Clawing Back at Exec Comp (part II)
The NYT hits upon a subject we have discussed repeatedly in the past: Why are CEOs allowed to keep bonuses based on profits that were ephemeral, false or even fraudulent?
As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers’ money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars.
Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning.
“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”
Either investors should be able to pursue recovery via litigation, or the SEC should go after the ill-gotten cash.
Either way, Bonuses based on profits that were not real are not bonuses — they are the proceeds from theft, and as crime, should be disgorged.
>>
Previously:
CEO Clawback Provisions in the Bailout? (September 2008)
http://www.ritholtz.com/blog/2008/09/ceo-clawback-provisions-in-the-bailout/
Citi Bailout (November 2008)
http://www.ritholtz.com/blog/2008/11/citi-bailout/>
Source:
On Wall Street, Bonuses, Not Profits, Were Real
LOUISE STORY
NYT, December 17, 2008
http://www.nytimes.com/2008/12/18/business/18pay.html
December 18th, 2008 at 9:46 am
Why CEOs and senior management paid so much relative to the average worker when ANYONE who is competent and “smart enough” can do the job? I find it particularly irksome when there are claims of genius used as justification. It seems that every CEO and senior management is the smartest person in the room.
December 18th, 2008 at 9:50 am
HA!
Angelo Mozilo LAUGHS at this. He’ll use every dime for lawyers first and then maybe, just maybe, make a donation with whatever’s left to save the spotted owl of Tibet and then tell the world to kiss his arse……
December 18th, 2008 at 9:58 am
“Why are CEOs allowed to keep bonuses based on profits that were ephemeral, false or even fraudulent?”
~~~~~~~~~~~~~~~ Because we have a justice system that ignores white-collar crime, or rich-people crime, but pays vigorous attention to poor-people crime. It’s just easier to prosecute folks who don’t have the money to hire the best defense. I hope Obama restores the rule of law and these folks are prosecuted.
December 18th, 2008 at 10:01 am
Two things:
1.) as I’ve said before, these catz were Paid like Hitmen, b/c they Were Hitmen.
Successful? Of Course they were.
and, 2.) Happily, long lost peep are starting to regress, toward the Valley, much awaited ‘Green Light’ has been seen on New Project, and the, much-procrastinated, commencement of learning a ‘new’ language (Res Ipso Loquator) has reached its ‘has to begin’-stage..
LSS: less time for too much posting
Hope the Holiday Season finds y’all, each and every, Hearty & Hale.
and, as a gift, remember, Give what you cannot Keep, to Gain what you cannot lose..if that is too opaque, start with understanding.
December 18th, 2008 at 10:01 am
Wouldn’t this be akin to the libel laws, where you have to prove intent? Very difficult to convict anyone under this scenario.
December 18th, 2008 at 10:01 am
Somehow it seems fitting to call these guys: “False Profits”.
December 18th, 2008 at 10:03 am
O, ‘claw backs’? yeah right, as, as, as if..
or, if so, watchWho gets ’scratched’, should be tres’ telling..
December 18th, 2008 at 10:05 am
…and the members of the Boards of Directors who approved these bonus “schemes” in the first place?
What’s the term I’m grasping for here?
fiduciary non-feasance?
fiduciary misprision?
criminally negligent?
non compos mentis?
December 18th, 2008 at 10:12 am
anyone else seeing the auto bailout being announced tommorow to try and bust shorts on options expiration. seems they love announcing on options expiration, could be paulsons christmas gift to the longs.
December 18th, 2008 at 10:15 am
I find the simple act of discussing clawbacks to be very encouraging, but no doubt these characters have covered their butts with expensive lawyers. Seriously, we have discussed many times here that all the hatred of shorts overlooks the fact that the real fraud and abuse happened on the way up, not on the way down.
Clawbacks and disgorgement. Nice. At least the lawyers will dodge the recession, but they always do.
December 18th, 2008 at 10:16 am
Ventura 2012: There are no shorts, except dumb ones. Right now, this is the thinnest market imaginable.
We can get busy again in January when hedgies come a-selling…
December 18th, 2008 at 10:18 am
Not to worry all. According to Liesman, a report says that the TARP program is actually MAKING us money! Oh goodie, so we can all just relax and move on with our lives……..
