Wednesday, January 28, 2009

Business-people who reduce capitalism's appeal

Maureen Dowd shows justifiable contempt for the greedy 'masters of the universe' who have destroyed the lives of millions - 80,000 extra unemployed globally in one day this week - and yet still cretins like former CEO of Merrill Lynch Mr. Thain - a man who in my view should be in jail - cries that huge salaries need to be paid to retain the talent.
(Thain) "“If you don’t pay your best people, you will destroy your franchise” and they’ll go elsewhere, he said.
(Dowd writing about Merrill Lynch) Hello? They destroyed the franchise. Let’s call their bluff. Let’s see what a great job market it is for the geniuses of capitalism who lost $15 billion in three months and helped usher in socialism".
The maximum salaries paid in large companies should be subject to shareholder approval.  If shareholders underpay they will cop it in the hip-pocket but director-determined salaries (on the basis of reports by 'independent' remuneration committess) don't work. Salaries that are 100X the average worker's salary in the UK and 358X the average worker's salary in the US are ridiculous.  You don't have to get involved in arguments about angels dancing on the heads of pins to understand this.

It should be understood by all shareholders and all boards that all incentive contracts should be a minor top-up to fixed salaries that are payable as equity claims realisable with at least a 10 year lag. The claim that then executives are subject to the whims of their successors (more moral hazard reasons for enriching themselves!) is nonsense - they should select good successors as part of their job.

We all know that the 'get rich quick' society is a crock.  People who do a good job of managing firms for the longer-term should get good rewards of perhaps twice or three times average earnings.  Psychopathic executives (the sought after cunning, manipulative, untrustworthy, unethical, parasitic, and utterly remorseless output of the business schools) are not required nor are greedy spivs who believe that the path to wealth is simply to gear up and buy. All business schools need to teach courses in ethics and never pretend that an MBA alone provides the skills to manage anything.

Shareholders need to be clear. We don't believe your lies, spivs. You have to work as anyone else does to justify a good salary. I am a defender and supporter of capitalism but I am not a fool and we have been dudded.

19 comments:

jc said...

Harry

You have no idea what you're talking about when it comes to compensation on Wall Street.

Honestly do you really think you’re the first person to have ever thought about compensation, the way it’s paid and when?

That's what people spoke about for a good part of their time on the job and now here you are trying to recreate the car engine.

Please!


Wall street salaries were meant to be variable in order to keep costs down in what was and still is a very cyclical industry. It means that firms would still be able to navigate tough times on a lower cost base while giving upside in the good times.

And over a certain amount compensation was always paid as stock that usually took up to 5 years to vest. If you left for another job, you lost it. If you were fired for reasons other than fair cause you were able to claw it back.


If you think Wall Street is so easy I suggest you ought to try it some time. The fact is that probably less that .25% of the population would be smart enough or savvy enough to be able to hold down a successful job on Wall Street as a trader and make decent money. In fact it’s probably even less.


You’re given, if you're a trader a few screens, a telephone bank and expected to make money that covers various allocations of overhead cost and expected to make budget in an sector that doesn’t have recurring income. You can’t count on making money that Doll yen is going rise tomorrow the way it did today in the same way that as an airline you would know that each day a certain number of people would be traveling between Melbourne and Sydney for business.


Salespeople basically have to earn the trust of clients hoping to get a trade here and there.

You really have no idea just how hard it is to make money and no idea just how beneficial it is to firm to be able to make a large portion of their compensation variable rather than fixed. Think how much better airlines would be if this were the case to give an example.

Then here are the investment bankers who simply have to rely on relationships and be able to initiate merger and acquisition deals or give advice when they are called. You really think this is easy, harry?
Compensation in I-banking is an extremely complicated issue and the best way to pay people is to limit the fixed component and make the variable as open ended as possible.

Unfortunately, people like you don’t really have much of an idea what you are talking about when it comes to this issue.

And what exactly would you charge Thain with. I’m not defending him in any way; however there doesn’t seem to be anything that he did that was against the law at this stage. Wood away from the trees he actually did a very good job of selling the firm at the right moment in time. His timing was superb even if the magic carpet issue was a little tasteless.


Fine, harry allow the board for figure out comp and then you would all the good traders migrating over to hedge funds and trade from that platform.

