eponymous firm in 1989 and later selling it. Now senior managing director at Steven Hall & Partners, Meyer has the kind of perspective on President Obama's pay restrictions that can only come from a veteran of the business. In an interview with Fortune's Jennifer Reingold, she talked about what's good and bad in it.

Q: Pearl, what do you make of the Obama plan? Will it change the way banks pay their executives?

A: I think it's clever. It's well designed from the perspective of the government trying to balance incentives with the need to satisfy the concerns of the public and the Congress. What they are trying to do, I believe -- how should I put this delicately -- is to meet the expectations of the public. But I don't know how effective it will be in motivating and retaining the people we need for the long haul.

It sounds very good if you believe that the people who are now in charge were responsible for the disaster. But these disasters were caused by a small segment of the managing population and the problem is proper oversight by senior management, most of which are gone. Now there is a cadre of executives who are going to be punished or penalized for the actions of others. I am concerned that these institutions won't be able to maintain the quality of their hires.

Q. But what else would they do? Go to other companies that didn't take TARP funding?

A. Exactly, yes. Right now AIG (AIG, Fortune 500) is hemorrhaging people and they are being grabbed up right and left.

Q: Are there specific elements of the plan that you like or don't like?

A: Some of these things are very sensible, like don't redecorate your office. On the other hand, the nonsense about Wells Fargo (WFC, Fortune 500) not being able to have a sales meeting is terrible. It's business. They're going to have to have sales conferences and people are going to have to pay for them.

If you really look at it, though, they didn't really limit executive pay. They limited current cash compensation to $500,000. Continuing to grant restricted stock and other long-term incentives represents an opportunity for long-term wealth accumulation, considering the depressed value of the stock. AIG is now at around $1 a share...if people could get restricted stock at a dollar and bring that company back, they could easily make up for what they've lost in cash.

Q: This is not the first time government has tried to limit compensation. What has been the result in other attempts?

A: Ideologically I think that if it was not a quid pro quo [meaning, that this is in return for government funding], it would be a very bad idea. Every time we've had regulatory interference with the marketplace, it has boomeranged. I've gone all the way back to Nixon's wage controls. It was a complete failure. There was a limitation of 4% on all salary increases, but before that many companies weren't giving 4%. After that they all were. And the year after the controls expired, salaries increased 10%.

The same thing happened with the $1 million cap on the tax deductibility on executive salaries. And the limit of 2.99 times salary for the tax deductibility of golden parachutes [severance or change-in-control payments made to executives]. No one was getting that before: The average was 1.5 times. People were coming to me saying, "Mrs. Meyer, why am I only getting 1.5 when the government lets you do 2.99?" It just boomerangs

It does raise an a few interesting questions. The big one would be: Will these high level executives abandon the TARP firms to receive more money?

[Hosakawa Tito]

There is a glut of unemployed bankers & finance industry workers out there. What happens to wages for labor when there's more workers than jobs? Wages go down or at best stagnate, right? Why should it be any different for highly paid executives? The government should make the companies that already received billions of tax-payer money give back the bonuses they paid out, 18+ billion worth. It's really pulls at your heart strings that some feel they can't get by on $500,000 per year plus stock options. The compensation culture has to change from high risk short term profit, gimme my $50 million I'm outta here before it goes bust; to more long term viability/profitability. Share holders need a meaningful voting say on management compensation & perks, that counts, not the jury-rigged in favor of the board & top echelon that is in place now. It's one thing when you're spending & risking your own money, and quite another when you're spending & risking other peoples money.

[HoreTore]

I think I'm going to have a boner for the rest of the year!


Lucky I have a date tomorrow night....

[Strike For The South]

I think I'm going to have a boner for the rest of the year!


Lucky I have a date tomorrow night....

Make sure he's gentle

[Alexander the Pretty Good]

It's one thing when you're spending & risking your own money, and quite another when you're spending & risking other peoples money.

Apply this to both business and government and I'm on board.

[HoreTore]

Make sure he's gentle

You should remember from our last......"encounter" that I like it rough

[Crazed Rabbit]

The government shouldn't interfere in such things. It will only backlash.

