Wednesday, September 24, 2008

Wall Street Executive Compensation Manifesto & Challenge: I will risk working for free, will you?

This financial and investing blog entry is directed at Mr. Paulson, The Treasury, The Federal Reserve, Congress, The White House, and Wall Street in general.

My Challenge to Wall Street and Executive Management

I hereby challenge Wall Street executives to meet or exceed my personal commitment to fixing the financial system problems in this country, and doing so with the same promise I make to REQUIRE ZERO PAY unless I, through managing such a firm, achieve success not just in the short-term, but the long-term as well, for shareholders and/or the American taxpayers. IF you believe in your abilities as much as I believe in mine, especially when you perhaps have more "experience or qualifications" to perform the job of Senior Executive of a public company than do I, you should have no problem signing onto my plan. If not, step aside and allow me, and perhaps a few associates of mine that will offer equal commitment to the task, to take over the situation and fix the problems.

I have outlined my corporate-compensation manifesto below, to which I will subscribe, and I suggest the government force other CEOs and highly compensated managers of public companies to subscribe to, especially in light of the latest "private profits, public losses" shift that leaves us ordinary citizens to bailout the result extremely bad management decisions of recent, and especially where any CEO's will be managing what is essentially a government-backed / taxpayer-backed venture going forward.

After reading this New York Times article describing the Wall Street Bailout Terms, which absolutely infuriated me, and forced me to make as clear as possible how adamant I feel about how MR. PAULSON IS ABSOLUTELY WRONG WITH CONCERNS ABOUT LIMITS ON EXECUTIVE COMPENSATION. I hereby call you and your other cronies out on the floor for a debate about WHY such high-compensation is "needed", when I am quite willing to work without pay unless I perform! Here's the quoted text that got me fired up:
"Under a so-called claw-back provision, the secretary would have the power to force companies to recoup previous payments to executives of companies involved in the program. And Mr. Frank's plan would give broad authority for the Government Accountability Office, an investigative arm of Congress, to audit and oversee the program.
But Mr. Paulson said that he was concerned that imposing limits on the compensation of executives could discourage companies from participating in the program.

"If we design it so it's punitive and so institutions aren't going to participate, this won't work the way we need it to work," Mr. Paulson said on "Fox News Sunday." "Let's talk about executive salaries. There have been excesses there. I agree with the American people. Pay should be for performance, not for failure.
But he quickly added: "But we need this system to work, and so we — the reforms need to come afterward.""

OK, Hank,... let us focus on your statement about "Pay should be for performance" instead of the sentence (expressing concerns about compensation limits) that simply furthers the Wall Street mantra many years in the making which justifies exceedingly exorbitant salaries, options, and bonuses for executives even while companies are losing money, going under, laying off thousands, and so on. And, that part of Hank's statement about reforms needing to come afterward: BULL #@$! Reforms must happen NOW, or no (lasting) benefit will arise from these bailouts!

If that part about pay-for-performance is real in your own belief system, it is NOW time to start making executive compensation what is SHOULD be: a true risk/reward system, where for being that high-level executive and leader, you are taking the "risk" of not meeting or exceeding company profit goals, which would make your pay essentially disappear, while at the same time you have the potentially LARGE reward that comes with creating corporate and shareholder profits that lead to your own salary and bonuses being large. This is the age-old risk/reward concept.

Notice how this differs from what led us to this mess on Wall Street to begin with; i.e., the current "reward/reward" system, whereby executives get massive compensation packages even when a company makes nothing and shareholders lose millions or billions, and/or employees take the brunt of the impact of "cuts" while executives reward themselves for these actions. It is so utterly obvious that current executive management at most publicly traded firms (most: there are some exceptions) have absolutely no belief in their abilities, in their company's ability to ever generate profits, or in the prospects of their stock price ever increasing. If they did, they would not have to receive massive compensation packages for simply "doing their job" whether doing it resulted in company growth, shareholder value growth, and so on.

