Editore"s Note
Tilting at Windmills

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January 10, 2006
By: Kevin Drum

EXECUTIVE PAY UPDATE....The Wall Street Journal reports that new SEC chairman Christopher Cox is getting ready to propose the "most sweeping overhaul of pay disclosure rules in 14 years":

The proposed changes, according to SEC officials, would for the first time require corporate proxy statements to provide a column with a total annual compensation figure for each of a company's five highest-paid executives and be far more specific about the value of their various benefits. Total compensation is an elusive number under the current system, and one for which investor advocates have long sought greater disclosure.

In addition, the SEC would force companies to take the monetary value of the stock-option grants given to top executives and place those figures side-by-side with salary and bonus information. Under a new accounting rule, companies must start expensing the value of their stock options.

....Mr. Cox, a free marketer and former congressman who worked in the Reagan White House, has signaled in recent months that executive compensation is going to be a major issue for him, and indeed the proposal will be the biggest change he has championed since taking over five months ago.

Good for him. Sunlight may or may not be the best disinfectant, but it's a pretty good one. These rules are long overdue.

Kevin Drum 2:20 AM Permalink | Trackbacks | Comments (96)

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Comments

These guys (CEOs) are beyond being embarrassed into doing the right thing, and non-corporate shareholders don't have the power to make them.

Posted by: DevilDog on January 10, 2006 at 2:32 AM | PERMALINK

Remember Michael Millikin? I do. He seems like small potatoes these days doesn't he?

Posted by: moe99 on January 10, 2006 at 2:33 AM | PERMALINK

Under a new accounting rule, companies must start expensing the value of their stock options
Fucking FINALLY.

That will do as much to bring it under control as anything else.

Posted by: Sandals on January 10, 2006 at 2:40 AM | PERMALINK

I don't know how much of a change this is from the past. Data on executive compensation for the top 5 executives has been discolsed for years. Standard & Poor's even aggregates it in their execucomp database. All I can think is that the disclosure will be a little broader. But this is certainly nothing drastically new or groundbreaking.

As sandals says, expensing the options is the big deal here.

Posted by: Ian D-B on January 10, 2006 at 2:42 AM | PERMALINK

Good for him. Sunlight may or may not be the best disinfectant, but it's a pretty good one.

Sunlight does root out some of the worst bugs though, and makes it easier to target the weeds that more challenging to pull.

Posted by: Jimm on January 10, 2006 at 4:00 AM | PERMALINK

This is helpful. But it would be more helpful for this information to be discussed extensively in the mass media. Executive compensation inflation has been pretty outragous for a long time and it's not the stockholders who are paying the biggest price for it.

Posted by: joe on January 10, 2006 at 4:57 AM | PERMALINK

Why do losers who are unsuccessful always want to highlight the pay of those who ARE successful? Is that all you liberals can do? Complain? THESE are the guys that create the jobs that let everyone else live. Talk about envy. This is class warfare, straight and simple. Why don't you just stop carping and try and do something yourselves? This IS the land of opportunity, you know.

Posted by: VirgilS on January 10, 2006 at 5:08 AM | PERMALINK

VirgilS:

What do you have against meritocracy?

Bob

Posted by: rmck1 on January 10, 2006 at 5:26 AM | PERMALINK

It would be interesting to know how much cumulative stockholders' equity has been stolen by CEOs in the form of excessive compensation. I'll bet you would find the Dow much higher had this theft not been allowed.

Posted by: bob h on January 10, 2006 at 7:26 AM | PERMALINK

Sunlight does root out some of the worst bugs though, and makes it easier to target the weeds that more challenging to pull.

Posted by: james on January 10, 2006 at 7:33 AM | PERMALINK

VirgilS,

If you have no problem with CEO comp, then surely you'll have no problem with the disclosure of CEO comp, right? That's all this is about. Thanks for playing, though.

Posted by: MeLoseBrain? on January 10, 2006 at 8:02 AM | PERMALINK

Slightly OT, but I can't resist...

David Broder on President Clinton, Democrat: "He came in here [in 1993] and he trashed the place."

David Broder on Tom DeLay, Republican: Eh, the place was already trashed when he got here [in 1985].

Posted by: Moonlight on January 10, 2006 at 8:07 AM | PERMALINK

The best control would be an independent compensation committee of the Board, composed of independent, advisory types with no connection to senior management. When the chairman of the Compensation Committee golfs with the CEO, you get abominations like Jack Welch of GE, who raped GE of almost $1 billion in profits over the course of his career, continuing into his retirement.

Great wealth only comes through great exploitation.

Posted by: Stephen Kriz on January 10, 2006 at 8:18 AM | PERMALINK

I agree with the parodic VirgilS. CEOs are the most productive members of society and should be compensated accordingly, and it's none of our business how much. It's a known fact that CEOs are directly and solely responsible for the rise in economic productivity in the last few decades. But it's not easy. These overworked geniuses have to be at least 50.1% right on every decision before them while statistically they only have a 50-50 shot each time. Must be nervewracking. Plus, in order to create all those jobs that let everyone else live, CEOs are often forced to slash their own workforce ruthlessly, and that is very hard to do if, like conservative Republicans everywhere, one is blessed with great personal ruth.

And if the valiant work of these sainted benefactors couldn't be more difficult, I haven't even touched on the horrific scourge of a rogue Justice Dept. and the barbarity of incarceration in Connecticut.

Posted by: R. Porrofatto on January 10, 2006 at 8:29 AM | PERMALINK

In related news, SEC Chairman Christopher Cox, a former congressman who worked in the Reagan White House, was dubbed an "unsuccessful loser" by "VirgilS", whom no-one has ever heard of.

Posted by: S Ra on January 10, 2006 at 8:54 AM | PERMALINK

Is that all you liberals can do?

