Tag Archives: executive pay

CEO’s Castles and Company Performance

Where are the Shareholders’ Mansions? CEOs’ Home Purchases, Stock Sales, and Subsequent Company Performance by Crocker H. Liu, Arizona State University and David Yermack, New York University – Stern School of Business

We study real estate purchases by major company CEOs, compiling a database of the principal residences of nearly every top executive in the Standard & Poor’s 500 index. When a CEO buys real estate, future company performance is inversely related to the CEO’s liquidation of company shares and options for financing the transaction. We also find that, regardless of the source of finance, future company performance deteriorates when CEOs acquire extremely large or costly mansions and estates. We therefore interpret large home acquisitions as signals of CEO entrenchment. Our research also provides useful insights for calibrating utility based models of executive compensation and for understanding patterns of Veblenian conspicuous consumption.

To understand better the reasons behind the underperformance of companies whose CEOs acquire very large homesteads, we read news stories about major events affecting the firms in our sample in which a CEO acquires a property with at least 10 acres or a 10,000 square foot house. These news stories suggest parallels between the CEOs’ oversight of their personal assets and management of their companies. No less than nine of the 25 CEOs attempted major corporate acquisitions in the two years following their personal acquisitions of very large real estate,9 and seven of the 25 announced significant capital investment initiatives involving the construction or expansion of corporate facilities. An additional two firms became mired in accounting scandals shortly after their CEOs purchased mansions, and one firm saw a previously agreed merger collapse.

Using a database of principal residences of company CEOs, we study whether these executives’ decisions about home ownership contain information useful for predicting the future path of their companies’ stock prices. We find that CEOs who acquire extremely large properties exhibit inferior ex post stock performance, a result consistent with large mansions and estates being proxies for CEO entrenchment. We also find that the method of financing a home’s acquisition is informative about future stock returns. A general pattern of CEO sales of their firms’ shares and options exists over the twelve months leading up to the date of home acquisition. However, when the CEO does not sell any shares, his stock performs significantly better ex post than the stocks of firms whose CEOs do liquidate equity to finance their houses. The retention of company shares simultaneous with a new home purchase, despite the presence of an evident personal liquidity need, appears to send a signal of commitment by a CEO to his company.

That we put in power CEO’s that see themselves as nobility with the right to build castles (and many of these CEO castles dwarf all but the most conspicuous castle built by nobility) by taking the wealth produced by others from corporate coffers is a sign of our failure to select acceptable leaders for companies.

Related: Another Year of CEO’s Taking Hugely Excessive PayExcessive Executive PayExposing CEO Pay ExcessesNarcissistic Cadre of Senior Executives9 Deadly Diseases

When Performance-related Pay Backfires

When Economic Incentives Backfire by Samuel Bowles, Sante Fe Institute

Dozens of recent experiments show that rewarding self-interest with Economic incentives can backfire when they undermine what Adam Smith called “the moral sentiments.”

Punished by Rewards, by Alfie Kohn, is a great book on this topic. The area of “motivating” employees is one it is often hard for managers to learn. Even managers that have been studying Deming, Ackoff, Ohno… for years still have trouble with the idea that trying to find the right incentive scheme to motivate the right behavior is the wrong approach. Read the The Human Side Of Enterprise by Douglas Mcgregor (in 1960) to re-enforce the understanding of human motivation provided by Toyota’s respect for people principles.

Managers need to eliminate de-motivation in the work systems not try and find bonus schemes to motivate behavior. Eliminating de-motivation is often much more work. You can’t just get some money from the bonus pool and start giving it away. You have to manage. But if you are a manager you shouldn’t be afraid to actually manage the system and make it better.

Related: “Pay for Performance” is a Bad IdeaReward and Incentive Programs are Ineffective — Even Harmful by Peter Scholtes – The Defect Black MarketWhat’s the Value of a Big Bonus?Problems with BonusesLosses Covered Up to Protect BonusesStop Demotivating Employees

When performance-related pay backfires:
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Narcissistic Cadre of Senior Executives

In yet another voice against the looting mentality of the current crop of executives Chris Bones, dean of Henley Business School writes a A crisis of confidence?

