Obama orders pay cut for execs at rescued firms

[The Minsky Moment]

Exactly.  CEOs don't bid for their jobs, and the cheapest one gets it; compensation is determined by the compensation committee, which consists of one's peers at other firms, who have a vested interest in seeing one get the highest possible compensation, to justify increasing their own compensation.

This isn't a market system.

QFT.  Anecdotally, the empirical literature I have seen does not provide much support for the claim that CEO salaries accurately reflect value added.

[KRonn]

For one thing the repeal of Smoot-Hawley which allowed banks to get more into riskier investing?

Glass-Steagall.  Smoot-Hawley was an import tariff.

Lol... Duh, I knew that too!    Smoot-Hawley was the tariff prior to, or during, the great depression days.

Thanks for the correction.

[alfred russel]

Two thoughts:

1) the "price mechanism" in banking is fundamentally broken.  A bank is in the money business - but the cost of money to the bank is not set by the market.  It is set by the Fed which has priced that commodity at only slightly above zero, and indirectly by Treasury which has aritificially lowered bank borrowing costs by guaranteeing other financial liaiblities (like commercial bank bonds).  Only the revenue side of the bank business is market-based right now - it is like being able to play in Vegas with loaded dice. 

2)  It is interesting to compare Goldman Sachs in the not so-long ago day when it was a private partnership (essentially a purely capitalistic enterprise where the owners managed the enterprise and bore all the risks) as opposed to its time as a public company.  There are two major differences: post-IPO GS carried (and carries) significantly more leverage and risk and the "partners" get a bigger cut of the income then ever before even though they hold vastly less equity.  Basically the bank has put significant risks onto the shareholders and then appropriated the extra compensation of that risk for the banker-employees.

This is not an attack on GS in particular - just that their recent conversion to public company form makes the comparison easier.

I wouldn't consider those factors an attack on GS, it would seem to be a solid case for a ringing endorsement, as the company has provided strong returns for shareholders. Outsized returns for shareholders + higher compensation for employees and executives = a win - win.

[grumbler]

I wouldn't consider those factors an attack on GS, it would seem to be a solid case for a ringing endorsement, as the company has provided strong returns for shareholders. Outsized returns for shareholders + higher compensation for employees and executives = a win - win.

Particularly when everyone else who did the same went bankrupt.

[The Minsky Moment]

I wouldn't consider those factors an attack on GS, it would seem to be a solid case for a ringing endorsement, as the company has provided strong returns for shareholders. Outsized returns for shareholders + higher compensation for employees and executives = a win - win.

Those shareholders that bought early and held have done very nicely.  Those that were forced to liquidate in the crisis did not do so well.  Those that bought in the crisis in the belief that the government would rescue the system (hello Mr. Buffett) have done very well indeed.

I agree that the present setup does provide a win-win for both GS execs and those shareholders with the fortitude to sit out crises.  The cost of providing the win-win unfortunately falls to the general taxpayer which explains in part the rising tide of popular anger.

[alfred russel]

Exactly.  CEOs don't bid for their jobs, and the cheapest one gets it; compensation is determined by the compensation committee, which consists of one's peers at other firms, who have a vested interest in seeing one get the highest possible compensation, to justify increasing their own compensation.

This isn't a market system.

QFT.  Anecdotally, the empirical literature I have seen does not provide much support for the claim that CEO salaries accurately reflect value added.

My company is a small public company in the insurance industry with just over $1 billion in annual revenues. The publicly available compensation data (companies are required to disclose the CEO, CFO, and top 3 other execs):

CEO: $2 million
CFO: $1 million
Three others: All over $1 million, one is twice as much as the CEO.

The three others are rainmakers that negotiate their salaries directly with the board (they have their own legal counsel for the negotiation). Those people can not be paid less, as they are in a good position to walk and take their clients with them (which are about 15% of our revenues). The CFO came from public accounting, where the average partner pay is in the $600-$700k range. I don't know how we could retain him with significantly less pay.

