QuoteSome U.S. firms paid more to CEOs than taxes: study
WASHINGTON (Reuters) - Twenty-five of the 100 highest paid U.S. CEOs earned more last year than their companies paid in federal income tax, a pay study by a Washington think tank said on Wednesday.
At a time when lawmakers are facing tough choices in a quest to slash the national debt, the Institute for Policy Studies, a left-leaning group, said it also found many of the companies spent more on lobbying than they did on taxes.
The senior Democrat on the House of Representatives oversight committee, Elijah Cummings, called for hearings on executive compensation "to examine the extent to which the problems in CEO compensation that led to the economic crisis continue to exist today."
Several companies mentioned in the report took issue with its methodology and said they paid all taxes owed.
General Electric spokesman Andrew Williams called the study "inaccurate" and noted it did not include significant income taxes paid in 2010 for previous years, or state taxes paid. "GE pays what it owes," he wrote in an e-mail response to questions.
Boeing spokesman Chaz Bickers said the study is "simply wrong".
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.
The institute compared CEO pay to current U.S. taxes paid, excluding foreign and state and local taxes that may have been paid, as well as deferred taxes which can often be far larger than current taxes paid.
The group's rationale was that U.S. taxes paid are the closest approximation in public documents to what companies may have actually written a check for last year. It said deferred taxes may or may not be paid.
The accounting used in SEC filings differs from the accounting used to tally what's owed on a corporate tax return. Neither the IPS number nor the figure cited by Boeing exactly equals the check written to the IRS, says Scott Dyreng, an assistant professor at Duke's Fuqua School of Business who studies corporate taxes, and though companies could disclose that figure, don't have to and don't do so.
$16.7 MILLION AVERAGE
Compensation for the 25 CEOs with pay surpassing corporate taxes averaged $16.7 million, according to the study, compared to a $10.8 million average for S&P 500 CEOs. Among the companies topping the IPS list:
* eBay whose CEO John Donahoe made $12.4 million, but which reported a $131 million refund on its 2010 current U.S. taxes.
* Boeing, which paid CEO Jim McNerney $13.8 million, sent in $13 million in federal income taxes, and spent $20.8 million on lobbying and campaign spending
* General Electric where CEO Jeff Immelt earned $15.2 million in 2010, while the company got a $3.3 billion federal refund and invested $41.8 million in its own lobbying and political campaigns.
Though the companies come from different industries, their tax breaks fall into two primary areas.
Two-thirds of the firms studied kept their taxes low by utilizing offshore subsidiaries in tax havens such as Bermuda, Singapore and Luxembourg. The remaining companies benefited from accelerated depreciation.
Shareholders have responded favorably when companies in which they invest keep a tax bill low through legal methods, thereby benefiting earnings. But Chuck Collins, an IPS senior scholar and co-author of the report, said that is a mistake.
"I think it's an exposure of weakness in a company if their profitability is dependent on their accounting department and not on making better widgets," he said.
In prior reports, Collins said, out-sized CEO pay was often a red flag of bigger problems to come. The IPS has been putting a pay report together for 18 years. Among those whose leaders have made the high pay list in years past, only to have their businesses falter: Tyco, Enron and WorldCom.
Let the Berkut and Yibagger frothing begin.
I think a better indicator is to compare taxes paid to profits.
Not sure what the issue is. Companies pay low taxes in general, but that does not mean that the state receives no revenue from their expenses (such as the CEO pay) - it's paid by the recipients of such expenses.
Also, in principle, in a set up where the company would pay its CEO $1 and kept the entire pay as a taxable income, the amount received by the state treasury would be most likely smaller than in a set up where the company would pay its CEO an amount equal to its entire income, since personal income taxes are as a rule higher than corporate income taxes.
This seems like populism pure and simple. Also shows CdM does not know shit about economy or accounting.
Quote from: Monoriu on September 01, 2011, 05:42:34 AM
I think a better indicator is to compare taxes paid to profits.