Right now, many corporate executives are essentially just like ANY other employee that shows up for work and gets paid whether they are an *exceptional* employee, and average one, or a complete screw-up!... but, there is one big difference: currently, these upper-level executives are getting stellar pay packages for their "efforts" whether such efforts are fruitful or fruitless or downright calamitous. This has to end.

My proposal for executive compensation change will fix Wall Street and restore investor confidence in a MEANINGFUL LONG-TERM WAY, not like this current bandage-approach of yet another bailout package. Bailouts like those being done now, and proposed now, are perhaps the WORST way to achieve any LONG-TERM investor-confidence, as there will be no fundamental change with one of the main negative influences on stock prices, investment returns, and investor confidence (i.e., corporate management whose primary concern appears to be how much, and how quickly, they can suck from the company for personal gain regardless of shareholder returns). In fact, it is quite simply a reinforcement of wrongdoing and broken practices when failures are "bailed out" without serious changes to the rules of the game.

My Executive-Compensation Manifesto
(and Challenge); circa, bailout-mentality-decade, early 21st Century.

This compensation manifesto is certainly not perfect, nor the end-all of compensation directives, but it should serve as a decent bit of foundation work to get the discussion headed in the right direction, and with additional time and effort (and input from others), I am sure it could be tuned into a doctrine that could be applied to public companies in order to reign in outlandish compensation, and more so return investor confidence and long-term shareholder value.

1. As I stated in a prior financial blog about the Government rewarding financially irresponsible companies and individuals:
"If you have risen to the level of CEO [or other Senior Executive] of some major corporation and can not afford to not make ANY money for a year or two, you do not have the financial responsibility to run such a company - period!" This should be rather clear, but if not, let me restate this: if the executive(s) have not managed their own personal finances well over the years, and built up their own "retained earnings" (i.e., some substantial savings) over the years, then they do now show financial responsibility adequate to justify their position.
Sadly, the current pool of "executive talent" that is running these public companies will perhaps meet my 1st condition simply due to the fact they have already ripped off the investors and given themselves massive financial cushions during this recent age of reward-reward executive compensation (note: I think those that fit this bill should be banned from further consideration, pending a rather detailed review into how they acquired their compensation – some of these people may be just fine for consideration, though many will prove out to be the rip-off artists that took massive pay packages for essentially, failure). I'd love to further apply this same concept to elected officials, as our government is currently made up of masses of individuals that show little financial aptitude, beyond getting elected with hopes to increase their personal fortunes after making all sorts of connections that will pay off later (most likely via the revolving door between Washington, Wall Street, and Lobbyist firms). These same people then sit down together and dream up bailout packages and debt-spending frenzies like none other, perhaps in part because they have no clue what real financial responsibility entails.
2. See item #1 for reference continually as I further expand on my executive compensation manifesto. The only exception to the zero-pay potential is that I suggest meeting any Federal or State or Local "minimum wage" base requirements, and to offer any legally-imposed benefits or benefits applied to *every* employee regardless of their pay-grade (e.g., Health Insurance plans, Sick Leave, etc.). And, to handle work-hours laws and/or overtime regulations, even though I consider Senior executives "exempt", for purposes of this manifesto adhering to any possible legal requirements, I suggest that the Senior executives, while earning the minimum-wage figure, be compensated for all hours works, and at 1.5X minimum-wage for overtime and perhaps 2X for weekend time.

3. Note how my doctrine still supports successful "startup" firms, like Google for example, that created enough wealth for their upper management through product and service innovation that resulted in strong demand for their initial public offering that their executive leadership team certainly would have met the criteria set forth in #1. These persons may have received compensation prior to going public, and I consider such compensation irrelevant for my doctrines, as shareholders in the IPO must choose what value to place on the new firm upon entering the stock-market (and, that value includes prior compensation and stock holdings by insiders). But, like any public company, after these startups have entered the realm of publicly-traded stocks (via IPOs), these people will be subject to all the terms of the manifesto from then on.

