CdM's red post for the day

[Neil]

If they're concerned about income distribution, by all mean they should make that case (and there are several good arguments in their favor).  But don't pretend it has anything to do with the financial crisis.

There is no need to pretend.  There is a connection between the casino mentality, and the rising income inequality.  When a hedge fund manager is paid 20% of profits when the fund is up, and pays 0% of losses when it's down, there is an enormous incentive to both ratchet up the risk, as well as throw caution to the wind in general.  Multiply that by hundreds, and you've got quite a combustible situation.

Why would a hedge fund manager pay losses?

[The Minsky Moment]

I imagine there was a time when progressives would have been ashamed of intellectual dishonesty.

If they're concerned about income distribution, by all mean they should make that case (and there are several good arguments in their favor).  But don't pretend it has anything to do with the financial crisis.

If they think corporations should pay more taxes, by all means make that case, but don't pretend Boeing only paid $13 million in federal taxes in 2010.

Lying to further a cause you believe is righteous is still lying.

That's a strong accusation based on a very thin reed -- namely, exactly how one interprets dislosures on tax accounting.
The difference between the IPS estimate and the company estimate comes down to how one handles the phenomenon of deferred taxes.  Basically in any given year, a company like Boeing reports that X amount of dollars is due in taxes for that year (current tax expense) and Y amount would have been due but has been deferred for some period of time.  The trick is that one really doesn't know precisely in advance when the Y amount is going to have to be paid out, or even if it will have to be.

IPS approach is to take the current tax expense and represent that as the company's claim of tax expense incurred for that year. 
The company says that is too low because it essentially treats the entire deferred component as costless.  So the company refers to the actual net cash payment made to the IRS for that year.  But that amount is misleading as well because it is incorporating tax obligations that were principally incurred in past years.

Really the fairest way to analyze this would be to look at a 5 or 10 year period.  But IPS doesn't want to do that because the numbers wouldn't be as stark; the company doesn't want to do that because it would make clear that over the long haul they really aren't paying much in tax.

[Admiral Yi]

Joan: I picked the Boeing example because in their case the IPS number was a result of a refund for overpayment in prior years, not deferred taxes.

[The Minsky Moment]

What is the connection between hedge funds ratchetting up risk/throwing caution to the wind in general, and the subprime meltdown?

Without being specific to hedge funds, the housing finance bubble required that there be a viable demand for the securities used to package and repackage the loans generated.  Absent strong demand for such securities, the loans could not be sold on and thus would remain on the books of originators, who would then be responsible for covering them with their own capital.

[Martinus]

Maybe in the long term, but not in the short term (and taxes reflect short term).  CEOs should be rewarded based on how well they perform given the circumstances, not based on how good the circumstances are.

yes I've heard that line to explain why CEO X gets paid a huge chunk despite losses, on the theory that industry conditions are terrible.
But when industry conditions are flush, does the CEO's pay get cut when the company is up 15% on the year but the industry is up 20%?  That rarely seems to happen

In most cases where I advised with management bonus contracts they did. The shareholders and the management prepare/approve the business plan/budget based on market conditions and the company conditions. If the CEO goes above the business plan, he gets a bonus. If he underperforms, he does not/gets less money.

[Martinus]

Why not instead of giving him a lump sum at the end of his employment, just pay him a wage based on how the company is doing after he left.  If the company does well for the next 20 years, he keeps getting a nice salary for 20 years.  If it kicks the bucket a week after he leaves, he gets nothing.

This is usually achieved through giving him stock options. For obvious reasons, people rarely are capable of sustaining a lifestyle where they would get no pay while they work. 

[The Brain]

Why not instead of giving him a lump sum at the end of his employment, just pay him a wage based on how the company is doing after he left.  If the company does well for the next 20 years, he keeps getting a nice salary for 20 years.  If it kicks the bucket a week after he leaves, he gets nothing.

This is usually achieved through giving him stock options. For obvious reasons, people rarely are capable of sustaining a lifestyle where they would get no pay while they work. 

wut

[Martinus]

If they're concerned about income distribution, by all mean they should make that case (and there are several good arguments in their favor).  But don't pretend it has anything to do with the financial crisis.

