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Exec Comp Restrictions Get Tougher

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Exec Comp Restrictions Get Tougher [#permalink] New post 13 Feb 2009, 14:41
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The new "stimulus" bill includes even tougher restrictions on executive compensation then President Obama proposed a couple weeks ago. The new restrictions are RETROACTIVE and apply to every single company that took TARP money (including firms that didn't want the money but were forced to take it such as Wells Fargo and JP Morgan). Among other restrictions, the top 20 executives can no longer have a bonus that exceeds one third of their total compensation and all TARP companies will be required to have an annual "say on pay" shareholder vote approving executive compensation.

http://www.businessweek.com/bwdaily/dnf ... B+analysis
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 13 Feb 2009, 15:29
While I can imagine banks will find some way around it, but in the mean time this has to be the ABSOLUTE DUMBEST thing I've ever heard in my life. If the compensation is so outrageous, then why don't the SHAREHOLDERS do something about it. It's called corporate governance. Let's use an example of EXCESS compensation:

Quote:
The Dynamic Investment Bank is having a rough time. Projections are that DIB will lose about $5 billion dollars this year and will have to lay off as many as 2000 employees. You have a well-earned reputation as a financial turn-around artist. Many companies are trying to hire you. You tell DIB that there is no way you can avoid any losses this year, and some layoffs are inevitable. But you do think that you can save the company a lot of money and a lot of good employees. Here's the deal you want. In addition to a good salary, at the end of the year you want one-quarter of one percent of the amount by which you reduce that projected $5 billion loss. DIB agrees. At the end of the year the company has lost not $5 billion, but $2 billion and is on its way to profitability next year. What's more, you only had to lay off about 400 employees. Now ... you have earned a bonus of $7,500,000. Should you get it? Do you deserve it?


Well...now that won't be a problem because no one in their right mind with any talent would ever take a job that limits your compensation. I can imagine if you have ANY talent whatsoever, the minute the job market begins to recover, you are gone. Start your own firm, go to Evercore, Lazard, Hedge Fund, PE, or whatever, but I can guarantee they leave the banks that had to take TARP money.
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 13 Feb 2009, 16:42
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I can think of one other organization that caps executive pay.....the Federal Government. Clearly they attract the best and the brightest as well. :roll:
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 13 Feb 2009, 22:43
domtri33 wrote:
I can think of one other organization that caps executive pay.....the Federal Government. Clearly they attract the best and the brightest as well. :roll:


Well put :)
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 14 Feb 2009, 04:51
Looks like our friends in Washington, in their infinite wisdom, have forgotten the law of unintended consequences. I think you're likely to see a flight of top executive talent to the banks that haven't received TARP money, and the banks who didn't need the money in the first place giving it back very quickly. So in the end, the banks who are most vulnerable will lose the most talent, making them more vulnerable to future problems, while the stronger banks get even stronger.

I have no problem at all with putting executive compensation plans to shareholder vote (although in theory if the shareholders were that pissed about bonuses, perks, etc they could have removed the members of the Board compensation committee), but for some bureaucrats in Washington to arbitrarily set a limit on compensation (effectively putting a price ceiling on labor) is absurd. Ask the Soviets how well government set pricing works.
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 14 Feb 2009, 06:27
With new financial regulations and oversight, and changing global financial landscape. The required 'talent' will probably change. The old style of 'short-term focused talent' may well be brushed aside under this currently incubating generation of financial regulation.
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 14 Feb 2009, 08:02
Let me first say that I'm pro free market, competition, etc. but I think you have to view these banks as effectively gov't organizations at this point until they prove otherwise by paying back taxpayer loans/funds.

What's wrong with the "unintended" consequence of stronger banks paying back taxpayer funds to the government, that they should have never taken in the first place? (I know, they all said that they were "forced" to take it by Hank & Co, but last time I checked they were fiduciaries for their shareholders not for Treasury/Gov't, so how about a little courage and real leadership? Oh yeah, we're talking about Wall St.) And what's wrong with the weaker banks that keep taxpayer funds being subject to stricter gov't restrictions? If it harms the company from a competitive standpoint maybe that's the process that we identify and put a few more of these banks out of their misery thus paring our bloated financial system down to a viable size.
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 14 Feb 2009, 11:31
cougarblue wrote:
And what's wrong with the weaker banks that keep taxpayer funds being subject to stricter gov't restrictions? If it harms the company from a competitive standpoint maybe that's the process that we identify and put a few more of these banks out of their misery thus paring our bloated financial system down to a viable size.


What's wrong is it puts us right back in the place we were before we spent $350 billion bailing out the banks. If we want weak banks to fail, let them fail. Don't prop them up, then hamstring them so they have trouble competing.
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 14 Feb 2009, 11:36
cougarblue wrote:
Let me first say that I'm pro free market, competition, etc. but I think you have to view these banks as effectively gov't organizations at this point until they prove otherwise by paying back taxpayer loans/funds.