Christopher Cox was appointed by Bush.

The stockholders on the company, why shouldn't they know how the money is being spent ?

Posted by: Stephen on January 10, 2006 at 8:55 AM | PERMALINK

Wait a minute -- Bush did something right? I await the arguments that will twist this into something to screw the people. Or maybe to distract us all from Iraq.

Posted by: slightlybad on January 10, 2006 at 9:21 AM | PERMALINK

" CEOs are the most productive members of society"

LOL! you obviously don't know much about what CEOs actually do.

It's hard work! It really is!

My favorite job until this one...

Posted by: George W Bush on January 10, 2006 at 9:35 AM | PERMALINK

This just means that CEO's will achieve greater deepths of shamelessness.

Posted by: Jeremy on January 10, 2006 at 9:42 AM | PERMALINK

Wait a minute -- Bush did something right?

I think I speak for many liberals when I credit Bush for pushing through the FCC's Do Not Call List to stop telemarketers, as well. That will definitely be one of the Bush administration's greatest positive legacies, and if this pay disclosure initiative passes, as well, Bush will have a chance to bolster that legacy.

Posted by: Constantine on January 10, 2006 at 9:55 AM | PERMALINK

Wait a minute -- Bush did something right?

I think I speak for many liberals when I credit Bush for pushing through the FCC's Do Not Call List to stop telemarketers, as well. That will definitely be one of the Bush administration's greatest positive legacies, and if this pay disclosure initiative passes, as well, Bush will have a chance to bolster that legacy.

Posted by: Constantine on January 10, 2006 at 9:56 AM | PERMALINK

Note: At this point "he is proposing to propose these rules".

Hmmm.... I'm wondering just how far this will actually get and what form it will take in the end.

Given the way things work in the Bush regime it will probably end up as a rule prohibiting disclosure of executive compensation!

Posted by: Buford on January 10, 2006 at 9:56 AM | PERMALINK

Gotta agree with my "bro" and main man, ole' Virg, CEOs have created a lot of jobs in China and India. They will probably open lots of factories next in Tierra de Fuego; do a lot of wind tunnel testing. Virg and I say, give 'em the bread.

Posted by: stupid git on January 10, 2006 at 10:05 AM | PERMALINK

The currently proposed method of stock option expensing is stupid beyond belief and will lead to even more uncertainty about true earnings than exists at present.

If you are going to expense options, the best way to do it is to account for the cost of exercised options and the cost of share repurchases used to keep the stock float from increasing.

Posted by: Yancey Ward on January 10, 2006 at 10:13 AM | PERMALINK

Now, now, take some pity on the poor CEOs. Very few of us have the courage to stand up to difficult decisions. As Lord Farquad said in the movie "Shrek" sending his knights out to fight the dragon; "Some of you may die, but that's a sacrifice I'm willing to make!"

Posted by: Tripp on January 10, 2006 at 10:15 AM | PERMALINK

Unlike most of you, I don't think CEO's are making "too much money". The only CEO compensation I care about are for companies I choose to invest in.

Like Chris Cox (who I respect as a sincere champion of the free market), I think markets work best when accurate information is available. Will this rein in CEO compensation? Maybe, maybe not. But it will ensure that shareholders know how much those CEO's are being paid, and will demand accountability if the CEO is not bringing in results.

Posted by: Brad Warbiany on January 10, 2006 at 10:27 AM | PERMALINK

Good one, Constantine.

Posted by: shortstop on January 10, 2006 at 10:28 AM | PERMALINK

But it will ensure that shareholders know how much those CEO's are being paid, and will demand accountability if the CEO is not bringing in results.

Actually, it will only give us the information we need to demand that accountability. It's up to the shareholders to pick up those reins.

Posted by: shortstop on January 10, 2006 at 10:30 AM | PERMALINK

Brad,

The only CEO compensation I care about are for companies I choose to invest in.

Me too, but the thing is that my company has taken away my defined benefit pension (where I only had to care about my personal CEO) and has forced me to invest in the 'market,' which for anyone but a total idiot means mutual funds.

So if they want to force me to care about the entire market then I want to force them to give me the information so I can do a good job.

Hey - don't want me to notice your pay? Then don't force me to buy stock, suckers!

Posted by: Tripp on January 10, 2006 at 10:37 AM | PERMALINK

Surely Virgil is a parody? In reality, the quickest way for a CEO to boost the value of their stock options is to implement massive lay-offs. When was the last time anyone heard the CEO of a large US corporation announce a significant expansion of its domestic workforce?

Posted by: chasmrich on January 10, 2006 at 10:43 AM | PERMALINK

Some of you may die, but that's a sacrifice I'm willing to make!"

I thought that was W's war cry.

Posted by: ckelly on January 10, 2006 at 10:48 AM | PERMALINK

All attempts to restrict or regulate executive compensation in any way are slaps on the face of mothers who want their sons to grow up to be CEOs.

Posted by: tbrosz on January 10, 2006 at 10:49 AM | PERMALINK

In Adam Smith's world of small owner-operated businesses (the world free-marketers imagine they live in) sunlight would be a good disinfectant. In a world of giant companies with widely diffused ownership, it's likely CEOs will continue to dominate the board of directors---and rip off the shareholders. And, of course, CEOs will also continue to parade around like they've "earned" the money, and negotiated a "fair" contract in a "free" market. Its really pretty disgusting.

Posted by: Dwight on January 10, 2006 at 10:52 AM | PERMALINK
Wait a minute -- Bush did something right?

Er, I'm sure he did at some point in time, but that's not what is being discussed here. Bush appointed someone who did something right. Whether appointing him was right depends on the totality of what he does in the position, and is not determined by the fact that he has proposed one good policy.