December 18th, 2008 at 10:31 am
why do a claw back at all? why pay them their bonus over some specified time period of say 10 years? it would be lots cheaper. no need to sue or any thing else. and you could add new conditions to this bonus payment. like the company has to be still be making a profit? and you could also put their regular salaries under the same scope.
December 18th, 2008 at 10:31 am
“they are the proceeds from theft, and as crime, should be disgorged.”
Boy what has taken you so long to get to this realization? You’re way behind the curve on this one.
There are so much things to say about this but anytime you have socialization of an industry, Bonus gravy has to stop. Otherwise everyone is paying for someone else’s free trip to Hawaii.
I can’t believe that people are still saying things like ‘maybe if we tie the bonuses to a longer term cycle that would keep them from making self serving short term decisions. ‘ The point that they are still thinking they deserve any kind of a bonus reflects on how unfit they are to deal with this crisis. In comparison this makes the auto execs look like the tooth fairy. The argument that they need proper compensation to retain their experience falls flat in an environment where the world is coming apart at the seams and they are still contemplating their navels. All the experience in the world does not help if it can not be properly focused.
I think they should know that if they rip people off they can expect to go to jail. Perhaps that will get them to think long term. But you know what? I don’t care to fund their white collar crime jail cell.
I say they become the first wave of our intersolar exploration projects. Send them to Mars.
December 18th, 2008 at 10:33 am
@willid3: But that would be far too complicated for their enabling lap dogs to manage and let’s face it, we can’t have anyone pushing back on the kings and queens of this country. We would all just perish.
December 18th, 2008 at 10:37 am
Who would go after them? The SEC?
I would love to see it but have little hope that anything will be done.
December 18th, 2008 at 10:46 am
Here is an approach:
http://www.bloomberg.com/apps/news?pid=20601087&sid=auEEfFRNdqcs&refer=home
By Christine Harper
Dec. 18 (Bloomberg) — Credit Suisse Group AG’s investment bank has found a new way to reduce the risk of losses from about $5 billion of its most illiquid loans and bonds: using them to pay employees’ year-end bonuses.
The bank will use leveraged loans and commercial mortgage- backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today.
- There is more at the link
December 18th, 2008 at 11:00 am
Here’s what will happen as a result of all this talk: absolutely nothing. As someone else noted, white collar crimes continue to be under prosecuted. Here’s an idea (realizing that Madoff is a somewhat separate issue): put Madoff to death or life in prison. And if it is life in prison, have it be a real prison. That might give people a negative incentive. Attaching real penalties to these crimes might actual cause them to think twice. And while we’re at it, force the compensation to be paid out over years.
But as I said, nothing will happen.
December 18th, 2008 at 11:02 am
Send them all to Mars, Check back in twenty years. If they’re still alive then start taxing them, without representation.
December 18th, 2008 at 11:04 am
Off Topic:
I know a few of you are feeling the pain on SRS. Here is a little more sunshine, or just more nail in the commercial real estate market.
http://www.nytimes.com/2008/12/18/business/18brokers.html?pagewanted=2&_r=1&hp
December 18th, 2008 at 11:14 am
I don’t understand why most people have a real attitude against workers having a contract stating how they will be treated and payed, yet all the CEO’s have a contract I doubt any of them would want reviewed in the public by the public.
Has there ever been an investigative piece comparing the “CRIMINAL” contract packages these CRIMINALS contract for themselves by themselves? We actually have people in the US that still believe the common shareholders have a say. No one has a say but these board room criminals.
December 18th, 2008 at 11:36 am
Yawn. Next.
December 18th, 2008 at 11:40 am
Barry, you know how hard it is for shareholders to “pierce the corporate veil” and get at the bastards. And if bonuses are calculated under compensation agreements using derivative-type inscrutable performance metrics, good luck to ya proving fraud or breach of fiduciary duty! Business decision, business decision. And it is industry-standard in every industry. God help us.
Let’s call it what it is: there’s a class war going on and the pigs making the money are straight out of Orwell. Might makes right and he who has the gold makes the rules. 2+2=5. Thain should get a $10 million bonus because he kept the company from losing more than $11 billion. [Marv Albert: Yessssssss!]
Will Spielberg’s next movie be Madoff’s List?