That's circular logic. Each company pays the same percentage of profits in taxes. The question is how it recognizes income and expense (which make up the profit). ;)
And if you mean gross income, then it really depends on how profitable the company is. In some industries a 5% profit margin is good, in others it gets to 30 or even 50%.
Score one for el Polaco
Quote from: Martinus on September 01, 2011, 07:04:17 AM
That's circular logic. Each company pays the same percentage of profits in taxes.
Actually, they don't, except in theory. Tax credits and the like can make taxes paid on a given profit different for different companies.
Quote from: grumbler on September 01, 2011, 08:27:13 AM
Quote from: Martinus on September 01, 2011, 07:04:17 AM
That's circular logic. Each company pays the same percentage of profits in taxes.
Actually, they don't, except in theory. Tax credits and the like can make taxes paid on a given profit different for different companies.
Especially in State and Local taxes since they are always competing to get some big business to base themselves in their area.
So the guy sees that a company is paying the CEO more than they pay in taxes, and his solution is to engage in class warfare bullshit against the executives? Wouldn't the logical solution be to increase the corporate tax rate rather than crying like a little bitch about how some people make more money than you do, and because of that they must be evil?
Quote from: grumbler on September 01, 2011, 08:27:13 AM
Quote from: Martinus on September 01, 2011, 07:04:17 AM
That's circular logic. Each company pays the same percentage of profits in taxes.
Actually, they don't, except in theory. Tax credits and the like can make taxes paid on a given profit different for different companies.
Yeah but that's going into specifics and tax planning - and in any case does not invalidate my point that "taxes compared to profits" makes a poor indicator of what this article/study was trying to accomplish.
Quote from: Valmy on September 01, 2011, 08:35:39 AM
Quote from: grumbler on September 01, 2011, 08:27:13 AM
Quote from: Martinus on September 01, 2011, 07:04:17 AM
That's circular logic. Each company pays the same percentage of profits in taxes.
Actually, they don't, except in theory. Tax credits and the like can make taxes paid on a given profit different for different companies.
Especially in State and Local taxes since they are always competing to get some big business to base themselves in their area.
Well, it is implied that my statement holds only true within the same tax jurisdiction. ;)
Quote from: Martinus on September 01, 2011, 06:54:45 AM
Not sure what the issue is.
The issue is this: either companies are paying very low taxes because they aren't generating profits or because they are exploiting the code to reduce taxable income. If the first, then the CEOs shouldn't be paid tens of millions. If the latter, then either the code needs to be fixed to eliminate loopholes or the government should just give up and get out of the business of entity-level taxation.
Quote from: The Minsky Moment on September 01, 2011, 10:45:58 AM
Quote from: Martinus on September 01, 2011, 06:54:45 AM
Not sure what the issue is.
The issue is this: either companies are paying very low taxes because they aren't generating profits or because they are exploiting the code to reduce taxable income. If the first, then the CEOs shouldn't be paid tens of millions. If the latter, then either the code needs to be fixed to eliminate loopholes or the government should just give up and get out of the business of entity-level taxation.
The thing that the author (and apparently, you) is missing here is that the CEO's pay is taxed at his level anyway so I fail to see where the issue is again.
Quote from: The Minsky Moment on September 01, 2011, 10:45:58 AM
Quote from: Martinus on September 01, 2011, 06:54:45 AM
Not sure what the issue is.
The issue is this: either companies are paying very low taxes because they aren't generating profits or because they are exploiting the code to reduce taxable income. If the first, then the CEOs shouldn't be paid tens of millions. If the latter, then either the code needs to be fixed to eliminate loopholes or the government should just give up and get out of the business of entity-level taxation.
CEO pay is not always linked to company profitability, for a variety of rather obvious reasons.
Quote from: Martinus on September 01, 2011, 11:08:58 AM
The thing that the author (and apparently, you) is missing here is that the CEO's pay is taxed at his level anyway so I fail to see where the issue is again.
What you are missing is that there are issues of significance at play other than what the government's final tax take is.
Quote from: Berkut on September 01, 2011, 11:18:07 AM
CEO pay is not always linked to company profitability, for a variety of rather obvious reasons.