So, again, no, people endorsing this one action of Cox's are not implicitly saying that Bush did something right.


Posted by: cmdicely on January 10, 2006 at 10:58 AM | PERMALINK

cmdicely,

So if an appointee of Bush does something wrong, then it is not Bush's fault?

Posted by: Yancey Ward on January 10, 2006 at 11:04 AM | PERMALINK

A couple of things. The Providence Journal, dated Dec 17, 2005 noted that executive pay in 2004 rose 15% to an average of $9.6M. There are 20 executives (unnamed in the article) who made over $40M in 2004.

Meanwhile, the pay of the average worker rose 2.9%, to $33,176.

Also, the percent of corporate profits going to the top 5 executives more than doubled from 1993 to 2003, rising from 4.8% to 10.3%.

In the 70s, the average CEO made something like 40 times the pay of the average worker; in 2000, the average CEO makes 500 times the pay of the average worker.

People should be paid what they're worth. Pay for performance is an accepted axiom. However,
by virtue of "golden parachute" arrangements made prior to hiring, many CEOs are completely insulated from this. They make their money whether the company performs or not. How does this sit with the "workings of the market"? The rationale is that they need to be able to focus on their job and not worry about getting paid, but why isn't that true for the average guy, too?

The other problem is that institutional buyers compose about 75% of the stock market, this per Investor's Business Daily. Given this, the average shareholder has no real power to influence anything. CEOs sit on numerous boards, and they form a very clubby group that looks after their interests. Again, isn't this removing the invisible hand of the market? I don't have a problem with free markets; I do have a serious problem with crony capitalism.

Posted by: klaus on January 10, 2006 at 11:10 AM | PERMALINK

klaus, you're so cynical. Clearly, the performance of each and every average worker in 2004 ranged from incompetent to mediocre, while every single one of those CEOs performed admirably. It really is a meritocracy.

Posted by: shortstop on January 10, 2006 at 11:20 AM | PERMALINK

So if an appointee of Bush does something wrong, then it is not Bush's fault?

Posted by: cas on January 10, 2006 at 11:23 AM | PERMALINK

So if an appointee of Bush does something wrong, then it is not Bush's fault?

Of course not. It's Clinton's fault.

Posted by: lib on January 10, 2006 at 11:30 AM | PERMALINK

Klaus: A couple of things. The Providence Journal, dated Dec 17, 2005 noted that executive pay in 2004 rose 15% to an average of $9.6M. There are 20 executives (unnamed in the article) who made over $40M in 2004.

CEO compensation is usually heavily tied to performance of the company in general. 2004 was a very good year for business, so obviously their pay rose quite a bit. It wasn't going up 15% per year in 2001-2002, and for a lot of CEO's, may have been declining, or if it was stock options, wasn't declining but the options were underwater.

Now, obviously like the late '90s, being a CEO in 2004 or 2005 is probably a lot easier than in 2001-2002. So I'm sure a lot of them are riding the wave, not exactly adding 15% more value to their companies. But the government rules about not expensing stock options caused CEO compensation to be heavily related to options, so they can scoot by "riding the wave". I'd love to see the government require expensing options (as someone expressed above) to curtail some of this.

Posted by: Brad Warbiany on January 10, 2006 at 11:33 AM | PERMALINK

Long over due indeed, especially in light of how IBM has this new benefit cut on pensions and health care for it's retirees. Other corporations will follow suit.

IBM isn't filing bankruptcy - nope, just cutting benefits - HOWEVER, I'm sure IBMS's CEO's don't have any benefit cuts. Rich companies are telling employees that they have to sacrifice and sacrifice and sacrifice despite the upbeat news of wall street simply for the good of the company but certainly those CEO's don't sacrifice anything at all.

This is why I had absolutely NO problem with the recent union transportation strike in NYT. American need more strikes. Corporations keep asking employees to make more sacrifices as has our Supreme Court in recent years - has done likewise - this profit of the rich only court decisions have left individual Americans without any kind remedy whatsoever.

Mean while corporation are putting the burden on taxpayers - it's for tax paying lucky duckies to pick-up the tab for what corporations just don't want to pay anymore. This has got to stop unless corporations START paying far more taxs then they do now.

But alas, we all have to remember that the SEC chief works at the pleasure of President. Bush and most the GOP, with their so called conservative compassion that is merely estableish for the wealthy - not the regular average working stiff.

This is all a pipe dream. Republican have never served the working class - only rich people and rich corporation -The GOP has always made most American less well off every time the came into office. Bush wants to legalise what it was that Jack Abramoff was doing and what Tom DeLay was doing as well - Bush sure doesn't want to clean it up. Bush is not a conservative - Bush is and always has been s criminal and nothing else.

Posted by: Cheryl on January 10, 2006 at 11:35 AM | PERMALINK

Behind every great fortune is a great crime.

Posted by: Jeffrey Davis on January 10, 2006 at 11:41 AM | PERMALINK

Republican[s] have never served the working class

Maybe not, but for awhile there were Republicans who worked for Main Street rather than Wall Street. Now, they work for K Street.

Posted by: Jeffrey Davis on January 10, 2006 at 11:42 AM | PERMALINK
So if an appointee of Bush does something wrong, then it is not Bush's fault?

That depends on, well, a number of things, such as if the wrong thing was done at the direction of the President, whether the appointee was acting under delegated Presidential authority (for which the President remains responsible even while the appointee is responsible for his own actions) or independent authority, whether the propensity to do the wrong thing at issue was a reason he was appointed, and so on.

Not that this has anything to do with the issue at hand. Why are so many people on this thread obsessed with making this discussion about endorsement of Bush?

Posted by: cmdicely on January 10, 2006 at 11:42 AM | PERMALINK

Remember Michael Millikin? I do. He seems like small potatoes these days doesn't he?