December 18th, 2008 at 11:41 am
Most Americans appear more upset with the pay of autoworkers and other regular Americans than that of the executives. The culture of kissing up and kicking down is as strong as ever in this country, and so the race to the bottom for the majority is destined to continue.
December 18th, 2008 at 11:41 am
Icahn on the subject of “say on pay”:
http://www.icahnreport.com/report/2008/09/say-on-pay.html
December 18th, 2008 at 11:43 am
Seven Stages of Grief:
1. Denial
2. Pain
3. Anger <—– you are here.
4. Bargaining
5. Depression
6. Testing
7. Acceptance
December 18th, 2008 at 11:59 am
Transor Z wrote,
“Let’s call it what it is: there’s a class war going on and the pigs making the money are straight out of Orwell.”
I wouldn’t say Orwell – more like Kafka.
As Goldman Sachs and other banks awoke from unsettling dreams one morning, they found themselves transformed in bed to a monstrous leech….
December 18th, 2008 at 12:02 pm
While we’re at it, let’s also talk about all the government/pseudo government employees that are wringing us dry. The head of the MTA in New York City brought home $300,000 last year. Meanwhile, fares were just raised and subway and bus lines were eliminated.
In Hoboken, NJ they are proposing raising property taxes 47%. Cops and firefighters, who I actually think should start out with better salaries but make way less later on, can be making three times the average resident salary. Thanks a lot “public servants.”
It’s a mad dash to loot the coffers before the whole thing collapses. Looks like we’re running out of time. Get yours while you can.
December 18th, 2008 at 12:05 pm
A thought about pay moving forward;
Why not implement a vesting schedule for these exec. bonuses, much like a company would put a vesting schedule on the profit sharing contribution they might give in a qualified plan to a non-exec employee.
You could make the vesting schedule 5-7 years. This would allow for time to discover whether or not the profits were real. Someone mentioned Mozilo above, if there had been a 5 year vest on the bonus he recieved in 2004 for example, it would not have ever gotten paid to that p.o.s.
I would like to think that if they were only paid portions, or not anything until the vesting period is complete, it would encourage a more long term approach towards increased earnings/profitability and better overall management, instead of the structure now which encourages pushing the stock price up short term be it real or not.
Something like this would also help avoid the arrogance of say Thain, whom I believe just a few weeks ago wanted a $10mil bonus for his role!?! Was that for real?
Also, this helps avoid the costly, and probably lenghty litigation suggested above, and allows the SEC to focus on enforcing real time regulation, something they clearly need have not been doing.
This needs to be thought out more but having just come up with this in my head it seems like a step in the right direction.
December 18th, 2008 at 12:10 pm
Must read as an addendum:
http://feedproxy.google.com/~r/NakedCapitalism/~3/tml-D67-UO0/new-york-times-story-pulls-punches-on.html
December 18th, 2008 at 12:35 pm
Should the Feds reimburse a CEO’s prior period’s taxes on income etc for those who get clawback orders?
Also, if a CEO bought his mistress a Jean Schlumberger-designed necklace should he get a state credit on sales tax when returned? Should the platinum-digger be required to gift back the ornament to the Treasury? Is she jointly and severally liable for any private jet jaunts? What about this example CEO’s old lady? Is she on the hook for the mistress’s clawback allocation? Is there way to implement this without letting her know on a form 1040?
December 18th, 2008 at 12:39 pm
This period will go down as one of the greatest eras of fraud and corruption in America. This will be studied in the future about the pitfalls of capitalism and free-enterprise (and we all thought we were smart enough to prevent this!).
Virtually everyone is in agreement that this is happening. What is aggravating is that simple solutions will not be enacted. Perhaps a revolution in America is needed. I read an article within the last year espousing how the government would squash any citizen uprising. And we are the “free” world!
December 18th, 2008 at 12:48 pm
CEOs should be paid a salary that is in line with what other employees make. They are not superstars, they are managers. That America has failed to understand this for so many years is the biggest part of the problem right now. We have companies that have been badly, badly managed, and yet the CEOs have raked in the cash. Now we can all see how badly they were managed, and yet we all pay the price, except for those presonsible.
What a stupid country.
