If you think CEO compensation is getting out of control please

[valuecfa]

Broxburnboy: One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.

 

Broxburnboy, I could not agree more. However, i'm trying to tackle more realistic goals right now. What u speak of is probably one of the biggest problems in my mind as well, yet there are so many fish in that privileged pond, that i don't know if that will ever change.

 

I'll leave that one to Patrick Byrne, Prem Watsa, and Michael Moore (i hear he is making a video on this subject).

 

I'm just picking my battles.

[watsa_is_a_randian_hero]

"GE said that the market value of GE increased by "hundreds of billions of dollars" during Welch's tenure. "

 

How about this for an exercise - if Warren Buffett wanted to be paid more - how much could he be paid before you would sell the stock and no longer own?  Now I'm talking TOTAL comp (to your point with Welch), including perks.

 

$10 million?

$50 million?

 

I think he could be paid $500 million or more per year and it would still be a good deal for most shareholders.

 

Look at it this way - how much alpha do you think Buffett creates?  Lets say he is able to create on average 3% alpha per year (an extremely conservative estimate).  With a market cap of $140 billion, that is $4.2 billion of value created on an annual basis by Warren Buffett, and he definitely deserves to be paid more than he is.

 

The same goes for Prem Watsa, the same goes for Schmidt/Page/Brin (GOOG), Jobs (AAPL), Mackey (WFMI). 

 

On a lighter note, Jerry Yang is paid $1 but he is not worth one dime.

[valuecfa]

How about this for an exercise - if Warren Buffett wanted to be paid more - how much could he be paid before you would sell the stock and no longer own?  Now I'm talking TOTAL comp (to your point with Welch), including perks.

 

$10 million?

$50 million?

 

I think he could be paid $500 million or more per year and it would still be a good deal for most shareholders.

 

Since i don't follow GE's compensation plans closely, as i am not a shareholder...

EDIT: OOPS! I thought you were talking about Welch and GE here

 

I will answer your question with a question.

 

Do you think Welch would have preformed any less well, had his annual pay been $20 million vs. the $500 million you propose?

 

Or what if Welch's salary was $1 Billion per year? When is enough enough? Don't get me wrong, I am all for incentive compensation and rewarding great managers well. However, I would prefer Buffett's approach of giving them a big bonus each year they preform great. I would even be fine with restricted stock awards too.

 

There have just been so many compensation "issues" in the past and present, that i think the issues are not being handled anywhere near properly by the compensation committees and BODs. Whether it be repricing of options, backdating of options, outrageously low strike prices, golden coffins, golden parachutes, windfall if they are fired!, extaordinarily long warrant periods of decades in some cases, or excessive perks like this ridiculous one: (flying to the doctor for a physical.) --(I wonder if he also flies to Dairy Queen for a midnight snack)

http://dealbook.blogs.nytimes.com/2009/03/27/a-trip-to-the-doctors-on-the-company-jet/

 

This listing of waste of shareholder capital is endless with all these executive compensation issues.

 

the same goes for Schmidt/Page/Brin (GOOG)

 

I disagree. Google's mgmt already was very, very will compensated in earlier years with their previous stock options. They've gotten into a bit of rough patch recently, and do they cut back or even stablize perks? No, they reprice underwater options. As can be seen here: http://www.footnoted.org/gold-stars/google-rolls-out-its-option-exchange-program/

---That created a lot of shareholder value!!---  :P {{I just made a fart noise with my mouth}}

 

How about this for an exercise - if Warren Buffett wanted to be paid more - how much could he be paid before you would sell the stock and no longer own?

As far as warren buffett's salary. I don't know at what point i would not be a shareholder. Certainly a very high one. I don't have to worry about that with him as he is not a self-serving CEO.

 

Once again, I am all for rewarding great managers with great rewards during good years. But repricing stock options when companies share price has fallen 70%!? I'd like to reprice my options too. How is that great for shareholders, awarding dismal performance. Or giving bonus perks, and bonus salaries during crappy periods. I could go on and on.

 

Once again, i''l put this in caps just to emphasize my point, -MANAGERS SHOULD BE REWARDED VERY WELL FOR GREAT PERFORMANCE- but this is not what is happening in corporate america. They get overly rewarded regardless of performance, even during poor performance: through repricing of options, change of controls, etc, etc, etc, etc, etc, etc, etc, etc, etc, etc, .............

 

As Jack Bogle says, "ENOUGH!"

 

This is a simple way to put it:

It's like raising your dog. You reward him with treats when he pees outside. You don't reprice his stock options when he poops on the floor.

 

 

[cheapguy]

Can we compare the CEO's pay with the Hedge fund managers/Private equity pay ?