Yes, its a populist move that will make some happy. But guess what - the top talent will leave all the firms that are forced to accept these conditions and the economy will suffer.

CR

[HoreTore]

The government shouldn't interfere in such things. It will only backlash.

Yes, its a populist move that will make some happy. But guess what - the top talent will leave all the firms that are forced to accept these conditions and the economy will suffer.

CR

That "talent" is responsible for the biggest economic crisis since the 30's. Please, do explain why it's a bad thing for them to bugger off....

[Crazed Rabbit]

Because it's not the whole class of people responsible, just a few. Most of those people affected by this are not responsible. It's cutting your nose to spite your face.

CR

[HoreTore]

Because it's not the whole class of people responsible, just a few. Most of those people affected by this are not responsible. It's cutting your nose to spite your face.

CR

I sincerely doubt they will be forced to beg in the streets with a 500.000 dollar salary.

Do we have a different moral code for people at the top, btw? Responsibility and loyalty doesn't apply to them, nor do they care about it? Are the commies right when they claim that the only thing senior management cares about is personal wealth, personal wealth and some more personal wealth?

[Hosakawa Tito]

The government shouldn't interfere in such things. It will only backlash.

Yes, its a populist move that will make some happy. But guess what - the top talent will leave all the firms that are forced to accept these conditions and the economy will suffer.

CR

But the government has already "interfered" by making the tax-payers shareholders in these failing companies. If they're "top talent" why is their company failing and looking for a handout of tax-payer money?

Because it's not the whole class of people responsible, just a few. Most of those people affected by this are not responsible.

Hogwash. The entire culture of corporate officer compensation must be changed and this will happen at healthy institutions also. There's no justification for the lavish waste of shareholder's money on $35,000 commodes and $17,000 waste baskets ala John Thain . This isn't an isolated case, it's common practice. Every corporate board member for these troubled companies should be fired and blackballed from ever serving as such again.

[Husar]

Well, isn't it a nice display of how a country is free, offers free choice and a chance for everyone to rise to the top when "top-talents" prefer to be unemployed and others can get to try their job?
It's like with presidents, even if they're good, you wouldn't want them to serve more than 8 years, maybe a similar rule should be made for managers? After those 8 years they could retire and hold speeches for 50000$ each, like some politicians do.

[KukriKhan]

I just wish the poli's would cap their own salaries and perq's. Spread the suffering around, yanno?

In my town, the City workers took a 5% pay cut across-the-board, rather than have forced layoffs (which may come anyway, later this year, if/when things get worse).

City Council, otoh, got a 9% pay raise, that none have declined/refused.

[Lemur]

I just wish the poli's would cap their own salaries and perq's. Spread the suffering around, yanno?

There have been a few minor nods toward this.

[Hosakawa Tito]

I just wish the poli's would cap their own salaries and perq's. Spread the suffering around, yanno?

In my town, the City workers took a 5% pay cut across-the-board, rather than have forced layoffs (which may come anyway, later this year, if/when things get worse).

City Council, otoh, got a 9% pay raise, that none have declined/refused.

I agree, but don't get me started on my New York State Banana Republic representatives or I'll forget my org manners, get banned from the Backroom, and receive a courtesy call from the men in black.... I mean we have to give them such compensation to retain their awesome brilliance or the people of New York will suffer from mediocre leadership...*the sarcasm meter is redlining cap'n, anymore o' this and she's goona blow*

[LittleGrizzly]

This is rubbish!

We need to give these people more not less money, with this extra increase in wages and bonuses we shall attract all the top talent and they will save us from this economic trouble!

Double all CEO's, Board members and top level management's pay!

[drone]

What really needs doing is a rewrite of how corporate officer compensation boards work. More input from shareholders, and more focus on bonuses for long-term success. For all companies, not just the ones taking a bailout. Then, with the federal government as a large shareholder of the failing companies, these limitations can be applied as part of the new process. This would also give large retirement plans and mutual funds a better say in how their investments are to be squandered.

Shareholders really need to be more involved in the process, and people should not invest in companies that allow the board to raid the profits.

[Vladimir]

I just wish the poli's would cap their own salaries and perq's. Spread the suffering around, yanno?