What you want to create is the old Tory system that counted was the old school tie and the chance of making some capital off your own wits is basically prevented. So we would go back to the 50 families running the country like they used.
Harry

You have no idea what you're talking about when it comes to compensation on Wall Street.

Honestly do you really think you’re the first person to have ever thought about compensation, the way it’s paid and when?

That's what people spoke about for a good part of their time on the job and now here you are trying to recreate the car engine.

Please!


Wall street salaries were meant to be variable in order to keep costs down in what was and still is a very cyclical industry. It means that firms would still be able to navigate tough times on a lower cost base while giving upside in the good times.

And over a certain amount compensation was always paid as stock that usually took up to 5 years to vest. If you left for another job, you lost it. If you were fired for reasons other than fair cause you were able to claw it back.


If you think Wall Street is so easy I suggest you ought to try it some time. The fact is that probably less that .25% of the population would be smart enough or savvy enough to be able to hold down a successful job on Wall Street as a trader and make decent money. In fact it’s probably even less.


You’re given, if you're a trader a few screens, a telephone bank and expected to make money that covers various allocations of overhead cost and expected to make budget in an sector that doesn’t have recurring income. You can’t count on making money that Doll yen is going rise tomorrow the way it did today in the same way that as an airline you would know that each day a certain number of people would be traveling between Melbourne and Sydney for business.


Salespeople basically have to earn the trust of clients hoping to get a trade here and there.

You really have no idea just how hard it is to make money and no idea just how beneficial it is to firm to be able to make a large portion of their compensation variable rather than fixed. Think how much better airlines would be if this were the case to give an example.

Then here are the investment bankers who simply have to rely on relationships and be able to initiate merger and acquisition deals or give advice when they are called. You really think this is easy, harry?
Compensation in I-banking is an extremely complicated issue and the best way to pay people is to limit the fixed component and make the variable as open ended as possible.

Unfortunately, people like you don’t really have much of an idea what you are talking about when it comes to this issue.

And what exactly would you charge Thain with. I’m not defending him in any way; however there doesn’t seem to be anything that he did that was against the law at this stage. Wood away from the trees he actually did a very good job of selling the firm at the right moment in time. His timing was superb even if the magic carpet issue was a little tasteless.


Fine, harry allow the board for figure out comp and then you would all the good traders migrating over to hedge funds and trade from that platform.

What you want to create is the old Tory system that counted was the old school tie and the chance of making some capital off your own wits is basically prevented. So we would go back to the 50 families running the country like they used. No thanks.


Look the thing that ruined Wall street was that it corporatized and moved away from the old partnership system. Goldman Sachs was a much better firm when it was a partnership. So was Morgan Stanley and so was the old firm i worked for First Boston before they went into an unhappy marriage with Credit Suisse.

hc said...

jc, I have taught about executive remuneration in a business school for 14 years. I don't believe much of the received wisdom.

None of the executives who have over-borrowed and driven their firms to bankruptcy while receiving great bonuses seem so smart.

I am unsure you have much idea how hard it is to make money. How hard it is for all of us. There is more to production than reading computer screens and trying to buy cheap.

I don't want the board to determine maximum salaries in a firm - I want this done by shareholders. Boards have failed as you yourself said in a comment on an earlier post.

The whole thing is a disgusting mess. The traders you praise are destroying the free enterprise system that you and I both want to see survive.

phil said...

The point of Harry's post is that smaller/individual shareholders do not get a look in. The power is retianed in-house between the execs, the (not so) independent remuneration advisers and the institutional investors. I can't argue against you JC because you've been in the industry, but to an outside there are no checks and balances.

And if the CEOs do destroy shareholder value, on the publicly available evidence they don't seem to suffer - they've walked away with millions and so far they've been picking up fresh gigs with equally "outrageous" salary packages.

jc said...

oops please delete the above as I copied/pasted it twice.


Harry

You have no idea what you're talking about when it comes to compensation on Wall Street.

Honestly do you really think you’re the first person to have ever thought about compensation, the way it’s paid and when?

That's what people spoke about for a good part of their time on the job and now here you are trying to recreate the car engine.

Please!