December 18th, 2008 at 1:01 pm
Winslow said “This will be studied in th future about the pitfalls of capitalism and free enterprise.’
Studied?!?!? Ok I’ll just come out and say. All these guys are guilty of is trying to re-arrange the deck chairs on the Titanic so they can enjoy a bit more caviar before they go down with the sinking ship that is the US Economy. There’s “no where to run to baaaaby No where to hide..” Thier penenance will be to witness all the suffering of the folks below deck before they drown themselves…
“Capitalism” aka Cronyism has been destroyed… There is only the State now and Thank God we have a shot with this Obama guy Because if we don’t help him and he (and we) fails then my grandchildren may have to live and suffer through a Dystopian Nightmare of Dictatorship and Revolution right fracking here in the good old US of AAAAAA.
Was I the only one who saw the upcoming ARM disaster segment on 60 minutes for gosh sakes!!! it make Suprimes look like a tiny little leak compared to the hugh gash thats going to happen to our ship of state when these things start to reset in 2010…
‘Thomas Andrews: The pumps will buy you time, but minutes only. From this moment on, no matter what we do, Titanic will founder.
Ismay: But this ship can’t sink!
Thomas Andrews: She is made of iron, sir. I assure you, she can. And she *will*. It is a mathematical certainty.” Titanic 1997
William Hazen
December 18th, 2008 at 1:07 pm
Clawbacks inevitably a precursor to mob action. First stop, Fuld’s house.
December 18th, 2008 at 1:40 pm
WE PROPOSE A NEW LAW that requires all EXECUTIVE compensation packages to pay out based on % of YEARLY WEIGHTED AVERAGE EBITA for ALL EXECUTIVE LEVEL POSITIONS in all publicly traded entities.
Thereby policing Exec behavior to produce sustainable, strategies and cash flows from operations as opposed to quick hits that result from unwise risk taking and or accounting artifice. Who cares what the exact % is that would be doled out to the EXEC as long as the payout methodology is based on a potential flash-in-the-pan NI that directly promises unlimited short-term upside compensation and complete ruin thereafter for all save for the EXEC.
December 18th, 2008 at 1:41 pm
The money is gone. Don’t bother to pay lawyers to battle other lawyers over money that has been long-spent.
Instead, enact some rational regulations regarding employee compensation in publicly-owned corporations.
Here’s a start: Any non-wage compensation must be paid based on objective measurements using a 5-year moving average, as deferred extraordinary compensation. If the reference metric plummets through the 5-year window, the “bonus” gets scaled back accordingly, otherwise, it is paid out as credited 5 years earlier. Such compensation would be given a favorable tax treatment, something akin to a capital gains distribution.
This would eliminate a lot of the flagrant contracts that executives write for themselves, and then get the boards that they have brought in to approve it. And when you look at what it would do in the lower levels of the organization, it would enhance the bond between employee and employer, eliminate a lot of stupid subjective performance appraisals, and focus the employee on making the enterprise successful.
What privately held companies do is only the owners’ business, but publicly-held companies should expect some degree of regulation on their behavior. It’s clear that the shareholders are never going to act in their own interests, just as Greenspan “discovered” that the banks and brokers would take risks that were not in their own self-interest. Very few of us are responsible adults, and we need rules recognizing that.
People need rules and codes of conduct — it’s called civilization. The trick is to design the rules so as to be as flexible as possible, but not more flexible than prudent. The act of government should be a constant struggle to improve these rules, making them less onerous and more effective, simplifying at every opportunity.
December 18th, 2008 at 1:59 pm
Bonuses should never be given as cash beyond 10% of the regular salary. They should be given in the form of stocks or (stock-price indexed certificates) that are locked up and cannot be sold for 10-years. That way the incentives are to create profit in a way that will keep the company long-term viable, rather than sink it in a few years.
December 18th, 2008 at 2:06 pm
@jmay: “3. Anger <—– you are here.”
One of the things that is really surprising me in all this is the absence of real anger.
Perhaps it’s because of the administration change, the old administration is already done and people don’t hold the new administration responsible for it.
I think we’ll see one of these clowns taken out before this is all over. Guy loses his job, loses his unemployment, wife leaves then gets a letter that his credit limit has been reduced 90% from the same bank the government just gave 20 billion dollars to.