The problem with the pay restrictions the government is putting out there is that companies like GM and AIG--big companies that effect the entire economy--now have noncompetitive pay scales with minnows such as us. At the end of the day, $2 million for a CEO isn't material to the success or failure of even our business, but the leadership team can have a material effect. The only reason for major companies such as GM or AIG to offer such dismal salary structures is to appease an outraged public--it doesn't make business sense.

[grumbler]

I agree that the present setup does provide a win-win for both GS execs and those shareholders with the fortitude to sit out crises.  The cost of providing the win-win unfortunately falls to the general taxpayer which explains in part the rising tide of popular anger.

Yes, it was win-win-lose, but it was impossible for the taxpayer to avoid unfairly rewarding GS execs and stockholders (by saving them from bankruptcy) without suffering a lot of collateral damage in the process.  Sometimes you just have to let the bums have their day.

Though I suppose questions could be raised about how much of a "gamble" it was for GS to hold all that "risky" debt, vice how much the government interference that would save them from utter ruin was a "sure thing."

Sorta funny how the US government forced all of GS's competitors from the market, but not GS themselves.

[alfred russel]

I wouldn't consider those factors an attack on GS, it would seem to be a solid case for a ringing endorsement, as the company has provided strong returns for shareholders. Outsized returns for shareholders + higher compensation for employees and executives = a win - win.

Particularly when everyone else who did the same went bankrupt.

MS is up about 4x from its IPO, and GS about 3x. (I'm pulling those numbers from Yahoo! finance, so they may not be the most accurate). Even if you put equal amounts of money in all 5 investment banks, you haven't done too poorly.

[alfred russel]

Sorta funny how the US government forced all of GS's competitors from the market, but not GS themselves.

[The Minsky Moment]

Sorta funny how the US government forced all of GS's competitors from the market, but not GS themselves.

Both parts of the House of Morgan came off OK.

Barclays ended up with Lehman's swanky new NYHQ, most of Lehman's US-based human capital and billions from the US Treasury to cover their AIG exposure.

[grumbler]

My company is a small public company in the insurance industry with just over $1 billion in annual revenues. The publicly available compensation data (companies are required to disclose the CEO, CFO, and top 3 other execs):

CEO: $2 million
CFO: $1 million
Three others: All over $1 million, one is twice as much as the CEO.

The three others are rainmakers that negotiate their salaries directly with the board (they have their own legal counsel for the negotiation). Those people can not be paid less, as they are in a good position to walk and take their clients with them (which are about 15% of our revenues). The CFO came from public accounting, where the average partner pay is in the $600-$700k range. I don't know how we could retain him with significantly less pay.

The problem with the pay restrictions the government is putting out there is that companies like GM and AIG--big companies that effect the entire economy--now have noncompetitive pay scales with minnows such as us. At the end of the day, $2 million for a CEO isn't material to the success or failure of even our business, but the leadership team can have a material effect. The only reason for major companies such as GM or AIG to offer such dismal salary structures is to appease an outraged public--it doesn't make business sense.

Well, the outraged public is the entity whose money has been diverted to keeping these businesses going (and that made no business sense either) so they get listened to.

And, BTW, if your CFO is claiming that the average salary in public accounting is $600-$700k, you should check out other sources like http://www.careers-in-accounting.com/acsal.htm which notes that it is $150k.

I think part of the perception that these salaries are or are not outrageous is due to the fact that people don't understand that sometimes these things are guaranteed compensation, in which case disaster pays as well as success (though not, perhaps, for as long!  ) and sometimes they are partly performance-based (in which case poor decisions are punished).  the former is far more objectionable than the latter, but both are seen as objectionable when a firm is sucking on the public teat.

Business sense says that these firms should be allowed to fail.  Then other firms (like yours, AR) can pick up new talent cheaply, and don't have to overpay your own execs.  You can almost certainly get a decent CFO for $150k.  Paying a million is a crime.