4. Any compensation packages for senior executives should be awarded in arrears. The basic reasoning is simple: as we have learned, "good" quarterly or annual financial reports can be completely and utterly misleading when viewed in the context of the long-term implications of what made particular periods "good". Examples abound, whether the "good" numbers were due to intentional hiding of the bad (like in off-balance-sheet vehicles, or just plain and simple cooking of the books), or due to overly-optimistic and aggressive tax-stances or accounting policies that will require "earnings restatements" and the like (e.g., FedEx trying to classify employees as contractors to save money - which I hear recently backfired), or due to any other reason that "good" values would be front-loaded with a pending disaster to follow (e.g., the current sub-prime mortgage debacle and resulting imminent bailout!).

The arrears-period should be long enough to make obvious any attempt to circumvent the discovery of reality by shareholders. Meaning, if actions of senior executives were truly "good" then those actions should appear good at 5 to 10 years out, when looking back upon them. This leads me to a key concept in my compensation manifesto and challenge: the current insanely-large rewards of Wall Street (to senior executives) should only remain possible IF the executives take the risk that their strategies and management decisions lead to long-term rewards for the average shareholder as well.

Here's the basic idea, which can be tuned as needed (but, not tuned to avoid the spirit of the time-proven rewards structure)
  • All earnings to be held in arrears, whether salary, bonuses, or stock-options (hereinafter referred to as "potential compensation" or "compensation" for short), will be held in a financially "safe" storage mechanism, such that executives need not worry about their potential compensation disappearing if it is indeed "earned" over time.
  • The compensation potential must be sufficiently large to induce qualified executives to take on this "risk" in order to have the chance for substantial "rewards", but, if all (publicly held) companies employ the directives contained in this manifesto (whether voluntarily, or by law), the definition of "substantial" will likely vary considerably from the insanely high and ever-increasing compensation packages management has been rewarding themselves with for the past decade or more. This leads to setting a maximum compensation potential based on a variety of data-points and criteria, which will be outlined next (others will certainly arise)…

  • Data-point 1) the company-average-employee wages. It seems only sensible that there be some correlation to the pay of the "average person" within an organization in order to encourage paying a fair living wage to all employees. Likewise, if outsourcing is employed for cost-savings initiatives within a company, any labor that is essentially replaced with outsourced-labor or other contractors will still be counted towards this average-wage by determining the end-worker's average wage.
  • Data-point 2) stock dilution. In as much as common stock (or preferred for that matter) is diluted during the tenure of executive management, their potential compensation should be diluted by an equal percentage. Contrarily, if outstanding shares of stock are reduced (i.e., concentration vs. dilution), then compensation can by multiplied by the same percentage. This should help reign in the massive dilution that seems to occur constantly in public companies as executives essentially "print stock at will" to self-reward, whether they should be rewarded or not. So as not to think this metric would encourage management to jeopardize cash-positions for the sake of stock buybacks, keep reading…
  • Data-point 3) Cash and equivalents vs. Short and Long-Term Debt. Some multiplier force will be involved to reflect solid financial practices. Now, since management must make decisions that are best for the LONG TERM corporate and shareholder returns, this consideration should in itself not dissuade management from considering financing (or, per data-point 2, equity issues) if it is truly the right thing to do for growth.
  • Data-point 4) Earnings. Another "multiplier" factor when calculating compensation (and, other factors to follow). Plain and simple, the bottom line. And, this is not any "before extraordinary items" and the like; this is the real deal and is truly net income.
  • Data-point 5) Dividends paid to shareholders. Higher payout to shareholders equals higher compensation potential. Again, this must be balanced with the preceding metrics to ensure dividends are not being paid out at the expense of corporate health (something that seems all to common these days!), but…
  • Data-point 6) Stock price. Again, decision balance is important, as stock price is directly correlated to compensation potential.
  • Data-point 7) Environmental impact. This one is not in my short-term "requirements", though it needs to be addressed soon. Fact is, a company should not reward executives that increase short-term profits at the expense of simply shifting environmental disasters to foreign countries or the like.
  • Data-point 8) ratio of total "senior executives" to normal workers. Positive correlation to compensation package. There needs to be a reason to keep some "depth" of talent in the upper ranks. But, this too needs weighed with total cost-structure for the company. The idea here is to "spread the talent, spread the responsibility, and spread the wealth" so as to potentially encourage more of a management-by-consensus or better group-dynamic at the top vs. the often highly corrosive infighting among top-management seeking power-grabs and such.
  • Data-point 9) time-delay for receiving compensation. Highly correlated multiplier to total compensation potential, offering much greater rewards for demonstrating faith in the long-term outcome of decisions. This one is quite important.
  • Data-point XYZ) I believe there are others, though for now, this is enough detail to begin a discussion certainly.
  • "Releasing" of compensation will be "tiered", with "earned" compensation being released from its holding in arrears-state in smallest portions for most recent completed time-period, and largest-releases for oldest covered time-periods. I.e., time-proven "earnings" are truly earned and delivered to the executive, and in greatest percentage for the longest-term proven results. Finally, if executive actions lead to failed long-term returns for the shareholders, or are proven to have resulted from illegal action or actions that were taken simply to manipulate compensation formulas (as I first discussed), some or all compensation for the time-period(s) in question is released back to the COMPANY immediately and into general operational assets (or, in the case of stock-options, returned to the treasury).