 

 

Comparing them with some owner-ceo's is not an apple to apple comparison.

 

 

Share holders don't like to give stock options, high pay, ...

So how are you going to reward management ?

 

So if CEO's are not owning a lot of stock (to start with), how will you make them own significant percentage of the company ?

 

They could be adding value to the company even if they do not own a lot of the company.

 

On the other hand, how many Hedge fund managers are ready to give up 2/20 formula, or apply that only to gains above and beyond the historical average (say 12% for S & P).

 

I am hoping to see hedge fund managers or private equity people working for $100k or $1/year soon.

 

 

[Uccmal]

Have a look at the FFH Proxy this year.

 

Prem made 625 k, excluding dividends of course, which we all got.  No options, no stock gifts. 

 

Others made double or triple with bonuses.  A few got stock options but nothing too extravangant.

 

Alot of insider ownership, some of it dating to before the New York listing when the company could provide low interest loans to "key" personnel.  Many of the employees will end up richer than their wildest dreams from owning stock. 

 

Is there any reason to pay anyone more than what the FFH people get?  Absolutely not. Anything else is just an ego feeding extravagance.  FFH is able to keep the people by providing a high degree of involvement, a healthy work environment, and lots of opportunity.  Want to help restructure a company, go on ABH's board, or LVLTs etc. 

 

If shareholders buy shares with all of the factors in mind, such as executive compensation, return of equity, debt to equity etc.  then the high executive paychecks should disappear.  But they dont.  Most are institutional shareholders and they allocate according to capital allocation models not perfomance. 

 

 

I personally think that alot of very capable people would take CEO jobs for alot less pay than many are now getting.  Just so they could be part of something greater.  I would run HD if I could handle the stress (I cant), and was bright enough. 

 

The best way to vote is with your feet.  If everyone did that FFH's stock price would be around 1000 right now, but obviously they dont. 

 

[watsa_is_a_randian_hero]

There is a reason to pay employees more.  Top employees in finance can leave, go work for other firms, or start their own firms, esp. boutiques.

 

Say a top trader, or investment banker with a rolodex, brings in $100 million a year in value creation to your firm.  Do you want that person leaving?

 

I think the best analogy is sports.  Think of the value Michael Jordon created for the Bulls. 

 

Now, I have no problem with the SIZE of comp paid, but I do take issue with how it is STRUCTURED.  Esp for traders and management.  I work for a boutique investment bank, and there is not much you can do to create large negative losses performing traditional functions such as M&A.  However, for a trader, or for management in general, this can happen, and those taking on this type of risks should not be paid ANNUAL bonuses.  Comp should be longer-term oriented, based on 5 year performance, and your bonus would vest.  In order to attract employees to this pay structure, the size of the bonus would most likely need to be even higher though, because Ceteris paribus the employee is taking more risk they won't be paid anything at all.

[Partner24]

Al, in my mind you're absolutely right. That's a very good comment from you. Fairfax, like Berkshire, is one of the ultimate owner-capitalism friendly companies and it put the bar very high for the other companies around. But obvioulsy some people don't see that and to them be a shareholders friendly management company is just a very secondary factor in their analysis.

 

Cheers!

[valuecfa]

I work for a boutique investment bank...

 

Which one? Or, less revealing. in what state?

 

trader/associate/analyst/research/IB??

 

--

I'm research associate for well-known middle bracket firm in midwest.

I'd rather not say which one or in what universe coverage on a message board.

[watsa_is_a_randian_hero]

"I'm research associate for well-known middle bracket firm in midwest."

 

Equity research?

 

 

I'm in the midwest as well.  I'm in a valuation group that does fairness opinions/solvency opinions/corporate valuations/structured finance valuations.  I primarily work on the structured finance side but occasionally help out in other areas.

 

Its not what I originally set out to do (I'd rather be in asset management), but as Nassim Taleb would say - luck and randomness is the huge determinant in success.  About 6 months after I was hired the credit crunch took hold and the demand for valuation services for structured securities from hedge fund clients and corporates (for FAS 157) skyrocketed because they all became illiquid and holders needed valuations for their NAVs or 10-Qs.

[valuecfa]

Equity research?

 

Yes, equity.

 

It's not bad. Very, very little micromanagement at my firm (which is very nice, kinda work at your own pace), and has been repeatedly been voted as one of the top companies to work for. I definitely don't want to go into IB, but have considered moving to the corporate credit side if openings become available, under the right conditions. My goal has always, been to switch to the buy side or even PM someday, but it is hard to break into without the connects.

 

How weird would it be if we were at the same firm? Nah...