Would you consider JPM and Wells Fargo government institutions? The only reason they took TARP money is that the government forced them too. They didn't want or need the money. Also, the only reason Bofa is in trouble right now is that the government essentially forced them to close on the ML deal and told them they would guarantee some of their losses if they closed the deal. So the money Bofa has received is basically payment for doing the governments work of bailing out Merrill Lynch. It's absurd to punish these companies in the same way as say, citigroup, which clearly would not be around right now if it weren't for government assistance.

Also, I agree with the unintended consequences comment. Can you imagine a private investor investing money into a Company and then demanding that the company only hire the cheapest available talent for upper management??! I mean imagine you invested $10 billion in Microsoft or Mcdonalds or Wal Mart and then you told them to essentially fire every executive that makes over a half million a year. By restricting the comp of the top 25 people the government is essentially firing them because, if these guys have any value at all, they won't stay. The only one's that will stay are the ones that are so crappy they can't go elsewhere. And the replacements for the execs that leave will be someone that's willing to work at a failing bank that has no top talent for a miniscule salary that's lower than what they made 5 years out of business school. And the government thinks this is protecting taxpayer money??!! Ha! Yes, let's ensure that only the worst of the worst are managing billions of taxpayer dollars. Smart.
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 14 Feb 2009, 12:19
We can actually look at this lesson from a real life example.

Quote:
March 2007

Circuit City Stores Inc., the second-largest U.S. electronics retailer, will fire 3400 of its highest-paid sales people and hire replacements willing to work for less. Those who were fired can apply for the lower-paying jobs, company spokesman Bill Cimino said today. Sales may be volatile during the first half of this year as the new sales people transition in, the company said today in a statement.

...The sales people being fired weren’t given an option of taking a pay cut, spokesman Cimino said. He declined to give the pay rate for fired workers or the expected wages for new hires.

The job cuts will be “a challenge for Circuit City,” said Rick Weinhart, an analyst with BMO Capital Markets Corp. in New York. “These are all fresh faces coming in and certainly they’re less experienced, so I’m guessing it’s not going to be a one- or two-quarter challenge. There’s going to be a learning curve.” Circuit City pays about $10 to $11 an hour, on average, Weinhart estimated. Entry level pay probably is close to $8 for inexperienced workers, he said.

In January 2009, Circuit City filed for bankruptcy.
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 14 Feb 2009, 12:42
Jerz wrote:
cougarblue wrote:
And what's wrong with the weaker banks that keep taxpayer funds being subject to stricter gov't restrictions? If it harms the company from a competitive standpoint maybe that's the process that we identify and put a few more of these banks out of their misery thus paring our bloated financial system down to a viable size.


What's wrong is it puts us right back in the place we were before we spent $350 billion bailing out the banks. If we want weak banks to fail, let them fail. Don't prop them up, then hamstring them so they have trouble competing.


Exactly...they should've never done them in the first place. But we're really focusing on the wrong issues here. What's "hamstringing" the banks isn't, and will not be, their ability, or lack thereof, to overpay for terrible management. You think some guys making $500k will make worse decisions as the geniuses who made $50M per over the last several years?
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 14 Feb 2009, 12:50
IHateTheGMAT wrote:
Would you consider JPM and Wells Fargo government institutions? As long as they are using taxpayer funds for capital, and haven't repaid, yes. The only reason they took TARP money is that the government forced them too. How exactly did they "force" them to? What would've happened if they refused? I guess we'll never know.

They didn't want or need the money. Also, the only reason Bofa is in trouble right now is that the government essentially forced them to close on the ML deal and told them they would guarantee some of their losses if they closed the deal. No trouble came from the great idea to purchase Countrywide? So the money Bofa has received is basically payment for doing the governments work of bailing out Merrill Lynch. It's absurd to punish these companies in the same way as say, citigroup, which clearly would not be around right now if it weren't for government assistance.

Also, I agree with the unintended consequences comment. Can you imagine a private investor investing money into a Company and then demanding that the company only hire the cheapest available talent for upper management??! I mean imagine you invested $10 billion in Microsoft or Mcdonalds or Wal Mart and then you told them to essentially fire every executive that makes over a half million a year. By restricting the comp of the top 25 people the government is essentially firing them because, if these guys have any value at all, they won't stay. The only one's that will stay are the ones that are so crappy they can't go elsewhere. And the replacements for the execs that leave will be someone that's willing to work at a failing bank that has no top talent for a miniscule salary that's lower than what they made 5 years out of business school. And the government thinks this is protecting taxpayer money??!! Ha! Yes, let's ensure that only the worst of the worst are managing billions of taxpayer dollars. Because the guys who are supposedly the "best of the best" did such a great job? Smart.
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 14 Feb 2009, 13:11
I use to work at CC - funny thing about that story is that some of the big sales people were making 50-60k (rumors that some made 75-85K) usually more than the managers of the stores and the upper end pay they would have been offered was $12 an hour.