[alfred russel]

My company is a small public company in the insurance industry with just over $1 billion in annual revenues. The publicly available compensation data (companies are required to disclose the CEO, CFO, and top 3 other execs):

CEO: $2 million
CFO: $1 million
Three others: All over $1 million, one is twice as much as the CEO.

The three others are rainmakers that negotiate their salaries directly with the board (they have their own legal counsel for the negotiation). Those people can not be paid less, as they are in a good position to walk and take their clients with them (which are about 15% of our revenues). The CFO came from public accounting, where the average partner pay is in the $600-$700k range. I don't know how we could retain him with significantly less pay.

The problem with the pay restrictions the government is putting out there is that companies like GM and AIG--big companies that effect the entire economy--now have noncompetitive pay scales with minnows such as us. At the end of the day, $2 million for a CEO isn't material to the success or failure of even our business, but the leadership team can have a material effect. The only reason for major companies such as GM or AIG to offer such dismal salary structures is to appease an outraged public--it doesn't make business sense.

Well, the outraged public is the entity whose money has been diverted to keeping these businesses going (and that made no business sense either) so they get listened to.

And, BTW, if your CFO is claiming that the average salary in public accounting is $600-$700k, you should check out other sources like http://www.careers-in-accounting.com/acsal.htm which notes that it is $150k.

I think part of the perception that these salaries are or are not outrageous is due to the fact that people don't understand that sometimes these things are guaranteed compensation, in which case disaster pays as well as success (though not, perhaps, for as long!  ) and sometimes they are partly performance-based (in which case poor decisions are punished).  the former is far more objectionable than the latter, but both are seen as objectionable when a firm is sucking on the public teat.

Business sense says that these firms should be allowed to fail.  Then other firms (like yours, AR) can pick up new talent cheaply, and don't have to overpay your own execs.  You can almost certainly get a decent CFO for $150k.  Paying a million is a crime.

The average pay at a Big Four firm is in the 600-700k range. Obviously not for all firms, most of which are going to be mom and pop shops.

$150k for a CFO for a global public company--even one as small as ours--is silly.

[Admiral Yi]

The SEC rule only relates to broker-dealer operations; it does not regulate capital in the proprietary trading side of the business which is where a lot of GS' leverage (and risk) can be found.

This sounds backwards to me.  Please alleviate my ignorance.  I don't see how leverage can be used in broker-dealer operations.  It's the client's money.  And when you say it does not regulate proprietary trading do you mean they can assume unlimited leverage for that part of the business, or that there is a different ratio?

[grumbler]

The average pay at a Big Four firm is in the 600-700k range. Obviously not for all firms, most of which are going to be mom and pop shops. 

So the "Big Four" is now the average firm?  I think not. The average pay for the Big Four partners is in the $200,000 - 3,000,000 range (it is right there in the link I provided).  Even if you say that the average including only companies your size should be considered, you know it isn't going to be 33-50% more than the Big Four average, which is what you are paying.

$150k for a CFO for a global public company--even one as small as ours--is silly.

So you say, but mere assertion isn't an argument.  $1 million is silly as well (to make my own assertion).

[Zanza]

My company is a small public company in the insurance industry with just over $1 billion in annual revenues. The publicly available compensation data (companies are required to disclose the CEO, CFO, and top 3 other execs):

CEO: $2 million
CFO: $1 million
Three others: All over $1 million, one is twice as much as the CEO.

I work for a huge company with close to 100 billion euro in revenue (well, before the crisis ) and in 2007, the six board members were paid more than 30 million euros, with the CEO getting about 10 million euro. I wonder if their value-added even comes close. In 2008 which was already a really bad year for the company, they still got 16 million between them.
I have a hard time believing that their value added comes close to that. And I think that their jobs are so prestigious that you would get really good people who would do it for less.