This has resulted in the creation of a narcissistic cadre of senior executives who knew no right but their own perception and brooked no criticism or check on their ambition. In their demands for personal rewards we have seen them in their true light.

Secondly, a responsible organisation should set limits above which senior reward will not stray. I cannot see a reason why any annual bonus plan should be worth more than 100% of salary or should pay out more than 50% of this in the year in question. I do not think there is any justification for the annual value of chief executives’ rewards to be more than 20 times that of the average employee. Rocketing executive pay is in no one’s interests, except the small number of executives involved, and limiting it voluntarily is a better solution than the state intervening through taxation changes.

Business schools can help rebuild confidence in business leadership. But they too have to change—to become critical friend rather than fawning supporter. MBA programmes have to produce values-driven general managers, not finance-driven technocrats. They must build critical thinkers with the ability to make decisions that benefit all stakeholders, not just themselves.

It really is a shame that the executives leading so many companies are so moral, ethically and managerially bankrupt. We need to stop allowing such people to become executives in organizations. With such fundamental problems in their basic understanding of human systems the correct solution is to stop allowing such flawed people to have power not to try and convince such flawed people to behave responsibly.

That executives believe they should act as royalty taking what they wish from the value produced by others is so fundamental a failure that I do not believe reform is the best solution. They should just be removed. If you are lucky some competitor will hire them and you can gain not only from their removal but from the damage they cause your competitor.

Related: Warren Buffett on Excessive CEO PayHonda Executives not OverpaidUnconscionable Executive PayTilting at Ludicrous CEO Pay 2008Looting: Bankruptcy for ProfitMore on Obscene CEO Pay

Another Year of CEO’s Taking Hugely Excessive Pay

I continue to do my part to publicize the abusive CEO pay packages that the current crop of unethical CEO’s, and those sitting on corporate boards have supported (Tilting at Ludicrous CEO Pay 20082007 post on CEO pay abuses). It does seem there is more anger now at the looting these corrupt CEOs have engaged in; though far too many people seem to think the corruption is some isolated few CEO’s. The widespread failure of ethical standards by an enormous number CEO’s (those taking from corporate treasuries as though it was their own personal bank account) is the problem (not a few individuals). The looters certainly have littered their “courts” with apologists for their egregious behavior. Even with the large amounts they pay such lackeys I am surprised they find such willing apologists, in such large numbers.

2007 pay
rank
Company CEO 2008 Pay 2007 Pay CEO % of 2008 Earnings total employees
1 Motorola Sanjay Jha $104,400,000 company lost $4.2 billion 64,000
2 Oracle Lawrence Ellison $84,600,000 $61,200,000 1.5% 86,600
3 Walt Disney Robert Iger $51,100,000 $27,700,000 1.2% 150,000
4 American Express Kenneth Chenault $42,800,000 $50,100,000 1.6% 66,000
5 Citigroup Vikram Pandit $38,200,000 company lost $27.7 billion 322,800
6 Hewlett-Packard Mark Hurd $34,000,000 $26,000,000 7.4% 6,200
7 Calpine Jack A. Fusco $32,700,000 327% 2,000

This executive pay data is for 2008, from the New York Times article, Pay at the Top. Earnings and employee data for 2008 from Google Finance. I would not pay any of these guys 1% of what they were paid if I owned the company, myself.

