Re: GDP up 3.3% Why are we not rich?


"Mike Burke" <mburke@xxxxxxxxxxx> wrote in message
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On Wed, 10 Sep 2008 17:00:16 -0400, "Janet" <boxhill@xxxxxxxxxxxx>
wrote:


"Mark Alan Miller" <mamiller@xxxxxxxxxxxxxxxxx> wrote in message
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"Mike Burke" <mburke@xxxxxxxxxxx> wrote in message
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On Thu, 04 Sep 2008 21:00:11 -0400, "ian@xxxxxxxxxx" <iann@xxxxxxxxxx>
wrote:

Senior executives tend to be paid what will attract and retain the
very best, and there are a whole host of esoteric issues involved
that
I don't fully understand. But if a corporation believes that its
senior management deserves a certain remuneration, then who are we -
with no relevant data - to judge what is fair and what is not?

You describe this pay-rate decision as if it is an arms-length
calculation made by disinterested people. It is NOTHING like that, not
at all. Its done with smoke & mirrors, but the people setting the
pay-levels are dependent on the largesse of the person who's pay they
are calculating.

Not according to my son. I've put arguments such as yours to him many
times, and he says that with most companies at least, the problems you
mention, eg short term results, etc, are well-recognised and
counter-measures are put in place to deter that sort of thing. Don't
ask me for the details though.

This is a recent phenomenon, and only enacted after substantial
pressure.
They aren't doing it because they want to, but because institutional
investors and even the government have told them they'd better. And no
matter how they set up the compensation, somehow execs are still earning
massive amounts during years their companies are doing poorly and
they're
responsible for the plight. They find new gimmicks to replace the old
ones. And if they can evade taxes while doing it, better yet.

Mark Alan Miller

I think that executive compensation is largely a racket. The corporate
boards are paid large sums and their self interest is to go along with the
CEO so as to stay on the board and keep collecting for doing little or
nothing. Recruiters are usually paid a percentage of the compensation of
the
people they recruit, and so they have a vested interest in pushing it as
high as they can--and in trying to create this kind of "CEO-class" recruit
that holds mystical powers in order to create the impression that
something
they can provide has crucial value to the corporation. CEOs who actually
CAN
make a difference, like Steve Jobs, are extremely rare.

I may have mentioned recently that my H was working for a short while in a
menial capacity at a business which was owned by a publicly-traded company
that had LOST X million dollars last year, and which was scrounging and
scraping to get the supplies and the personnel they needed (most of whom
were being paid under $10 per hour). The quickest way for that corporation
to turn a profit would have been to FIRE the CEO, whose compensation
accounted for their losses, and hire my H to run the company for a
fraction
of the salary. Say $500,000. The company would have turned an instant
profit, and my H, with his MBA and financial/investment background, would
be
perfectly capable of running the company at least as well as the
grossly-overcompensated CEO.

I referred this to the Fruit of My Loins who, as I said, does this for
a living. His reply is as follows:

Begin Quote

God, where to start.

The issue is largely about risk. Board's have to manage risk - their
own and the Company's. The way they do that is to hire qualified
people with a track record - past performance being no guarantee of
future performance, but the best indicator available. From a risk
perspective, hiring the second or third best candidate so as to save a
couple of million dollars (or even tens of millions of dollars in a
large company) by not hiring the leading candidate who can command
those sums, is a stupid investment. Higher risk and with immaterial
savings to the company.

Unfortunately, qualified people are relatively thin on the ground and
have much of the bargaining power. Also, courtesy of the public's
demand to know the details of executive pay in the late 90's, they are
very well-informed as to what the market rate is. Consequently, they
are able to strike a favourable bargain.

There is a commodity in short supply, and a relatively well-informed
market. Consequently, pay goes up - this is not mysterious or the
result of some well-organised conspiracy. There is some smoke and
mirrors in the US system where punters hire pay experts to negotiate
their package for them, but there is not much of a cosy club in
Australia. It is a media myth perpetuated by columnists who do their
research from the Wall Street Journal and F(inancial T(imes) and
assume the same things apply in Australia.