CEO comp should be reasonably connected to performance. The bottom line is the bottom line with respect to performance.
Quote from: The Minsky Moment on September 01, 2011, 11:45:41 AM
Quote from: Berkut on September 01, 2011, 11:18:07 AM
CEO pay is not always linked to company profitability, for a variety of rather obvious reasons.
CEO comp should be reasonably connected to performance. The bottom line is the bottom line with respect to performance.
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.
Quote from: DGuller on September 01, 2011, 11:56:33 AM
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
Quote from: The Minsky Moment on September 01, 2011, 12:33:44 PM
Quote from: DGuller on September 01, 2011, 11:56:33 AM
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
Of course all evaluations of that nature have to work both ways. However, I think the idiocy of cutting the pay of the CEO that keeps his ship afloat with minimal losses while everyone else is falling by the wayside is so obvious that the focus should be on fixing the overpayment during the good times, and not on giving up trying to separate the skill from luck.
Quote from: DGuller on September 01, 2011, 12:53:06 PM
Of course all evaluations of that nature have to work both ways.
But the problem is, they don't.
And that gets at a underlying problem, which is that the market for top officers for large public companies is dysfunctional, arguably not a proper market at all. The process of retaining and compensating CEO's is plagued by glaring principal-agent problems.
Quoteand not on giving up trying to separate the skill from luck
But where is the analysis that attempts to do that in any real way? How many comp committees take a rigorous look at the real economic contributions of their CEOs, as measured against the best available alternative? Many big companies that measure the economic contribution of line workers with exacting precision do little to obtain the same information on the guy at the top of pay scale.
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.
Quote from: The Minsky Moment on September 01, 2011, 11:45:41 AM
Quote from: Berkut on September 01, 2011, 11:18:07 AM
CEO pay is not always linked to company profitability, for a variety of rather obvious reasons.
CEO comp should be reasonably connected to performance. The bottom line is the bottom line with respect to performance.
While that is generally true, it is not specifically true at all.
Hence there could be many instances where a company does not make much money, or even loses money, and the CEO would still get paid.
Sometimes they may even get paid very well, the "bottom line" notwithstanding.
Quote from: Berkut on September 01, 2011, 01:20:17 PM
While that is generally true, it is not specifically true at all.
Hence there could be many instances where a company does not make much money, or even loses money, and the CEO would still get paid.
Sometimes they may even get paid very well, the "bottom line" notwithstanding.
Description is not prescription.
Quote from: Berkut on September 01, 2011, 11:18:07 AM
CEO pay is not always linked to company profitability, for a variety of rather obvious reasons.
Not only is it not always the case, these days it seems to be rarely the case which is JR's point.
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.
You listening to Glen Beck now Yi?
Quote from: Admiral Yi on September 01, 2011, 01:53:16 PM
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.
Quote from: DGuller on September 01, 2011, 02:00:13 PM
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.
What is the connection between hedge funds ratchetting up risk/throwing caution to the wind in general, and the subprime meltdown?
Quote from: Admiral Yi on September 01, 2011, 02:02:23 PM
Quote from: DGuller on September 01, 2011, 02:00:13 PM
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.
What is the connection between hedge funds ratchetting up risk/throwing caution to the wind in general, and the subprime meltdown?
Because subprime meltdown was really not a subprime meltdown, but rather a grossly over-leveradged financial system meltdown?
Quote from: DGuller on September 01, 2011, 02:07:13 PM
Because subprime meltdown was really not a subprime meltdown, but rather a grossly over-leveradged financial system meltdown?
Which hedge fund (or funds) created counterparty risk sufficient to endanger the financial system? Which were bailed out?
Quote from: DGuller on September 01, 2011, 02:00:13 PM
Quote from: Admiral Yi on September 01, 2011, 01:53:16 PM
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?
Quote from: Admiral Yi on September 01, 2011, 01:53:16 PM
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.
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.
Quote from: Admiral Yi on September 01, 2011, 02:02:23 PM
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.