5. "Golden Parachutes": GONE! This practice of rewarding failure with mega-bonuses when someone is "let go" must end! This is an integral part of the RISK/reward concept. The fact is, the average employee, who doesn't enjoy the prospect of potentially earning 10's or 100's or 1000's of times their base-pay, faces the simple exit-package they deserve if they do not perform: they are fired or "downsized" or laid off or whatever. The average employee gets to collect unemployment, and/or perhaps they get a few weeks severance per year of service. Well, same should go for Senior Executives! Period!
And, to the argument that perhaps a company would engineer the early departure of an otherwise successful executive just to not pay them the rewards they have earned: I think not. Fact is, this plan of mine encourages GROUP SUCCESS, as everyone's fate is tied together, from the lowest employee to the top of the company - it is all about performance. See next point...

6. I am not ignorant of the fact that, to have one's compensation so tied to the performance of not just one's own efforts, but potentially the efforts of subsequent management, is a tough concept to accept. But, again, if you have reached the level of executive management of a public company, you best have the insight to recognize real opportunity, a solid Board of Directors, and have faith in succession planning (in fact, my plan should encourage SOLID succession planning that, again, is focused on the long-term benefit to the company and shareholders, and not just instantaneous riches through "Golden Parachutes" and the like). The goal of this overall manifesto is to encourage hiring the right people for the job, especially executive management positions, with more regard for qualifications than connections. The fact is, the entire executive layer in corporations should have an interest in the same outcome: solid corporate returns and stockholder value and growth.


I guarantee that, if (the essence of these concepts are) implemented, the policies I have enumerated herein will have lasting positive effects on investor confidence in publicly traded companies and financial institutions. This will NOT be the case with a bailout plan that does nothing to fundamentally alter the way that executive pay is tied to performance. In fact, any bailout without something as sweeping as what I have described will likely just (very temporarily) postpone complete collapse that will follow, as executives will take the bailout as nothing more than reinforcement for their actions that led us here to begin with.

Some Related Observations and Discussion

I am sick of hearing that there are not "qualified people" to run these firms. Obviously the ones that have run the firms into the ground were not the best qualified, though we certainly heard much testimony to the contrary during the hiring and tenure of these individuals. It is time to expand the scope of who is capable of leading such firms to go beyond the traditional system of connected-individuals, and Boardroom-kickback-friendly stooges that so often end up running the show.

Fact is, a major change needs to occur on Wall Street before it all ends, or before we simply repeat this bubble-mentality that will yet again POP, and pop in ever larger ways, taking everything with it and starting the insane cycle of bailout-based-recoveries all over again, where the overpaid executives that cause it all will once again be the ones most highly rewarded, even as they cause the mess!

1 comment:

DED said...

Paulson won't be getting his way on "executive compensation." There's bipartisan opposition to him on this. That's been plainly evident in the hearings that I've watched.

Maybe Congress has learned from The Patriot Act and Iraq that rushing to act now and reform later is a bad idea as the reforms don't ever happen.