In my town, the City workers took a 5% pay cut across-the-board, rather than have forced layoffs (which may come anyway, later this year, if/when things get worse).

City Council, otoh, got a 9% pay raise, that none have declined/refused.

Good call! This always burns me. Especially in this case when congress recently voted themselves a pay increase.

[Lemur]

More input from shareholders, and more focus on bonuses for long-term success.

We have a winner!

[Don Corleone]

You're free to pay your executives whatever you want to with your own money. Shareholders and banks (the 2 normal sources of capital) place restrictions on executive pay, why shouldn't the government when they take up the role of investor.

Besides, rewarding somebody for gross incompetence really rubs me the wrong way. If Citibank feels so morally outraged that the White House would dare to suggest that they're overpaid, don't take their money!

[Husar]

We have a winner!

Yes, because we all know from the gaming industry how shareholders always have the best interests of the company's customers in mind and no company would ever try to screw it's customers or employees to appease the shareholders.

So if shareholders and banks are the only sources of capital nowadays anyway, then why are people supposed to buy all the stuff companies produce anyway if I may ask into the round?

[Ice]

Besides, rewarding somebody for gross incompetence really rubs me the wrong way. If Citibank feels so morally outraged that the White House would dare to suggest that they're overpaid, don't take their money!

From the Article:

It sounds very good if you believe that the people who are now in charge were responsible for the disaster. But these disasters were caused by a small segment of the managing population and the problem is proper oversight by senior management, most of which are gone. Now there is a cadre of executives who are going to be punished or penalized for the actions of others. I am concerned that these institutions won't be able to maintain the quality of their hires.

I'd have no problem if the pay restrictions were on the idiots who caused this. Unfortunately, it's not really that simple.

[Ice]

So if shareholders and banks are the only sources of capital nowadays anyway, then why are people supposed to buy all the stuff companies produce anyway if I may ask into the round?

You are confusing financing and profit. People are suppose to buy the products because they need the products. Companies are suppose to sell the products to pay their debt and/or make profit.

Now the sources of financing, are shareholders, banks, or corporate paper (like treasury bonds, except issued by corporations).

[Don Corleone]

From the Article:



I'd have no problem if the pay restrictions were on the idiots who caused this. Unfortunately, it's not really that simple.

It's not simply a matter of punishment on those responsible. It's a matter of "do you really need a government bailout or don't you"? If your CEO is raking in $10million, maybe the answer is no.

Seriously, let's consider the worst case scenario proposed by Ms. Meyer. The position and tone of her arguments seem to indicate that she believes maintaining the maximum number of corporate entities is a goal, in and of itself. But should it be?

Let's say AIG takes the TARP money, and in doing so, restricts executive pay. And as a result, the wall-street regulars all bail off of AIG's senior management team. What happens next? They have to go to the minor leagues. Since it was conventional wisdom and business-as-usual that caused the current mess, wouldn't fresh blood likely be a good thing?

And there's another syllogism in her article. She highlights that AIG is hemorraghing talent right now. But the executive restrictions haven't gone into affect yet. So these guys are paying themselves gobs of taxpayer cash, and leaving anyways.

Finally, I conclude that even if the worst were to happen, and some troubled instutions weren't able to retain top talent and ended up going under... is that so terrible? It's not as though the talent is just going to stop working... they'll be adopted into higher-paying (therefore, non-TARP limited, therefore, not in fiscal crisis) competitors.

This, by the way is reason #2 I believe the only thing the government ever should have done was buy troubled assets directly. Had they stuck to that approach, even if AIG went under, the government still had the assets they purchsed. By handing a bag of money to a thief and hoping this time he doesn't pocket it... well, you can see how well it's working out.

[Major Robert Dump]

It doesn't matter if the specific individuals being capped were responsible or not, what matters is that they are part of a company that is being bailed out at the taxpayers expense.

I understand this is a form of socialism, I understand it violates some of the basics of free market capitalism -- but how does saving failing companies and nationalizing banks not do the same thing? How does giving auto companies who can't manage their business and peddle subpar goods a handout not qualify as socialism when it essentially stifles competition from the other car companies who play on the same field as the Big3? How does a state paying for a large companies parking and plumbing in order to lure them to the state not qualify as socialism when 99.9% of that companies competitors recieved no such assistance

My point is that's its absolutely ridiculous that we this perverted system masquerading as capitalism yet critics of this salary cap cry about interfering in the market. Hell, McCain ran an entire campaign about Obama turning us socialist as billions of dollars were being poured into banks and billions more were being promised to car companies. Give me a break.