The reluctance of the GOP to investigate the missing $9 BILLION from the CPA speaks volumes. Like Buckaroo Banzai they don't want to tug on things they don't know the connections to. They suspect or fear that the the Bushes and Chalabis and such are implicated in its disappearance. $9 BILLION and no curiosity. Think what we went through over Clinton's LOSS in Watergate.

Posted by: Jeffrey Davis on January 10, 2006 at 11:46 AM | PERMALINK

I think I speak for many liberals when I credit Bush for pushing through the FCC's Do Not Call List to stop telemarketers, as well.

In the last year, our phone has never been so busy. The unscrupulous have simply switched to specious "charities".

Posted by: Jeffrey Davis on January 10, 2006 at 11:49 AM | PERMALINK

cmdicely: Why are so many people on this thread obsessed with making this discussion about endorsement of Bush?

I don't think anyone really was until you parsed Constantine's post, which I took as pretty much a lighthearted piece of banter.

Posted by: shortstop on January 10, 2006 at 11:49 AM | PERMALINK

cmdicely,

I was just making a little fun of the propensity of the commenters on this blog to blame Bush for everything that goes wrong, regardless of how responsible he may actually be.

Posted by: Yancey Ward on January 10, 2006 at 11:51 AM | PERMALINK

I beg everyone's pardon. The "Bush did something right" joke originated not with Constantine, but with slightlybad, who also does not appear to be asking for a serious dialogue on the topic.

Posted by: shortstop on January 10, 2006 at 11:53 AM | PERMALINK

The reluctance of the GOP to investigate the missing $9 BILLION from the CPA speaks volumes.

This is a slanderous lie. The US Army is at the Baghdad lost-and-found every day (every day!) asking "Has anyone turned in that $9 billion yet?" If that's not trying, I don't know what is.

Posted by: craigie on January 10, 2006 at 11:57 AM | PERMALINK
I was just making a little fun of the propensity of the commenters on this blog to blame Bush for everything that goes wrong, regardless of how responsible he may actually be.

We know, based on you posting at this blog, the relative importance you place on accountability: epsilon greater than zero.

Posted by: SavageView on January 10, 2006 at 11:58 AM | PERMALINK

Bob h:

Don't be ludicrous. Some CEO compensation may be excessive...but compared to the size of the economy it has a de minimus impact.

I will note that there has been at least one study done of the correlation between CEO compensation and a company's performance. The conclusion? The smaller or more closely held the company, the stronger the correlation. However, the correlation was sufficient enough at all levels that if one put together a stock portfolio based solely upon highly paid CEO's, you would generate a return 8% above the market. So, yeah, generally speaking (with frequent exceptions)...CEO pay reflects CEO performance.

As I've said before, some people appear to miss that if you have a company generating 500M a year in earnings and have a choice between two CEO candidates -- one of who you will pay 100K a year and the company will maintain its status quo earnings on his watch, or a CEO demanding 10M a year but who has a track record of increasing her employer's earnings by 10% a year....you'd be a fool not to take the 2nd candidate.

Posted by: Nathan on January 10, 2006 at 12:02 PM | PERMALINK

I was just making a little fun of the propensity of the commenters on this blog to blame Bush for everything that goes wrong, regardless of how responsible he may actually be.

Please provide an example of someone doing so inappropriately. Be careful not to prop up a strawman.

Bush deserves blame for improper actions by his lieutenants if he does nothing to discipline them (or worse, praises and/or promotes them). See also: Rumsfeld, Donald; Rice, Condoleezza; Brown, Michael; Rove, Karl.

Posted by: Alek Hidell on January 10, 2006 at 12:02 PM | PERMALINK

Can't defend Yancey Ward's arguments, but he's the closest thing to an honest conservative we've got on this blog now that Hubris has deserted us. So I say leave him be and save the ammo for the phony libertarians like tbrosz, the no-free-market-just-me-me-me neocons like rdw and the pure psychos like McAristotle.

Posted by: shortstop on January 10, 2006 at 12:04 PM | PERMALINK

One has to be blind to not recognize the principal/agent problem inherent in executive compensation, and one has to be blind to not recognize how damnably difficult it is to find a solution which provides a net benefit. Certainly, more transparency is needed and is welcome, but fundamentally, shareholders may need to have more control regarding this issue. I just don't know how to go about it effectively.

Options themselves may not be the most effective way to compensate executives, but ironically, it was unfavorable tax treatment of other forms of compensation which helped lead to the explosion in options. Stock grants, with required long-term holding periods, may be the best way to tie executive interests to stockholder's interests. Perhaps this is something that could be explored, but it will no doubt also be subject to the law of unintended consequences.

Posted by: Will Allen on January 10, 2006 at 12:08 PM | PERMALINK

I must speak up in support of my brethren Libertarians. Can I get an Amen?!

Free markets will save this planet from a socialistic nightmare by incenting EVERYONE to work harder.

CEOs need pay increases to incent them to work harder.

Everyone else needs pay cuts to incent them to work harder.

Can I get an Amen?!

Amen!

The truth will set you free.

Posted by: Tripp on January 10, 2006 at 12:11 PM | PERMALINK

I was a legal intern at the Commission some years back. I was struck by the presentations some of the Commissioners gave us. Nearly all of the conservative ones admitted that once they got to see and vote on enforcement matters, their previous anti-regulatory stances got soft pretty quick. There is a lot of abuse out there and it is no suprise that Cox is moving towards more regulation, not less.

Posted by: Rob W on January 10, 2006 at 12:11 PM | PERMALINK

OhmiGod, I sort of agree with Will Allen.