These guys and their friends have created a culture where their looting is as accepted as the clothes the emperor is not wearing. We need to wake up and stop letting these people steal the bounty created by the employees, customers, community, suppliers, investors… They want a world where they can behave like nobility – taking whatever they want from the value created by others. And lately they have succeeded in creating such a world. They leave in their wake very weakened companies and societies.
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Looting: Bankruptcy for Profit

Looting: The Economic Underworld of Bankruptcy for Profit by George Akerlof, University of California, Berkeley; National Bureau of Economic Research (NBER) and Paul Romer, Stanford Graduate School of Business; National Bureau of Economic Research (NBER). George Akerlof was awarded the 2001 Nobel prize for economics. This is the abstract to their 1994 paper:

During the 1980s, a number of unusual financial crises occurred. In Chile, for example, the financial sector collapsed, leaving the government with responsibility for extensive foreign debts. In the United States, large numbers of government-insured savings and loans became insolvent – and the government picked up the tab. In Dallas, Texas, real estate prices and construction continued to boom even after vacancies had skyrocketed, and the suffered a dramatic collapse. Also in the United States, the junk bond market, which fueled the takeover wave, had a similar boom and bust.

In this paper, we use simple theory and direct evidence to highlight a common thread that runs through these four episodes. The theory suggests that this common thread may be relevant to other cases in which countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust. We describe the evidence, however, only for the cases of financial crisis in Chile, the thrift crisis in the United States, Dallas real estate and thrifts, and junk bonds.

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

That is exactly what has been happening. People that are not honorable and are given huge incentives to risk the future of all the other stakeholders for immense personal gain will do so.

via: New York Times Pulls Punches On Wall Street Bubble Era Pay

Related: CEOs Plundering Corporate CoffersObscene CEO PayWhy Pay Taxes or be HonestTilting at Ludicrous CEO Pay 2008Excessive Executive Pay

Japan Airlines CEO on CEO Pay

Nice webbast of CNN clip on Japan Airlines CEO cutting his pay to less than that of the pilots. He really seems to understand the company does not exist for him to plunder (unlike so many CEOs in the USA).

Related: Japan Airlines using Toyota Production System PrinciplesUnder Nishimatsu, Japan Airlines Tries to Rise Above LegacyRespect for Employees at Southwest Airlinesposts on executive payHonda executives not overpaid either

Honda has Never had Layoffs and has been Profitable Every Year

Engineers Rule, 2006

Longtime auto analyst John Casesa, who now runs a consulting company, says, “There’s not a company on earth that better understands the culture of engineering.” The strategy has worked thus far. Honda has never had an unprofitable year. It has never had to lay off employees.

The lean and compact Fukui, like all of his predecessors, is an engineer who started in R&D and later ran the subsidiary. While other auto chief-executives-to-be were punching keyboards in an accounting office, Fukui ran the company’s motorcycle racing operations. He’s still racing. He hikes the stairs to his tenth-floor desk–tenth floor so he’s in the middle of things at Honda’s 16-story Tokyo headquarters and a desk because executives at Honda don’t have offices. Honda doesn’t disclose executive pay in detail, but the sum of salaries and bonuses that Fukui shares with 36 board members, $13 million, is just about enough for the boss at a big American company.

I checked and Honda was also profitable in 2007 and 2008 fiscal year (ending in September) and no I see no evidence of any layoffs this year (when I look online).

Related: Honda EngineeringBack to School for Honda Workers, 1993The Google Way: Give Engineers RoomGoogle’s Ten Golden RulesToyota as HomebuilderCurious Cat Science and Engineering BlogToyota’s CEO pay under $1 million

Of all the bizarre subsidiaries that big companies can find themselves with, Harmony Agricultural Products, founded and owned by Honda Motor, is one of the strangest. This small company near Marysville, Ohio produces soybeans for tofu. Soybeans? Honda couldn’t brook the sight of the shipping containers that brought parts from Japan to its nearby auto factories returning empty. So Harmony now ships 33,000 pounds of soybeans to Japan. An inveterate tinkerer, Honda also set up a center nearby to develop better soybean varieties and improve agricultural processes.

What’s the Value of a Big Bonus?