Quote from: The Minsky Moment on September 01, 2011, 12:33:44 PM
Quote from: DGuller on September 01, 2011, 11:56:33 AM
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.
Quote from: Razgovory on September 01, 2011, 01:11:57 PM
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. :huh:
Quote from: Martinus on September 01, 2011, 02:56:52 PM
Quote from: Razgovory on September 01, 2011, 01:11:57 PM
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. :huh:
wut
Quote from: DGuller on September 01, 2011, 02:00:13 PM
Quote from: Admiral Yi on September 01, 2011, 01:53:16 PM
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).
Quote from: Martinus on September 01, 2011, 02:56:52 PM
Quote from: Razgovory on September 01, 2011, 01:11:57 PM
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. :huh:
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.
Quote from: The Brain on September 01, 2011, 02:58:36 PM
Quote from: Martinus on September 01, 2011, 02:56:52 PM
Quote from: Razgovory on September 01, 2011, 01:11:57 PM
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. :huh:
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?
You could still pay him while he's working. I'm talking about the big golden parachutes they get.
Quote from: Razgovory on September 01, 2011, 03:06:14 PM
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.
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.
Quote from: Martinus on September 01, 2011, 03:01:36 PM
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.
Quote from: Martinus on September 01, 2011, 03:10:38 PM
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.
QuoteCEOs 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
I just used Japan as a rhetorical example. In fact, their economy has not been doing too well.
Quote from: Martinus on September 01, 2011, 03:14:15 PM
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.
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.
Quote from: Martinus on September 01, 2011, 02:55:51 PM
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.
Quote from: The Minsky Moment on September 01, 2011, 03:29:46 PM
Quote from: Martinus on September 01, 2011, 02:55:51 PM
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.
Quote from: Martinus on September 01, 2011, 03:33:09 PM
Quote from: The Minsky Moment on September 01, 2011, 03:29:46 PM
Quote from: Martinus on September 01, 2011, 02:55:51 PM
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.
Quote from: Admiral Yi on September 01, 2011, 02:48:14 PM
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.
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.
Quote from: ulmont on September 01, 2011, 03:13:23 PM
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.
Let the owners do as they please. They want to destroy their wealth. So what?
Quote from: Martinus on September 01, 2011, 03:10:38 PM
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.
Quote from: The Minsky Moment on September 01, 2011, 03:35:38 PM
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.
QuoteInstead 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.
Quote from: Martinus on September 01, 2011, 03:16:02 PM
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.
Quote from: Admiral Yi on September 01, 2011, 03:43:43 PMSo 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?
Quote from: Zanza on September 01, 2011, 03:54:52 PM
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.
Quote from: Admiral Yi on September 01, 2011, 04:09:53 PM
Quote from: Zanza on September 01, 2011, 03:54:52 PM
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.
But institutional shareholders are mostly pension funds and the like. They usually only care about the share price.
Quote from: Martinus on September 01, 2011, 04:16:03 PM
But institutional shareholders are mostly pension funds and the like. They usually only care about the share price.
:huh: Why would they not care about earnings, which are the ultimate determinate of share price?
Quote from: Admiral Yi on September 01, 2011, 04:09:53 PMDoesn't take that much time or effort to vote on a proxy issue.
The rational thing to do is not to care because it doesn't really harm you. And at least when I get mail for the annual stockholder meetings, there is no option to tick that says "Pay the CEO 50% less". I can just generally say yea or nay on the renumeration of all board members.
QuoteAnd institutional investors (and sometimes individual investors) can hold significant chunks of stock.
Yes, but if they just manage their customer's wealth, you'll have agents that supervise other agents etc. so the principal agent problem gets even worse. Do you think that a normal fund manager's incentives are built in a way that he has an interest in cutting CEO pay? I doubt that.
I'd give incoming CEOs a pile of common stock at the beginning on loan with the right to draw the dividends and have that be their only compensation.
Quote from: Admiral Yi on September 01, 2011, 04:26:11 PM:huh: Why would they not care about earnings, which are the ultimate determinate of share price?