But I don't think it is the law of unexpected consequences we need guard against first. Nope. We need to safeguard against plain old Greed and the human willingness to break laws, cover up, and sidestep the system to satisfy it.

Yes, some people may always try to find the loopholes but I don't see why we should give up the fight.

Maybe CEOs deserve their compensation, maybe they don't, but if they are paid by publicly owned corporations they by golly need to disclose their compensation. Free markets need free information.

Posted by: Tripp on January 10, 2006 at 12:18 PM | PERMALINK

1. When CEOs do their job, which is growing the company, this is celebrated in word and song, and they get a "bonus" of several billion dollars.

2. When they don't do their job, they may get fired, at which time they get "compensation" of several billion dollars.

3. If ordinary mortals do their job, whatever that is, they get their normal salary.

4. If ordinary mortals don't do their job, they get fired. Of course, sometimes they get fired even if they do do their job. Or they get a pay cut so that they can be allowed to keep their job. Or their health care gets taken away. Or degraded.

If you want to use phrases like "class warfare", you must incorporate these simple points, or you are just making noise.

Posted by: craigie on January 10, 2006 at 12:29 PM | PERMALINK

So, yeah, generally speaking (with frequent exceptions)...CEO pay reflects CEO performance.

Except that, as was pointed out above, average executive pay, relative to the average pay of workers, is now OVER TEN TIMES HIGHER than it was in, say, the 1970s. And there is NO difference between the relative performance of the executives in the 70s and those of today, except perhaps that the executives of today may NOT be performing so well.

Do better paid executives give somewhat better results? I should think so, for Christ's sake. I would also expect that a better paid ordinary work force would generate better results for a company. Within a class of workers, one would certainly expect differences in pay to reflect differences in performance.

What this really means is that there is something far out of control in how executive compensation is derived. It's pretty obvious that cultural and social norms, far more than any working out of the market, play the decisive role in allowing executive pay to be driven up so highly. In the 60s and 70s, executives were regarded as well paid, but it would have been outrageous to suggest amounts now routine.

The real question is, how do we return to the less excessive, less decadent norms of previous decades, which served the American economy so well at the time, and indeed grounded its greatest period of growth and dominance?

Posted by: frankly0 on January 10, 2006 at 12:30 PM | PERMALINK

Tripp, the problem is that the desire to have what rightly belongs to others (it is covetous desire, not greed, which is the issue here) is an unavoidable element of human nature, and attempts to eliminate the expression of unavoidable elements of human nature will often provide worse outcomes than the problem that one was ostensibly trying to "solve". This doesn't mean that one should just toss one's hands in the air and give up, but one ALWAYS has to be aware of the danger of unintended consequences.

Again, how the stock options explosion took place is instrucive. Some people were complaining mightily regarding executive compensation, and mandated that unfavorable tax treatment begin on compensation once it reached a certain point ( I can't remember the exact number), which in turn helped lead to the options explosion. rather than direct restrictions, or use of the tax code, I tend to think that measures which would increase stockholder power would be most helpful, but I don't pretend to have any easy answers.

Posted by: Will Allen on January 10, 2006 at 12:32 PM | PERMALINK

So I say leave him be and save the ammo for the phony libertarians like tbrosz, the no-free-market-just-me-me-me neocons like rdw and the pure psychos like McAristotle.

What about the batshit-crazy-and-mummified-his-mama wingnuts and the I-peeked-in-your-window-last-night-to-make-sure-you-weren't-doing-anything-gay frightwig wearing nutjobs? Can we kick their asses?

Posted by: Pale Rider on January 10, 2006 at 12:34 PM | PERMALINK

frankly0:

"Except that, as was pointed out above, average executive pay, relative to the average pay of workers, is now OVER TEN TIMES HIGHER than it was in, say, the 1970s."

And this is relevant to my point how?

"And there is NO difference between the relative performance of the executives in the 70s and those of today, except perhaps that the executives of today may NOT be performing so well."

Even if true, this would be irrelevant. However, I would advise you to compare the economy of the 1970's to today...it sounds like you'd be quite flabbergasted at the numbers.

Posted by: Nathan on January 10, 2006 at 12:37 PM | PERMALINK

Yancey Ward: I was just making a little fun of the propensity of the commenters on this blog to blame Bush for everything that goes wrong, regardless of how responsible he may actually be.

That's ridiculous, and obviously a reflection of your prejudices. Uh oh, looks like it's going to rain. F'ing Republicans!

Posted by: alex on January 10, 2006 at 12:41 PM | PERMALINK

frankly0:

for a simple but a quick comparison of the "misery index" (unemployment rate plus inflation) for the 1970's vs. today....see:

http://www.miseryindex.us/

Posted by: Nathan on January 10, 2006 at 12:43 PM | PERMALINK

Yancey Ward: The currently proposed method of stock option expensing is stupid beyond belief and will lead to even more uncertainty about true earnings than exists at present.

What is the proposed method? I don't know the details.

If you are going to expense options, the best way to do it is to account for the cost of exercised options and the cost of share repurchases used to keep the stock float from increasing.

That's a good way to account for them in hindsight, but how would you expense options when they're issued?

Posted by: alex on January 10, 2006 at 12:47 PM | PERMALINK

Alex:

there are several different methods of pricing stock options upon issuance. the courts have actually been grappling with this issue for a while when dealing with divorces.

Posted by: Nathan on January 10, 2006 at 12:49 PM | PERMALINK

Will Allen: Tripp, the problem is that the desire to have what rightly belongs to others (it is covetous desire, not greed, which is the issue here) is an unavoidable element of human nature...

You're oversimplifying, the very thing of which you're accusing others. Add "sense of fair play" to your "covetous greed" and you may just begin to get it. Without attempting to don a halo, which doesn't go with my new shoes anyway, may I point out that many of us are not looking to get compensated for results we fail to achieve? That which you call envy is a perfectly natural desire to see others playing by the rules just as we do, and subject to measurable outcomes just as we are. It's simple accountability for everyone.

