CdM's red post for the day

[Martinus]

I just used Japan as a rhetorical example. In fact, their economy has not been doing too well.

[ulmont]

I just used Japan as a rhetorical example. In fact, their economy has not been doing too well.

...a rhetorical example which tends to undercut your point when looked at in actuality, yes.  As to Japan's economic problems, I have yet to see anyone blame their underpaid CEOs.

[Martinus]

And $1.5 million is the average pay for a top 100 Japanese companies' CEO? Are you kidding me? A partner at an international law firm's Warsaw office can earn that much. That's retardedly low.

[The Minsky Moment]

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.

That is not how it work in large US public companies, which is the focus of this study. 

[Martinus]

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.

Ok. I was talking about mid level ones owned by private equity funds.

That is not how it work in large US public companies, which is the focus of this study.

[The Brain]

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.

Ok. I was talking about mid level ones owned by private equity funds.

That is not how it work in large US public companies, which is the focus of this study.

[The Minsky Moment]

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.

You are now raising an issue beyond my very limited knowledge of how tax expense accounting is done under GAAP.  I think a refund for overpayment for prior years overpayment would not get credited to the current years' current tax expense; if so, this is not a factor distorting the IPS number.  But I could very well be wrong about this.

The big factors that help drive down US tax payments for a company like Boeing are overseas production activities, access to R&D tax credits, having a large defined benefit pension plan, and successfully working the states for tax incentives.

BTW I don't need to pick on Boeing.  There is no reason for them to pay a dime more a taxes than they have to by law; it is their duty to shareholders to make sure they don't.

[The Minsky Moment]

No surprise that PE funds go through the trouble of making sure that CEO's of their portfolio companies have properly aligned incentives and are not padding the pay packet.  But there is no such shareholder control in the case of large public companies; rather, comp decisions get made by comp committees, who are typically former CEO themselves.

[Admiral Yi]

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

I agree that it's a perfectly legitimate question to ask whether US CEO pay is justified by their contribution to performance.  What I have problems with is attempts to impose a pay scale by legislative fiat (along with all the nonsense arguments I've already mentioned which purport to support of that legislative fiat).  Purport to support.  he he.  he he.  The owners of a company should be allowed to hire anyone they want to run their company, and pay him as much or as little as they want.

Now as Joan mentioned, there's many a slip twixt the cup of shareholder sovereignty and the lip of executive compensation.  Much like teachers.  So let's focus on correcting the flaws in this system through reform of corporate governance laws so that the people who's right it is to determine executive compensation have the ability to enjoy that right.

[The Brain]

Let the owners do as they please. They want to destroy their wealth. So what?

[crazy canuck]

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.

Just some of the assumptions in your post are as follows:

1) prior to the curbing of salaries Poland did not hire political cronies to work for state owned companies - hard to believe;

2)State owned companies did well before the curbing of salaries - hard to believe;

3) After the curbing of salaries the State owned companies did poorly for reasons other than because they were State owned companies - hard to believe.

[Admiral Yi]

You are now raising an issue beyond my very limited knowledge of how tax expense accounting is done under GAAP.  I think a refund for overpayment for prior years overpayment would not get credited to the current years' current tax expense; if so, this is not a factor distorting the IPS number.  But I could very well be wrong about this.

Instead of Boeing's reported "U.S. federal current tax expense" of $13 million which the IPS used, he said a better approximation of the company's taxes paid would be the $360 million it reported as its net income tax payments, most of which, he says, was federal.

"On federal cash tax payments last year we paid in the hundreds of millions," Bickers told Reuters. The company also received a $371 million credit from the government last year for overpayment of taxes in the past, and has added 5,000 U.S. jobs this year Bickers says, in part because of Federal tax breaks.

From the article.

[Zanza]

And $1.5 million is the average pay for a top 100 Japanese companies' CEO? Are you kidding me? A partner at an international law firm's Warsaw office can earn that much. That's retardedly low.

Your lawfirm is a partnership, right? If so, you can't compare partners to CEOs. The former are the owners, the latter is just an employee. There are differences in risk taken and in a partnership you won't have principal-agent problems, unless some of the partners actually manage the company and the rest are partners but aren't actively involved in management.

Anyway, behavioral economics has some interesting insights on CEO pay. It's not so much to motivate the CEO, but rather his underlings. That's thanks to how people relativize their own income.

[Zanza]

So let's focus on correcting the flaws in this system through reform of corporate governance laws so that the people who's right it is to determine executive compensation have the ability to enjoy that right.

The problem is that shareholders don't care about the CEO's salary. Let's say you own 1/10,000,000 of General Electric. If the CEO rises his salary by $10,000,000, that's costing you one buck. How much effort will you spend on reigning him in?

[Admiral Yi]

The problem is that shareholders don't care about the CEO's salary. Let's say you own 1/10,000,000 of General Electric. If the CEO rises his salary by $10,000,000, that's costing you one buck. How much effort will you spend on reigning him in?

Doesn't take that much time or effort to vote on a proxy issue.  And institutional investors (and sometimes individual investors) can hold significant chunks of stock.