Let's say your pension fund owns 1% of a big company. If the CEO salary rises by a million, that's still just ten thousand for your fund. How does that matter when you manage billions of dollars?
Quote from: Admiral Yi on September 01, 2011, 04:26:11 PM
Quote from: Martinus on September 01, 2011, 04:16:03 PM
But institutional shareholders are mostly pension funds and the like. They usually only care about the share price.
:huh: Why would they not care about earnings, which are the ultimate determinate of share price?
Maybe in Poland there is no such thing as a dividend?
Quote from: Zanza on September 01, 2011, 04:30:13 PM
Let's say your pension fund owns 1% of a big company. If the CEO salary rises by a million, that's still just ten thousand for your fund. How does that matter when you manage billions of dollars?
OK, if no one directly affected cares, why should the rest of us care?
Humans are wired to compare themselves with other people. Behavioral economics has shown that relative income comparisons do much more for happiness than the absolute height of salary. E.g. if you make 50k and your coworker makes 55k for the same job, you are unhappier than when you earn 48k and he earns 45k, despite being absolutely worse off. So by our nature we are unable not to care when we hear about those grotesque salaries.
Quote from: Admiral Yi on September 01, 2011, 01:53:16 PM
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.
Income inequality is a problem as is the fact that real income's stagnated for most people for a long time and there's an emerging super-rich that's global while not everyone else is and that's a problem. I think it is connected to the financial crisis in that it's indicative of a far wider abdication of responsibility by shareholders. The Treasury Select Committee had a good exchange with Bob Diamond on this and Barclays (led by Andrew Tyrie, a Tory and former banker) that indicated a wider corporate governance problem of sleeping shareholders.
I'm indifferent as to whether corporations pay more taxes, but I think our tax system should generally distort economic incentives a bit less by being simpler and generally lower.
I don't think that this sort of thing is lying when many on the left would believe it all.
Edit: I just checked and the Vickers' Commission on Banking over here is investigating the link between the implicit subsidy provided by the state to the big banks and very high levels of renumeration. Stephen Hester, who's now (the well-paid) CEO of RBS (now nationalised - his job is to get it fit for privatisation), has said he thinks there's a link. Though he adds that's not all it's affected.
Quote from: Admiral Yi on September 01, 2011, 04:37:10 PM
Quote from: Zanza on September 01, 2011, 04:30:13 PM
Let's say your pension fund owns 1% of a big company. If the CEO salary rises by a million, that's still just ten thousand for your fund. How does that matter when you manage billions of dollars?
OK, if no one directly affected cares, why should the rest of us care?
Its not that people dont care, it is that the cost of doing something about it is disproportionate to the individual investors stake in that fight.
Things are changing a bit with larger shareholders becoming more activist but the structure of things definitely favours the CEO getting paid out of any proportion to value.
Carl Icahn will save the world. :pirate
Quote from: Sheilbh on September 01, 2011, 04:56:40 PM
I don't think that this sort of thing is lying when many on the left would believe it all.
I suppose stupidity is less of a moral failing than dishonesty. But close-mindedness is higher than stupidity.
Quote from: Admiral Yi on September 01, 2011, 06:11:12 PMI suppose stupidity is less of a moral failing than dishonesty. But close-mindedness is higher than stupidity.
How is it close-minded? :mellow:
Quote from: Sheilbh on September 01, 2011, 06:20:25 PM
How is it close-minded? :mellow:
It would be close-minded if they declined to examine the evidence that their proposition is patently false.
Quote from: Admiral Yi on September 01, 2011, 04:09:53 PM
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.
A lot of shares are held in street name and done get voted. Management effectively controls the proxy and what questions are on, so while the proxy is a great tool to understand what management is being paid, it isn't really a useful tool to do anything about it.
Quote from: Admiral Yi on September 01, 2011, 06:23:22 PM
It would be close-minded if they declined to examine the evidence that their proposition is patently false.
I'm not sure what we're talking about here. Explain what the proposition and the evidence is.