Wall street salaries were meant to be variable in order to keep costs down in what was and still is a very cyclical industry. It means that firms would still be able to navigate tough times on a lower cost base while giving upside in the good times.

And over a certain amount compensation was always paid as stock that usually took up to 5 years to vest. If you left for another job, you lost it. If you were fired for reasons other than fair cause you were able to claw it back.


If you think Wall Street is so easy I suggest you ought to try it some time. The fact is that probably less that .25% of the population would be smart enough or savvy enough to be able to hold down a successful job on Wall Street as a trader and make decent money. In fact it’s probably even less.


You’re given, if you're a trader a few screens, a telephone bank and expected to make money that covers various allocations of overhead cost and expected to make budget in an sector that doesn’t have recurring income. You can’t count on making money that Doll yen is going rise tomorrow the way it did today in the same way that as an airline you would know that each day a certain number of people would be traveling between Melbourne and Sydney for business.


Salespeople basically have to earn the trust of clients hoping to get a trade here and there.

You really have no idea just how hard it is to make money and no idea just how beneficial it is to firm to be able to make a large portion of their compensation variable rather than fixed. Think how much better airlines would be if this were the case to give an example.

Then here are the investment bankers who simply have to rely on relationships and be able to initiate merger and acquisition deals or give advice when they are called. You really think this is easy, harry?
Compensation in I-banking is an extremely complicated issue and the best way to pay people is to limit the fixed component and make the variable as open ended as possible.

Unfortunately, people like you don’t really have much of an idea what you are talking about when it comes to this issue.

And what exactly would you charge Thain with. I’m not defending him in any way; however there doesn’t seem to be anything that he did that was against the law at this stage. Wood away from the trees he actually did a very good job of selling the firm at the right moment in time. His timing was superb even if the magic carpet issue was a little tasteless.


Fine, harry allow the board for figure out comp and then you would all the good traders migrating over to hedge funds and trade from that platform.

What you want to create is the old Tory system that counted was the old school tie and the chance of making some capital off your own wits is basically prevented. So we would go back to the 50 families running the country like they used. No thanks.

jc said...

No harry calls people on Wall street spivs. He just thinks that a guy that earns say $5 million with only a telephone and a couple of screens isn't worth the money because he's earning far too much compared to the dude on a factory floor.

Well that may be true. But so what. the product of the labor of the dude with a telephonme line is far higher than the dude on he factory floor.

the guy on the floor needs billions to allow to makes cars etc. While the guy with a couple of screens and a telephone needs far less.... And yes cost of capital is calculated quite well to ensure the trader isn't taken money that is simply earned off capital.

if you don't like the structure than I would suggest you try to entice what's left of the street to go back to a partnership situation. But let me warn you they wouldn't be earning less money if the firms went back that way.

the partners at Goldman sachs were earning 5 million a year before the corporatized and went public and the return on head count was the highest of nay firm in the world.


Harry simply doesn't know what he's talking about.

Yobbo said...

I love it when academics try to tell business people how to run their own businesses.

Those who can, do. Those who can't, teach.

jc said...

Well if you think you can consistently buy low and sell high then I suggest you try it Harry and see how well you do. Keep in mind that you don't have any edge to the other smart guy down the street other than your wits.

I’m not trying to sound offensive, but teaching about management comp over 14 years gives you what expertise to have a firm grasp of what the comp system ought to be on Wall Street.

You do realize don’t that for the most part the people that lost the freaking money were the originators and not the traders or sales people or the investment bankers. For the most part it was a bunch of geeks that the senior executives relied on to create mathematical models. So to a large extent it was probably no more than 15 -20 people in each firm that were responsible for the losses. Now compare that to a firm that had 14,000 employees like Lehman and 30 % of the stock was actually owned by the workers.

I’ll repeat it again, Wall Street comp went that way because it allowed firms the flexibility of creating variability that would otherwise be fixed costs in an industry that was extremely cyclical. In other words it was the best system available.

Yes Harry, some firms practiced comp caps and you know what happened, you started to lose you very best traders. Replacing really good traders is freaking hard as there are so few of them around.

It would be next to impossible for the boards at I-banks to figure out compensation other than the most senior executives.