What’s the Value of a Big Bonus? by Dan Ariely

To look at this question, three colleagues and I conducted an experiment. We presented 87 participants with an array of tasks that demanded attention, memory, concentration and creativity. We asked them, for instance, to fit pieces of metal puzzle into a plastic frame, to play a memory game that required them to reproduce a string of numbers and to throw tennis balls at a target. We promised them payment if they performed the tasks exceptionally well. About a third of the subjects were told they’d be given a small bonus, another third were promised a medium-level bonus, and the last third could earn a high bonus.

So it turns out that social pressure has the same effect that money has. It motivates people, especially when the tasks at hand require only effort and no skill. But it can provide stress, too, and at some point that stress overwhelms the motivating influence.

When I recently presented these results to a group of banking executives, they assured me that their own work and that of their employees would not follow this pattern. (I pointed out that with the right research budget, and their participation, we could examine this assertion. They weren’t that interested.)

This is an interesting look at an effect of bonuses. We all know monetary bonuses can influence behavior. The problem is the type of behaviors that result. Huge bonuses, for example, create huge incentives to risk the future of the company for the chance at a huge bonus for the executive. Extrinsic motivation leads to many problems.

Problems with bonuses: Losses Covered Up to Protect Bonuses“Pay for Performance” is a Bad IdeaProblems with BonusesBook: Punished By Rewards: The Trouble With Gold Stars, Incentive Plans, A’s, Praise, and Other Bribes by Alfie Kohn – posts on executive pay

Tilting at Ludicrous CEO Pay 2008

I continue to tilt at the robber barron CEO pay packages (2007 post on CEO pay abuses).

2007 pay
rank
Company CEO Pay 5 Year Pay CEO % of 2007 Earnings
1 Apple Steve Jobs $646,600,000 $650,170,000
   
18.5%
2 Occidental Petroleum Ray Irani $321,640,000 $509,530,000
   
5.9%
3 IAC Barry Diller $295,140,000 $512,270,000
   
Company Lost Money
4 Fidelity National Financial William Folley $179,560,000 NA
   
138.4%
5 Yahoo! Terry Semel $174,200,000 $432,490,000
   
26.4%
7 Countrywide Financial Angelo Mozilo $141,980,000 $295,730,000
   
Company Lost Money
13 XTO Energy Bob Simpson $72,270,000 $215,280,000
   
4.2%

Data via: Forbes CEO Compensation (Total compensation for each chief executive includes the following: salary and bonuses; other compensation, such as vested restricted stock grants, LTIP payouts and perks; and stock gains, the value realized by exercising stock options.) and Google Finance (using 2007 earnings – Countrywide from SEC). I realize this chart could be improved by spending more time (the effect of stock options exercised in one year distorts things a bit but the excess are so massively huge that the clarity of the data does not need to be very precise).
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CEOs Plundering Corporate Coffers

Pointy haired bosses broke the code they provided on their site for embedding a Dilbert comic, so I removed the broken code.

Dogbert: “I am stepping down as CEO so I can spend more time with the money I stole from this hellhole.” Unfortunately we still have far too few people that see the obscene behavior of CEOs and their brooks brother bureaucrats as unacceptable. The behavior of many of them has been similar to that of dictators looting the coffers of their country as the country sinks into despair. The CEOs have their actions supported by a flock of board members that are also spared the condemnation their despicable behavior deserves.

I must say I am amazed at how brazenly those participating in looting companies from within are; and how it is accepted. It is a shame such unethical behavior is tolerated. It seems once companies implode their are some minor complaints about the behavior, in the specific case in question, as though it was not the accepted current practice among the many of those in positions of power (Warren Buffett being one obvious counterexample).

At some point I sure hope those looting companies and voting to support such things are seen for what they are. And I hope we don’t make excuses about how those taking what they didn’t deserve were somehow excused because they paid large sums of money to others to say such behavior was acceptable. Undermining all those that rely on a companies long term success is despicable behavior. That we accept those doing so and those board members supporting it as honorable members of society is a sad commentary on our society. I understand they feel entitled to loot when they see their neighbors buying castles around the world and helicopters and jets and… But their behavior is despicable.
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