Using the logic of not capping salaries for these companies on bailout funds, well, poor people on welfare shouldn't have a limit in benefits and in fact should get a raise every year. I mean really, it is the same thing in theory and procedure. I'm curious how many people against the salary caps are for more lax qualifications for social welfare, and how many people against drug and alcohol testing of welfare recipients are for the salary caps.

As for caps for people in office I think the only people not for that are the people in office. Still, there's a difference between the pols salaries and the exec caps because pols were elected or appointed, and stupid spending on retreats and big dinners and high salaries are kind of expected because they are slimy politicians after all.

[Husar]

You are confusing financing and profit. People are suppose to buy the products because they need the products. Companies are suppose to sell the products to pay their debt and/or make profit.

Now the sources of financing, are shareholders, banks, or corporate paper (like treasury bonds, except issued by corporations).

Well, if they'd skip one cycle of financing, they could use all that profit for financing and wouldn't have to pay any interests. That way they would have more money for financing, unless you are saying that they only use the profits to pay the interest on their loans while taking up ever more loans in which case it's no wonder the industry is in big trouble if you ask me.

[Askthepizzaguy]

I just wish the poli's would cap their own salaries and perq's. Spread the suffering around, yanno?

In my town, the City workers took a 5% pay cut across-the-board, rather than have forced layoffs (which may come anyway, later this year, if/when things get worse).

City Council, otoh, got a 9% pay raise, that none have declined/refused.

Personally, I believe the entire Congress should serve without accepting a single dime as a salary until the budget is balanced and the national debt is paid off. That goes for the president and the cabinet too.

I volunteer to serve for free, and you know where I stand. The only thing is, I refuse to ask for donations, advertise, or campaign. I will only debate.

I'm non-partisan and I'd prefer that my personal life stay that way. As such, I won't be running.

[LittleGrizzly]

Well, if they'd skip one cycle of financing, they could use all that profit for financing and wouldn't have to pay any interests. That way they would have more money for financing, unless you are saying that they only use the profits to pay the interest on their loans while taking up ever more loans in which case it's no wonder the industry is in big trouble if you ask me.

I don't think it's quite that simple, alot of business need constant finance to reinvest in thier business and the major problem with a recession is not only will thier sources of finance dry up but other companies will extend thier 'debtor days' meaning they take longer to pay the other company (for stock or whatever they buy) generally larger companies will do this to smaller companies as they can get away with it, meaning little company in example will need finance to make up the temorary short fall, this constant finance and reinvestment as long as it is done well will cause the company to grow...

[Husar]

I don't think it's quite that simple, alot of business need constant finance to reinvest in thier business and the major problem with a recession is not only will thier sources of finance dry up but other companies will extend thier 'debtor days' meaning they take longer to pay the other company (for stock or whatever they buy) generally larger companies will do this to smaller companies as they can get away with it, meaning little company in example will need finance to make up the temorary short fall, this constant finance and reinvestment as long as it is done well will cause the company to grow...

Yes, I'm aware it's more complicated, we have managed to make a matter of plus and minus so complicated that we can discuss the whole thing for hours until everybody is confused, everybody thinks she/he is right and companies go bankrupt anyway. It really works, doesn't it?

[LittleGrizzly]

It really works, doesn't it?

Well it has its problems but generally...yes. For a really simple example imagine a game of command and conquer, if someone gave you a loan of 10,000 ore (ontop of your startup capital) you can expand and make more money far more quickly than an opposing player who doesn't have a loan. Of course in real life businesses can be unsuccessful even with expansion and finance, but mostly they expand and make more money and are able to pay back thier debts...

With the bankrupt companies it was more down to bad managment and other problems with companies rather than the system (though you could accuse the 'system' of having these flaws as inevitably built in) some companies struggled because of the recession rather than thier own bad practice, these are companies we should support as they are profitable and will return to this status once we get through the recession...