Quote from: Sheilbh on September 01, 2011, 06:25:40 PM
I'm not sure what we're talking about here. Explain what the proposition and the evidence is.
QuoteThe senior Democrat on the House of Representatives oversight committee, Elijah Cummings, called for hearings on executive compensation "to examine the extent to which the problems in CEO compensation that led to the economic crisis continue to exist today."
By evidence I suppose I mean the lack of evidence.
So that's what you were talking about? Sometimes you can be so direct that it's just jarring. That guy, of course, overstated the case. However, I don't think that executive compensation and the increasingly dysfunctional financial system are completely independent of each other.
Quote from: Admiral Yi on September 01, 2011, 06:32:54 PMBy evidence I suppose I mean the lack of evidence.
Possibly, examining whether or not there is evidence surely can't help? But yeah that's not one of the top three causes of the crisis.
But as I said earlier my view is that the outlandish renumeration at banks especially are symptoms rather than causes of the conditions for crisis. And I think it's worth looking at.
Quote from: DGuller on September 01, 2011, 06:37:58 PM
So that's what you were talking about? Sometimes you can be so direct that it's just jarring. That guy, of course, overstated the case. However, I don't think that executive compensation and the increasingly dysfunctional financial system are completely independent of each other.
Unless there was some causality that ran from executive compensation to the financial crisis, there's no case to overstate. It's just wrong.
I does appear that Congressman Cummings is not a likely finalist for the Riksbank prize.
Quote from: Admiral Yi on September 01, 2011, 01:53:16 PM
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.
Fine. Wealth redistribution should be accelerated with heavy progressive income tax, Friedman's guaranteed income should be instituted for all American citizens, and Boeing should no longer pay any taxes, insofar as it should be nationalized completely and all current aircraft production switched to Stratofortresses and Stratofortress spare parts.
Quote from: Ideologue on September 01, 2011, 07:08:02 PM
Boeing should no longer pay any taxes, insofar as it should be nationalized completely and all current aircraft production switched to Stratofortresses and Stratofortress spare parts.
Then you could slap on the label "Airbus A380" on the Stratofortresses, and it would be just like EADS.
Quote from: Ideologue on September 01, 2011, 07:08:02 PM
Fine. Wealth redistribution should be accelerated with heavy progressive income tax, Friedman's guaranteed income should be instituted for all American citizens, and Boeing should no longer pay any taxes, insofar as it should be nationalized completely and all current aircraft production switched to Stratofortresses and Stratofortress spare parts.
But isn't the Stratofortress completely useless at this point?
Guaranteed income is silly anyways. It makes more sense to just execute everyone who doesn't meet a minimum income.
Quote from: The Minsky Moment on September 01, 2011, 06:52:01 PM
I does appear that Congressman Cummings is not a likely finalist for the Riksbank prize.
:hug:
Quote from: The Minsky Moment on September 01, 2011, 07:12:41 PM
Quote from: Ideologue on September 01, 2011, 07:08:02 PM
Boeing should no longer pay any taxes, insofar as it should be nationalized completely and all current aircraft production switched to Stratofortresses and Stratofortress spare parts.
Then you could slap on the label "Airbus A380" on the Stratofortresses, and it would be just like EADS.
:hmm: An Air Force that's deprived of any real power, influence or relevancy? Go on...
Quote from: Siege on September 01, 2011, 07:53:29 PM
Quote from: Admiral Yi on September 01, 2011, 02:01:11 PM
Quote from: Razgovory on September 01, 2011, 01:59:47 PM
You listening to Glen Beck now Yi?
No.
I do.
He's a mormon. To him, you are gentile. Hell, he verges on anti-semitism in his rants (which is why Fox canceled his show). And plugs anti-semetic books on show.
Quote from: crazy canuck on September 01, 2011, 04:36:30 PM
Quote from: Admiral Yi on September 01, 2011, 04:26:11 PM
Quote from: Martinus on September 01, 2011, 04:16:03 PM
But institutional shareholders are mostly pension funds and the like. They usually only care about the share price.