December 18th, 2008 at 2:07 pm
@VennData:
There’s already a way to confiscate property associated with organized crime — RICO. Problem is, forfeited assets seized under RICO go to fund federal law enforcement agencies involved in the investigation. So the FBI, NYPD and SEC could split the value of the necklace. Yessssss!
Maybe off-topic, but I would submit that this corruption pales in comparison to the immorality of pediatric psychiatrists taking kickbacks from Big Pharma to medicate kids unnecessarily.
Should the torches and pitchforks go after the Frankenstein notion of corporation as a legal person instead of after CEOs and politicians? Maybe the left-wing nutters are on to something when they call the corporate person a sociopath. Why should we be surprised when CEOs behave in a sociopathic way? Is more regulation and legislation really going to change human nature?
December 18th, 2008 at 2:57 pm
swear i’ve seen this movie…:
@MAL – how educated, smart, and unique are CEOs and their ilk?
Randolph Duke: Pay up, Mortimer. I’ve won the bet.
Mortimer Duke: Here, one dollar.
Randolph Duke: [chuckling] We took a perfectly useless psychopath like Valentine, and turned him into a successful executive. And during the same time, we turned an honest, hard-working man into a violently, deranged, would-be killer![laughs]
@bcasey – what should be done to the current crop of market pariahs?
Billy Ray Valentine: [watches Louis clean his shotgun] You know, you can’t just go around and shoot people in the kneecaps with a double-barreled shotgun ’cause you pissed at ‘em.
Louis Winthorpe III: Why not?
Billy Ray Valentine: ‘Cause it’s called assault with a deadly weapon, you get 20 years for that shit.
Louis Winthorpe III: Listen, do you have any better ideas?
Billy Ray Valentine: Yeah. You know, it occurs to me that the best way you hurt rich people is by turning them into poor people.
Coleman: You have to admit, sir, you didn’t like it yourself a bit.
what a prescient movie!
(i have to admit, i am fond of the shooting part as a singular and easy solution.)
December 18th, 2008 at 3:08 pm
credit markets ripping today.
HYG +7% crawling out of basement… AGG breaking out. not to mention TLT!
bullish
December 18th, 2008 at 6:44 pm
Most salespeople comp plans have a clause to the effect of “if the customer does not pay the bill, you will be charged back for the compensation paid to you”. Seems something similar tied to fake profits should be in effect for corporate executives.
Also, as someone mentioned above, executives are just managers. It is the people under them who do the real work (gather the information, analyze it, make recommendations and implement the decision). The $$$ that a corporation disburses as salary and bonuses should be reconstituted so that their distribution is more equitably based on work performed. It is said that managers get more dollars because they have ultimate responsibility. But when an initiative fails, it is often the workers who gets the pink slip while the manager says “so sorry” and continues making bad decisions.
December 18th, 2008 at 10:29 pm
Ben22, ConstantNormal,
You don’t get it. Discussing effective compensation packages, moving forward blah blah, is not the point.
there is no moving forward. What happens in a depression is moving backwards. People are lucky to have jobs. Where your experienced people are talking about schemes to maintain their bonuses, I say they have no experience regarding the economic regime we are entering, and so their experience is worthless, Their complete compensation package should be jettisoned at as little cost as possible, sooner rather then later. But they won’t do that, and so they will continue to be a part of all of our problems.
December 19th, 2008 at 10:36 am
Somewhere, Hugo Chavez is laughing his ass off
December 19th, 2008 at 8:24 pm
Didn’t the Sec. of the Treasury just finish handing out a few hundred billion to The 9. To say nothing of the Trillions the Fed has sloshing about for the “In” crowd. Of course the rest of the guys expect their bonuses. They even have the current Supreme Court protecting them from shareholders.
What bothers me is Minimum Wage.
December 19th, 2008 at 11:45 pm
I have no problem with exorbitant bonuses. However, bonuses should have a direct relationship with a) the life-cycle of the product or service, and b) the profits derived over that life-cycle. Bonus expenditures would be set aside in an accrual account. If and when profits are not met, the accruals would return to capitalize that company, instead of being blown away in the Hamptons.
December 21st, 2008 at 11:18 am
Maybe we could form the Madam LaFarge Society and start collecting money to buy a guillotine