Also, it is a mistake to mix up payouts on termination with the
structure of pay packages - they are a completely separate
negotiation. Often a very well-designed pay package can be undone by
a negotiation when a CEO is fired i.e. pay me what I want or I'll air
all your dirty linen.

Another issue is materiality. A sum which is large for an individual
is immaterial for a company. If an ASX company with, say, an $80
billion market cap, saves $5 million on CEO pay, but has to settle for
candidate number 3 or 4 that is clearly a stupid decision - increasing
the risk of failure (based on one of the only reliable indicators -
their experience and track record) to achieve an immaterial saving.

As for some of the other comments:

1. Corporate boards in Australia are generally not paid large sums by
international standards.

2. CEO's don't dictate who sit on Boards, Chairmen do (ANZ being a
case in point) - the argument is bollocks.

3. Recruiters do have an interest in maximising pay, but not much
influence at the CEO level.

4. CEO's like Jobs are indeed rare, CEO's that can destroy an equal
amount of value are not - paying to avoid the latter is a good
investment. Linked to that, "steady as she goes" is very hard in a
big company over the long term (something like 10% - 20% of companies
manage median total shareholder returns over a complete 10-year cycle
- performance some clowns would have you believe is only average).

5. The risk a board would take by hiring someone on the basis of an
MBA (which is hardly a rare commodity) so as to save a few hundred
thousand bucks of short-term profit is incalculable.

End Quote

Mique

Your son is talking about Australia. That is immaterial to me. I am talking
about the US. Even he says that things are different here.

His entire argument, which sounds very rational and even I will agree has
some merit, founders if the assumptions that the "few qualified candidates"
ARE in fact a) qualified, or b) really few are false. I would suggest that
they are often false. Companies have a tendency to only hire someone to do a
job if they have done that job already, ignoring potential by the
bucketload. Companies routinely hire people who have already done the job
poorly or merely adequately elsewhere. "Qualification" becomes having
already had the job, no matter how mediocre the perfomance. Why? Because if
you hire someone who has already had that job title, then if they fail no
one can come back to you and complain that you hired the wrong person,
because s/he was "qualified" because s/he already had a job like this. It
becomes circular. In the computer industry, people used to say "No one every
was fired for buying IBM." Which meant that even if you failed to buy the
best technology for your company's needs, you were "safe." You had, in
effect, "managed risk." I would argue that this type of decision-making is
ultimately costly and short-sighted in the extreme.

Look at it another way. The financial industry is full of fund
managers--whose major qualification is that they have already been a fund
manager somewhere else--and stockbrokers and financial advisors and analysts
and people who want to be "players." Almost all of whom get fees for
"managing" money and "risk." Yet the vast majority of them either
underperform or at best match a simple index fund. They are full of BS about
their superior knowledge and investing smarts, and convince people to hire
them and pay them well--especially the deluded who want to be "players"--
but in fact it is all a mirage. They provide no value added

And let's look at what the job actually is. Is it to do an excellent job
providing the services or products that the company sells, and to position
the company to be able to provide said services or products efficiently and
well in the future? (An enormously complex task potentially involving R&D,
personnel, real estate, acquisitions, ensuring capital availability, and the
like.) Or is the job to manipulate the stock price for the short term gain
of the stockholders, core mission of the actual producing entity be damned?

BTW, regarding you son's snide remarks about my obviously less than serious
suggestion that Company X would do better to hire someone like my H at a
fraction of the cost of the CEO who was losing money hand over fist: having
an MBA is hardly his only professional qualification or experience. I'm not
going to trot out his CV on the internet for obvious reasons. And the CEO in
question is being paid millions. A $500K salary, which is generous enough to
attract plenty of people with significant financial expertise and
significant management experience, would save the company millions, not a
few hundred thousand. And one thing they know now is that the big $$ CEO is
NOT providing value added.


.

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