PR: What about the batshit-crazy-and-mummified-his-mama wingnuts and the I-peeked-in-your-window-last-night-to-make-sure-you-weren't-doing-anything-gay frightwig wearing nutjobs? Can we kick their asses?

Yes.

Posted by: shortstop on January 10, 2006 at 1:04 PM | PERMALINK

Mea culpa; that was "covetous desire," not "greed," Will.

Posted by: shortstop on January 10, 2006 at 1:11 PM | PERMALINK

The problem with assessing the "cost" of an option at the time it is issued is that it is a liability with an indeterminant value which can only be estimated by estimating the future performance of the stock (and, while the "value" arguably doesn't depend on this, the "cost" also depends on when it will be exercised.)

This, of course, means that the best acheivable method of assessing will have no less uncertainty than the combined uncertainty provided by the best available methods of predicting stock performance and aggregate human behavior in response to that performance.

(Of course, the difficulty in accurately assessing the cost and value of stock options also raises the question of whether they are a rational method of compensation, anyway, particularly, whether the decision to grant them, and in what amount, can ever be justified as responsible.)

Posted by: cmdicely on January 10, 2006 at 1:14 PM | PERMALINK

alex,

You don't. You simply disclose how many warrants have been issued, what the strike prices are, and holding periods and expiration dates are. In truth, the issuing of warrants does not cost anything until they are actually exercised. If they expire unexercised, then the cost was nothing. The proposed method will deduct an amount that is based on a guess of what the cost will ultimately be, but even though it is an educated guess, it is still just that. Let us suppose that we deduct from earnings, immediately, this calculated cost of just issued warrants, but that before the employee exercises the options, the market declines and the warrants expire, then this will cause earnings to rise during such times.

It is a myth that earnings are misstated due to option based compensation. Everything you really need to know about compensation costs is available if you are willing to look for it and analyze it, or pay for good analyses by professionals that you trust. I just wish the company statements were better organized so that working it all out were easy for me to do myself without having to resort to paying for the analysis.

If my method of accounting for stock based compensation were used, it would be done on a quarterly basis. If in a period, let us say, 1 million shares of company X were created and sold to an employee at a discount to the market, but the company repurchased no stock, then all you really need to know is the EPS calculated on the stock float at the time of reporting (this, of course, assumes good accounting practices in general-something one should not take for granted). However, if in the above case the company repurchased 1 million shares on the open market so that the float did not change, then you need to account for the difference between the amount paid for the open market purchases and and the amount received on exercising of the options- this is the cost of the employee option based compensation, and this needs to be deducted from net earnings or company cash.

Posted by: Yancey Ward on January 10, 2006 at 1:20 PM | PERMALINK

Shortstop, why are you concerned with what others are getting, as long as it is given willingly? The problem here is that that those doing the giving, the shareholders, may not have sufficient control over what amount is given. Given that reallocation costs are greater than zero, simply instructing shareholders to sell if they don't like the compensation packages their companies are granting is often not a solution, nor does it solve the problem of a lack of transparency when deciding to buy shares of a company.

The transparency issues are easier to solve than the fundamental fact that the executives of a company too often don't have their interests aligned with the shareholders, and the shareholders ability to control compensation is restricted. I'm not disagreeing with you terribly, but this is an issue that doesn't lend itself to clearly recognizable useful solutions.

Posted by: Will Allen on January 10, 2006 at 1:27 PM | PERMALINK

Why do you persecute my children?

I have blessed them with unimaginable (to you) wealth - how much more obvious do I have to be that these are my beloved chosen prophets? Do not meddle in their affairs, or I shall smite you rodents with another Great Depression. Besides, if you don't pay your execs what they're worth, they'll quit and go to work for Chinese companies where they can earn what they deserve.

Posted by: Mammon on January 10, 2006 at 1:35 PM | PERMALINK

Yancey Ward: The proposed method will deduct an amount that is based on a guess of what the cost will ultimately be, but even though it is an educated guess, it is still just that.

But what are the rules for making that estimate? IIRC Warren Buffett suggested just using the market value of options, but how can you really know that without actually selling equivalent options?

I'm not an accountant, so any real bean counters here are welcome to get a chuckle out of correcting me. That caveat aside, I believe there are two ways of accounting: accrual and cash flow. The latter is used for taxes, but the former is used to estimate company performance. It always involves estimates. For example, an order is accounted for when placed, not when paid for. Since large item orders can take years to fill, this makes sense. But there's always the non-payment or cancellation risk. There are also estimated warranty costs, and worst of all, potential liabilities due to injury from defective products.

Everything you really need to know about compensation costs is available if you are willing to look for it and analyze it

The rule change is mostly about making it easier to find. Also, IIRC, estimated option costs are used in tax accounting but not earnings accounting. That's absurd.

Posted by: alex on January 10, 2006 at 1:39 PM | PERMALINK

alex,

The rule changers might like to make it easier, I don't know for sure, but simply adding another variable to company earnings, which is what is proposed, can't make analyzing the actual earnings easier. I personally don't like the accrual method of accounting since it is not cash received. I realize that companies do it in order to smooth out the earnings, but I still don't like it, but I can always look at the change in company cash quarter to quarter if I like.

If one really wants to make it simpler to assess the cost of option based compensation, then simply require companies to purchase all exercised shares on the open market, and deduct this net cost from earnings each quarter.

Posted by: Yancey Ward on January 10, 2006 at 1:51 PM | PERMALINK

alex,

And, yes, the last thing you mentioned is absurd.