The example you brought of the firm I talked about the other day is actually a perfect example of “legalistic dishonesty” that I have ever seen. However they won’t get away with it as the shareholders will mount an insurrection if necessary.

That example is far different to the stuff I’m talking about here. Those arseholes won’t get away with that crap.

hc said...

What business are you talking about Yobbo. Is it producing socially valuable outputs or running fiorms into bankruptcy after pilfering shareholder funds?

If its the latter you bet I'll comment.

jc said...

Harry

If a business has a positive rate of return by definition it is economically worthwhile no matter if it's making cars, widgets or some guy sitting behind a screen.

hc said...

jc, The financial whiz-kids have not been earning positive rates of return. They have been driving firms into bankruptcy.

Your general claim is false. Theft as a business can offer a positive return but it does not advance the social interest.

civitas said...

"I don't want the board to determine maximum salaries in a firm - I want this done by shareholders."

In effect, it is. The shareholders elect the board. But it does take an unusual case for shareholders to oust board members. One such case is going on right now with Gaylord Entertainment, in which shareholders are trying to out the leadership by putting up names for board seats.

civitas said...

Here's the Gaylord Entertainment case.


http://www.bizjournals.com/nashville/stories/2009/01/26/story1.html?b=1232946000%5E1766373

hc said...

Boards don't represent shareholders although shareholders can get organised to ensure they do. I support this.

A famous recent example of an Australian board thumbing its nose at its shareholders was the Telstra board's rejection of advice from shareholders than executive salary increases be rejected.

civitas said...

"The point of Harry's post is that smaller/individual shareholders do not get a look in."

Well yes they do. When they buy and sell. Why would you buy stock in a company that you believe to be poorly run in the first place?

"I can't argue against you JC because you've been in the industry, but to an outside there are no checks and balances."

Well, there are in that you can sell your stock if you're unhappy with the business practices of the management. Public companies must attract shareholders to survive. The last thing anyone should want is for shareholders who are not paying attention to what goes on in companies they own, to start directing them. Sell companies you don't respect and buy those you do.

civitas said...

"Boards don't represent shareholders"

In the US, they most certainly do.

phil said...

civitas - what is the usual proportion of direct, active small shareholders compared to those whose interests are represented through managed funds, super fund investments and so on.

These are the ones whose decisions are taken by the institutions who are part of "the club" and as the meltdown seems to have exposed, have been looking after each other's interests rather than the interests of those they are supposed to be representing. Not surprising that the level of risk has been rising and, eventually, unsustainable decisions being taken (along with the development of ever more sophisticated finanical 'instruments' so that eventually no-one can analyse the structure and risk worthiness of what's being put in front of them (eg CDOs that were rated AAA by the ratings agencies, who are also part of the "club").

Sorry if this sounds conspiratorial, but it's more about shared values and understanding.

civitas said...

"These are the ones whose decisions are taken by the institutions who are part of "the club"

well, look at the example I gave above with Gaylord. That's an institutional investor. In fact, it's most often an institutional investor who challenges the board.

"Sorry if this sounds conspiratorial, but it's more about shared values and understanding."

It doen't sound conspirtorial, just a bit naive as to how it really works. It makes zero sense for someone who owns 1,000 shares to be directing management salaries. Sell companies whose management you don't like and buy those whose management you do. You can do the same thing through mutual funds. Any fund will tell you their investment philosophy and what they're invested in.

jc said...

jc, The financial whiz-kids have not been earning positive rates of return. They have been driving firms into bankruptcy.


Harry, the vast proportion of traders, sales people and I-bankers DID not drive the firms into bondage. That's simply nonsense.

As I have already told you the originators did which probably numbered around 20 people at each firm that was involved in the CDO markets in a major way. For some reason you have closed your mind to this and prefer to believe in what you want to believe.




Your general claim is false. Theft as a business can offer a positive return but it does not advance the social interest.

My claim is not false as the assumption was always that the assertion was based on legal activities- not jumping through a broken window and stealing people's belongings.

Anonymous said...

CEOs and Senior Management indulge in pattern bargaining all the time and then say they must be paid what the market is giving.

highly ironic.

My guess is given my reading of Graef Crystal is that most Boards do not realise the remuneration given out is not tied to performance.
I would also add that they do not try to find out.