There is no need to pretend.  There is a connection between the casino mentality, and the rising income inequality.  When a hedge fund manager is paid 20% of profits when the fund is up, and pays 0% of losses when it's down, there is an enormous incentive to both ratchet up the risk, as well as throw caution to the wind in general.  Multiply that by hundreds, and you've got quite a combustible situation.

Your reasoning fails to take into account that the "20% of profits" is a significant part of his income - and that performing a job like that properly is not cost-less (you are expected to maintain a certain lifestyle, wear certain clothes etc.)

So a fund manager who gets no share in profits pretty much breaks it even, so effectively has been working for free.

Not to mention, a lot of managers are expected to co-invest these days (with their own money).

[Razgovory]

Why not instead of giving him a lump sum at the end of his employment, just pay him a wage based on how the company is doing after he left.  If the company does well for the next 20 years, he keeps getting a nice salary for 20 years.  If it kicks the bucket a week after he leaves, he gets nothing.

This is usually achieved through giving him stock options. For obvious reasons, people rarely are capable of sustaining a lifestyle where they would get no pay while they work. 

Well, we could go with my original idea of using some sort of "Sword of Damocles" device to kill them if the company under preforms.  I went with a more moderate approach for the sake of this board.

[Martinus]

Why not instead of giving him a lump sum at the end of his employment, just pay him a wage based on how the company is doing after he left.  If the company does well for the next 20 years, he keeps getting a nice salary for 20 years.  If it kicks the bucket a week after he leaves, he gets nothing.

This is usually achieved through giving him stock options. For obvious reasons, people rarely are capable of sustaining a lifestyle where they would get no pay while they work. 

wut

Raz is suggesting a CEO should not be paid while he is working, but for 20 years after he stops. How the hell is he supposed to sustain himself while he is working?

[Razgovory]

You could still pay him while he's working.  I'm talking about the big golden parachutes they get.

[Martinus]

You could still pay him while he's working.  I'm talking about the big golden parachutes they get.

Oh ok. Well then as I said it is supposedly done through stock options. He can either cash it in on his exit or keep them and cash for (presumedly) more in 10 years.

[Martinus]

Incidentally, to anyone who would limit CEO's salaries (in general or in underperforming companies, for example), let me tell you a story.

About 10 years in Poland, the government wanted to curb salaries of CEOs in state owned companies and introduced a legislation capping them at certain level. The effect? Only political cronies now work for state owned companies (and they underperform heavily) because all good managers prefer to work for private companies and noone with talent and skill would want to work for the state owned ones.

If you insist that a CEO in a company with poor results must, under all circumstances, get shitty pay, then you will have more bankruptcies and very little recoveries.

If you insist that a CEO in an American company must have his salary capped, then your companies will have shitty managers, and the Japanese, Chinese and Russian ones won't.

[DGuller]

Your reasoning fails to take into account that the "20% of profits" is a significant part of his income - and that performing a job like that properly is not cost-less (you are expected to maintain a certain lifestyle, wear certain clothes etc.)

So a fund manager who gets no share in profits pretty much breaks it even, so effectively has been working for free.

Not to mention, a lot of managers are expected to co-invest these days (with their own money).

I don't care whether it is or it isn't a significant part of his income, and whether he needs that to buy bread to feed himself. 

Structuring hedge fund pay as an option rewards increasing the volatility of results.  That's also a big problem with Raz's approach:  structuring pay based on performance sounds nice, until you realize that you can only reward positive performance and not punish poor performance.  That likewise structures the executive's compensation like a call option, and call options go up in value with increased volatility.

[ulmont]

If you insist that a CEO in an American company must have his salary capped, then your companies will have shitty managers, and the Japanese, Chinese and Russian ones won't.

Somehow, the Japanese manage to find managers without paying them grotesque salaries.

CEOs at Japan's top 100 companies by market capitalization earned an average of around $1.5 million, compared with $13.3 million for American CEOs and $6.6 million for European chief execs at companies with revenues of higher than $10 billion, according to an analysis of 2004-06 data by Towers Perrin, a Stamford (Conn.) human resources firm.

http://www.businessweek.com/globalbiz/content/feb2009/gb20090210_949408.htm