While I don't disagree with what was said above but CC was getting killed by BestBuy who was paying $8 an hour to its sales people and CC was over paying its sales people like crazy on low margin products. So it didn't work out for CC in the long run but from what I saw on a micro scale was the sales people who got laid off went to work for BBY for $10 an hour and went back to work for CC later because they liked the no one cares, easy going nature of CC and they took the $12 an hour.

Man those were the good ol' days.
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 15 Feb 2009, 15:28
cougarblue wrote:
Jerz wrote:
cougarblue wrote:
And what's wrong with the weaker banks that keep taxpayer funds being subject to stricter gov't restrictions? If it harms the company from a competitive standpoint maybe that's the process that we identify and put a few more of these banks out of their misery thus paring our bloated financial system down to a viable size.


What's wrong is it puts us right back in the place we were before we spent $350 billion bailing out the banks. If we want weak banks to fail, let them fail. Don't prop them up, then hamstring them so they have trouble competing.


Exactly...they should've never done them in the first place. But we're really focusing on the wrong issues here. What's "hamstringing" the banks isn't, and will not be, their ability, or lack thereof, to overpay for terrible management. You think some guys making $500k will make worse decisions as the geniuses who made $50M per over the last several years?


I'm not debating whether current management is any good. Certainly several executives deserve blame for what has happened on their watch. But I do think that top executive talent, given the option between a job where comp is capped and one where comp is not capped, will choose the unlimited comp. Therefore, the bailout banks will find it harder to attract and retain top talent.

And in terms of the govt "forcing" the banks to accept money, there have been several published accounts - especially for the BofA-ML deal - where the government made strong hints to the CEOs that should the bank not do what the government was asking, then the govt would remove the management team from the bank.
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 15 Feb 2009, 16:20
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I'm going to generalize. I can see how in theory, the market setting exec salaries is best, but in practice, it doesn't seem to play out that well. When a company is doing well, they want huge salaries. When a company has nowhere to go but up, they justify it as a CEO leading them out of bankruptcy (I'm talking to you Rick Wagoner). In the end it's only an issue because it's easy for politicians to rally crowds about it, financially it doesn't make all that much difference. But on the flip side, why should it matter all that much to a CxO that's already making more money than he or his children could spend in their lifetimes.

Some CEOs are worth what they make and some aren't, I think it's just a fact of life. I'll say that Eric Schmidt is worth of penny of his $1 salary :-D . Certainly some would claim that Nardelli's $1 salary at Chrysler is more in line than what he made out with at Home Depot.

By the way, David Axelrod was making the rounds this morning and said the White House didn't like this piece, but then quietly added that they hope to enact something more strict...
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 15 Feb 2009, 16:21
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 15 Feb 2009, 17:43
If you want to make banks safer - if that is the ultimate goal - then pass a law that bans prop trading on the company's account. Just about every other function in an investment bank has a relatively small downside risk, whereas prop trading has a huge downside risk (as well as a huge upside). If you want to make banks more risk averse, then move all prop trading to the hedge fund industry. Let banks buy minority stakes in hedge funds if they like, but prevent them from owning anything outright. It has been proven that a small number of limited partners are better stewards of a firm's capital (their own money) than shareholder's in the public market. Then you do not need to regulate any company's executive salaries'. You can leave that up to shareholders' to decide, where I believe it belongs.
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 16 Feb 2009, 11:21
Every public outrage needs a whipping boy - remember Walmart, Exxon, Banks, Executives, goes on endlessly - they have the money others don't so obviously it's their fault.

**the use of the word obviously makes all statements that come after it a fact**
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 16 Feb 2009, 12:29
The Becker Posner blog does a nice job of arguing why the pay caps aren't a good idea. http://www.becker-posner-blog.com/

(Becker, Posner are profs at UChicago)
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Re: Exec Comp Restrictions Get Tougher [#permalink] New post 16 Feb 2009, 13:15
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Re: "unintended consequences" - I have a hard time believing the incoming administration just doesn't understand how executive compensation works. Paulson, Geithner, Summers - those guys know how corporate America works, and they clearly don't think that an exodus of talent is really that much of a risk. Even at "only" half-a-million-dollar per year salaries, I think any firm will be able to attract a ton of quite capable talent.

I'm not in banking, but I also have a hard time believing the federal government "forced" any banks to take TARP funds. Rather, they bailed them out with my taxes to prevent a massive round of bank collapses that would've shaken the foundations of the whole economy, and found banks more than ready to accept them. While I clearly don't think the federal government should begin micromanaging an industry like banking, the executive compensation caps make sense as a way to prevent unscrupulous folks (of which there are obviously more than a few on Wall Street) from milking the federal cow for all it's worth before (golden) parachuting away.

Again - no sympathies here for anyone crying about a $500,000/year salary cap, or not getting a bonus this year. The sense of entitlement makes me gag.
Re: Exec Comp Restrictions Get Tougher   [#permalink] 16 Feb 2009, 13:15
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