Posted by: Yancey Ward on January 10, 2006 at 1:53 PM | PERMALINK

Yancey Ward: If one really wants to make it simpler to assess the cost of option based compensation, then simply require companies to purchase all exercised shares on the open market, and deduct this net cost from earnings each quarter.

In cases where the exercised shares are a smaller percentage of the shares on the market, then just subtracting the market price ought to do.

For all I know this is how the cash flow for tax purposes is handled. I'd love to hear from a real bean counter.

At any rate, I think the rule change may be positive, and is certainly not harmful.

Posted by: alex on January 10, 2006 at 2:04 PM | PERMALINK

"Except that, as was pointed out above, average executive pay, relative to the average pay of workers, is now OVER TEN TIMES HIGHER than it was in, say, the 1970s."

And this is relevant to my point how?

It's relevant because, "...there is NO difference between the relative performance of the executives in the 70s and those of today, except perhaps that the executives of today may NOT be performing so well."

Even if true, this would be irrelevant.

Huh? It's extremely relevant because it demonstrates that there isn't a "free market" operating with regard to executive compensation.

However, I would advise you to compare the economy of the 1970's to today...it sounds like you'd be quite flabbergasted at the numbers.
Posted by: Nathan on January 10, 2006 at 12:37 PM

There's many ways to compare the current economy with the one during the 1970s. We may have a higher GNP, but compensation for most American workers has actually fallen. So in one very important sense the current economy is worse than it was during the 1970s.

Posted by: Dr. Morpheus on January 10, 2006 at 2:07 PM | PERMALINK

Nathan, you are defending the indefensible. But congratulations on the dogged obfuscation - nobody can say you're a quitter!

Posted by: chasmrich on January 10, 2006 at 2:21 PM | PERMALINK

"Huh? It's extremely relevant because it demonstrates that there isn't a "free market" operating with regard to executive compensation."

No it doesn't. And even if it did, it's irrelevant. All that matters is that the empirical data directly shows that higher-paid CEO's perform better than lower-paid CEO's.

"There's many ways to compare the current economy with the one during the 1970s. We may have a higher GNP, but compensation for most American workers has actually fallen. So in one very important sense the current economy is worse than it was during the 1970s."

Compensation hasn't fallen for the percentage of workers who were unemployed in the 1970's but are employed today.

but leaving that aside, "compensation for most American workers has actually fallen" isn't true.

Posted by: Nathan on January 10, 2006 at 2:29 PM | PERMALINK

alex,

As I wrote in my first comment, all you need to know is already disclosed in regards to compensation costs, but you need to know how to analyze it properly. The only real problem I have with how it is done now is that some companies use option based compensation extensively along with aggressive stock repurchases, but they don't deduct any of the cash used for the repurchases when they report the "earnings". This has the effect of hiding the compensation costs from the reported earnings per share. Now I can recalculate this EPS taking into account the exercised options and the share repurchases, but it takes time to find the info and do the necessary recalculations. It is a pain.

Posted by: Yancey Ward on January 10, 2006 at 2:48 PM | PERMALINK

Dr. Morpheus,

That CEO compensation has increased relative to lower tier employees is not evidence that the free market isn't working. For all you know, CEOs are simply more fairly compensated than they were in the past, and the market is properly adjusting this. Now I think the compensation has gotten way out of hand, but it is a symptom of the stock market bull that has been in place since August 1982 (The DOW is up by a factor of 12), the fact that CEOs are compensated by stock options rather than soley salary pay, and that shareholders just don't exercise as much control over the boards of directors as they used to.

However, it is an undisputed fact that a poor CEO who works for free can cost shareholders far more money than one who is paid a billion dollars. If shareholders don't like the compensation their employees are being paid, they can do something about it, even if it is difficult.

Posted by: Yancey Ward on January 10, 2006 at 2:58 PM | PERMALINK

Wonder what impact, if any, doing away with proxies would have? Just count the votes of shareholders who care enough to actually vote on proposals.

Posted by: demisod on January 10, 2006 at 3:30 PM | PERMALINK

Yancey Ward: If shareholders don't like the compensation their employees are being paid, they can do something about it, even if it is difficult.

Can they? Whatever happened to the proposal to let major stockholders nominate members of the board?

Posted by: alex on January 10, 2006 at 3:30 PM | PERMALINK

alex,

It isn't easy exerting control as a shareholder since ownership is so dilute. As Will Allen noted, this isn't an easy nut to crack open. The biggest problem I see is that the mutual funds and pension funds don't fight harder to exert some directorial control- individually and collectively they could do so should they choose. However, even this is imperfect since the fund managers are not themselves the true owners.

Posted by: Yancey Ward on January 10, 2006 at 4:11 PM | PERMALINK

Yancey Ward: It isn't easy exerting control as a shareholder since ownership is so dilute.

That's an intrinsic problem with publicly traded corporations (as Adam Smith noted).

My point is that some things could be done to ameliorate it, such as letting large stockholders nominate the board members that are supposed to represent them. Voting on board members nominated by management and the board is a Soviet style election. I don't know what's happened with the proposal.

Publicly traded corporations are essential in an economy that requires enormous capital investments and efficiencies of scale. Realistically that renders Smith style capitalism a quaint notion. We should at least try to ameliorate the problems though.

Posted by: alex on January 10, 2006 at 4:34 PM | PERMALINK

Maybe the average doofus on the street (such as myself) has no business putting most of thier assets into owning slices of several gigantic globe spanning corporations because the aformentioned doofus is incapable of excercizing sufficient oversight on the activities of those corporations for their own benefit and the idea that we should structure our society on the pattern of every doofus owning a tiny slice of various gigantic corporations and overseeing thier activities is just stupid.

