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19 October 2006

How to Pay CEO's

A New York judge has ordered former NYSE chairman Richard Grasso to pay back a big chunk (probably $100 million) of his sweet little ($187.5 million) retirement package. Attorney General Elliot Spitzer had argued that the package was illegal as non-profits are prohibited from paying "excessive" compensation. I have no idea what being a CEO of stock exchange entails, but I'm pretty sure it doesn't require a $188 million pension.

I doubt CEO jobs generally are all that difficult, and am sure that there are numerous qualified candidates for any given opening. CEO's have very rare skills, but these skills are what get them the jobs to begin with - politics, self-promotion, communication, aggressiveness, ambition. Once safely ensonced at the helm, the CEO's next job is to pick his management team, which is usually easy because it's just the same people who worked for him at his last job. He now merely has to cajole and threaten his subordinates to produce. Unless he does something really stupid like an ill-advised acquisition or getting caught spying on the board, millions of dollars are his for years to come. The nice part is that he basically gets to pay himself - the board, after going thru the whole search process and triumphantly announcing their wise choice, aren't about to challenge their annointed ruler on such a petty concern as his compensation, no matter how outrageous his demands may be.

Since the CEO can so easily loot a company's treasury, I believe executive compensation should be regulated (in public corporations, that is - a privately owned concern can dish out its booty any way it sees fit). I would start with a maximum base salary that is a function of revenue and number of employees (these acting as fair proxies for the complexity of the job) - something like 10 + xR + yE. The trick now is to reward exceptional or visionary performance. The best way to do this is via stock options, so that compensation is tied to overall company performance. The strike price should be floored at the current price plus the stock's average appreciation over the prior 3 years. This would limit the compensation potential in the first few years and force the CEO to concentrate on long-term growth. Now I haven't really thought this thru completely so no nitpicking, but the general idea is that the maximum should be generous so that the majority of compensation arrangements would be unaffected, but abuse would be curtailed.

Of course in the case of Grasso it was a retirement package that was at issue. This is much easier to tackle - the maximum value of any given retirement package should be based on a percentage of the company's total pension fund. What - your company doesn't have a pension fund? Oh well...


Anonymous Anonymous said...

Tie CEO compensation to revenues and/or profit. Period.

Stock prices are a result of what outsiders think a company's future is. This is often very wrong, and leads to all sorts of accounting malfeasance at the behest of management. I wanna know how much they are sellin' and if they are doing it at a profit.

In Japan, honchos used to only make some 30 times what a guy on the shop floor made. In America its been over a hundred and rising for a long while now. The tech folks are the ones who deserve a raise IMO>

October 20, 2006 10:32 PM  
Blogger ziel said...

...and leads to all sorts of accounting malfeasance at the behest of management

That's what jail is for.

The tech folks are the ones who deserve a raise IMO

It's one thing to be able to do technically challenging work. It's another thing to create work to do. Most tech guys aren't all that good at coming up with their own work products, so they need other people to find things for them to do. But overall, I think techie people do pretty well in this country, though they'd do better with a little less overseas outsourcing.

October 21, 2006 8:45 AM  
Anonymous Anonymous said...

Ziel wrote : "That's what jail is for."------true, but it sure aint' happenin' as much as it should. I cannot fathom how Google trades at what it does, or why the Dow is near 12 (other than the obvious that regular Johns and Janes have to use the market for retirement savings these days via 401K's becauses CD's, even long-term ones, no longer pay dirt---thanks to bank dereg).

When I stated accounting malfeasance, it was too narrow a phrase. Management does what it can to "pump" a company's image financially and socially no matter what its modus operandi is to potential members of the investing class. My company is quite frankly despicable socially. We contract out everything we can (to folks who are sure to be using illegals), cut everything we can in terms of benefits, make people work crazy hours, yet find money to pay for symphonies, art exhibitions, concert series, college football bowl games, and every form of PR our potential investors might want to see. We just screw our employees as much as we can to enrich the brass and the investors.

As far as "create work to do"..............robotics and computers are eliminating a great deal of work, outsourcing and H-1B's are eliminating alot more work for real Americans. Modern corporations employ alot of people, but not because they have hearts of gold. Indeed, we have no heart (but of course want to be seen as such). If we could employ 9 year olds in Bangladesh for 16 hour shifts, we'd do it and ship every job out of North America and its picky media, but we cant. We dont employ anyone because we care about society.

I read a glowing piece today via Daivid Brooks prasing a Barack Obama Democratic run. He's a "globalist" according to Brooks. Along with Max Boot calling for citizenship for illegals who will serve in our military (just like Rome we are a' demising........citizenship to the barbarians for military service that our people dont want to do), I think I really do have a handle on the neo-con plan. They love our lousy birthrates and loss of manufacturing. In fact, I honestly think they are totalitarians whove pre-empted the Repubs "for a while". I mean hell, 10 more years of demography, and the Republican party will pretty much be finsished stateside. And Morris, Frum, etc. will simply migrate to wherever politically. Egad, the party leadership is being played.

But our CEO's are doin' well. Joe Sixpack is getting married at 33 and having 1.5 children and a divorce, is in record personal debt, upside down on his mortgage (whose home value goes down every time a house full of illegals gets bought within a mile radius), but everything is hunky dory behind the gated walls and clean and neat thanks to the mexi-maids. Links look good due to the ground crew. God, its gonna be a hard fall for the corporate-repubs in about 10 years or so when demography puts REAL liberals in charge and the tax rates go back to Carter-era levels. I honestly dont think some of them will see this comin'.

October 22, 2006 10:11 PM  

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