Perhaps if we do attempt to implement this scheme it will turn out that over time the owners (mostly doofi now) will excercise less and less control over these corporations and the benefits of thier activities will be diverted more and more to the people who actually do control them and these people will form a corporate executive ruling elite with very little accountability to anyone outside thier group and transfer the wealth of the nation into thier own hands over time until a new equilibrium is reached.

Posted by: jefff on January 10, 2006 at 4:41 PM | PERMALINK

You make that sound like a bad thing jefff.

Posted by: demisod on January 10, 2006 at 5:24 PM | PERMALINK

alex,

Not allowing management to nominate board slates might help. Disallowing cross representation might also help- for example, one CEO could not serve on the board of a company that has a manager that serves on the board of the CEO's company. Such arrangements are incestuous and certainly make corruption easy.

Posted by: Yancey Ward on January 10, 2006 at 5:32 PM | PERMALINK

jefff,

Buy indices. As for where to put your assets, you do have choices outside of owning stocks directly or indirectly, but it is probably unwise not own some since it is only production that actually grows wealth. But if you are uncomfortable owning large companies, look into investing in very small, closely held ones, but I warn you- this is even more risky, but with a higher potential payoff if successful.

Posted by: Yancey Ward on January 10, 2006 at 5:37 PM | PERMALINK

Yancey: It isn't easy exerting control as a shareholder since ownership is so dilute. As Will Allen noted, this isn't an easy nut to crack open. The biggest problem I see is that the mutual funds and pension funds don't fight harder to exert some directorial control- individually and collectively they could do so should they choose. However, even this is imperfect since the fund managers are not themselves the true owners.

alex: My point is that some things could be done to ameliorate it, such as letting large stockholders nominate the board members that are supposed to represent them. Voting on board members nominated by management and the board is a Soviet style election. I don't know what's happened with the proposal.

Some would say that this is the problem with corporations that are too large and powerful, and that smaller, more local businesses and corporations could better be governed by their shareholders. After, all, while some CEO's have the shareholders' interests in mind, there are more than a few Ken Lay's out there in this world.

Of course, one could say it's also the problem with government. The power of the voter is so incredibly diluted, and perhaps power should be returned to state and local governments, where voters actually have some control over it. While some politicians have the voters' interests in mind, there are quite a few who think only about the special interests that provide their campaign funding, and are willing to let the voters go screw.

The scary thing is, I think most CEO's are driven by the desire to work and build their own reputation, and they know that increasing their company's earnings is the best way to do that. Most politicians are driven by their own ego and desire to stay in power where they're treated like gods, and they know that feel-good rhetoric and getting in front of the media is the best way to do that. Who would you rather trust?

Posted by: Brad Warbiany on January 10, 2006 at 5:55 PM | PERMALINK

"THESE are the guys that create the jobs that let everyone else live."

Yeah, if you live in China or India. How much more blindly than this can you parrot the talking points of the "have mores." If you had been paying attention since about 1980, you'd see that corp execs get the big bucks for laying US employees off, not hiring them.

Actual job creation gets done by small business, not big business.

Posted by: Cal Gal on January 10, 2006 at 6:03 PM | PERMALINK

I'm not looking for advice.

My point is that I have serious concerns that it is a good idea for people like me, or you, or probably any of us here on this board to be owners of these companies, especially owners of significant fractions of them. We are the ultimate absentee landlords understanding what it is we own on only the most basic level. It seems to me that this diffuse corporate ownership that is held up as the ideal may be incompatable with properly functioning capitalism.

It was actually while deciding to buy index funds (which I did, a tragedy of the commons) that I first considered the problem. Index funds are the purest expression of ownership without control. I don't even know what I own, and have no opportunity to vote my shares. The fund manager's entire goal is to do as little as possible, bothering to excercize oversight seems to be against the fund's management philosophy. Basically nobody is excercising owner control over these shares and management becomes more powerful. Indexes don't even give feedback on the level of affecting stock prices in an intelligent way. They merely reinforce being in the category that the index funds invest in.

In the end it seems likely that under capitalism the economy will correct this control/ownership imbalance by shifting ownership to those who have control, the executives, because so many who have ownership are actually incapable of excercizing control.

Posted by: jefff on January 10, 2006 at 6:10 PM | PERMALINK

Nathan,

Truly, what's the point of arguing with you?

Look, are you seriously going to maintain that it's simply irrelevant that executive compensation was, relative to the pay of average workers, 10 times lower in the 70s?

Now, I guess I just didn't expect you to be, or pretend to be, that obtuse.

You raise the point, quite breathlessly, that we are in fact better off in terms of some misery index today than in the 70s. Well, you see, the problem that should have been obvious to you, had you thought about it for a moment, is that my choice of the 70s was pretty arbitrary. I could equally well have chosen the 60s or 50s, and made the same point about executive pay, which was, I believe, in those decades, even less relatively. And in the 50s and 60s we enjoyed the greatest economic boom and dominance that we have ever experienced.

And the same phenomenon is true if you make comparisons across economies: Japanese executives to this day are far, far less well paid relatively than our executives are, yet in case after case they continue simply to eat our lunch.

What you can't come up with is ANY rationale, ANY, for why executives across time and across cultures should be so vastly better paid here in the US and right now than in other places or at other times. (I simply claim that the fact of higher executive pay is based fundamentally NOT on any pure working of the market, whatever that might mean, but is instead based on culturally dependent perceptions of what is acceptable to pay executives.)

If you don't see the relevance of my point, why should anyone even bother with you?

Posted by: frankly0 on January 10, 2006 at 8:29 PM | PERMALINK

I hope Chris really is getting more on the ball with the public interest. His sister tells me he's a nice guy, whatever that means.

Posted by: Neil' on January 11, 2006 at 10:22 AM | PERMALINK

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