:huh: Why would they not care about earnings, which are the ultimate determinate of share price?
Maybe in Poland there is no such thing as a dividend?
Most institutional shareholders are less interested in dividend and more in the earnings being reinvested so they can exit at a higher price.
Quote from: Admiral Yi on September 01, 2011, 04:26:11 PM
Quote from: Martinus on September 01, 2011, 04:16:03 PM
But institutional shareholders are mostly pension funds and the like. They usually only care about the share price.
:huh: Why would they not care about earnings, which are the ultimate determinate of share price?
The CEO salary is not a big item on the EBITDA usually, and as others said, institutional shareholders' managers usually earn similarly to the CEOs, so they'd rather see the profitability increased elsewhere (e.g. by outsourcing to BRIC) than by cutting the pay of their peers.
I think a lot of disagreement here comes from Yi and his side assuming that decisions of capital markets' actors are rational economically. This is sooooo 1960s Chicago. ;)
Quote from: Martinus on September 02, 2011, 02:09:38 AM
I think a lot of disagreement here comes from Yi and his side assuming that decisions of capital markets' actors are rational economically. This is sooooo 1960s Chicago. ;)
The problem is that their individual rational decisions can lead to a bad outcome for most, e.g. overpaid CEOs.
Quote from: Razgovory on September 02, 2011, 01:36:02 AM
Quote from: Siege on September 01, 2011, 07:53:29 PM
Quote from: Admiral Yi on September 01, 2011, 02:01:11 PM
Quote from: Razgovory on September 01, 2011, 01:59:47 PM
You listening to Glen Beck now Yi?
No.
I do.
He's a mormon. To him, you are gentile. Hell, he verges on anti-semitism in his rants (which is why Fox canceled his show). And plugs anti-semetic books on show.
Minsky told me to vote for him, and Minsky is way smarter than you and me.
Quote from: Martinus on September 02, 2011, 02:09:38 AM
I think a lot of disagreement here comes from Yi and his side assuming that decisions of capital markets' actors are rational economically. This is sooooo 1960s Chicago. ;)
Which disagreement are you referring to? I've already said I agree executive compensation does not reflect the will of the shareholders and the process should be reformed.
One of the difficulties is that compensation committees are typically made up of non-execs who are themselves CEOs or chairmen of other companies. It really is a "you scratch my back, I'll scratch yours" system and of course is self-erpetuating. X gets a big rise and Y has to get the same because that's what the market is paying.
After the SEC mandated that CEO salaries must be made public, they rose even faster. Probably because CEOs could be envious of even better paid CEOs.
Quote from: Martinus on September 02, 2011, 02:09:38 AM
This is sooooo 1960s Chicago. ;)
Not really. Rationality of investors = trying to maximize their gains.
It has nothing to do with how they do it. It's just that generally, investors in any given market try to maximes their wealth and decisions are based on this.
Quote from: Gups on September 02, 2011, 04:43:26 AM
One of the difficulties is that compensation committees are typically made up of non-execs who are themselves CEOs or chairmen of other companies. It really is a "you scratch my back, I'll scratch yours" system and of course is self-erpetuating. X gets a big rise and Y has to get the same because that's what the market is paying.
Yes, and, at least in the UK, most of the shares are held by institutional investors that also draw their leadership from the same pool of people.
Quote from: DGuller on September 01, 2011, 03:13:10 PM
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.
I think this is a fundamental, but also fundamentally misunderstood, concept. When upside gains vastly outweigh downside losses, a volatile environment is desirable. That's not a rational market any more.
Quote from: Gups on September 02, 2011, 04:43:26 AM
One of the difficulties is that compensation committees are typically made up of non-execs who are themselves CEOs or chairmen of other companies. It really is a "you scratch my back, I'll scratch yours" system and of course is self-erpetuating. X gets a big rise and Y has to get the same because that's what the market is paying.
Yup. This.
I suspect there is also a problem of "me-too"itis. I bet the really top notch executives are probably worth their huge salaries, from the perspective of what they add to the potential shareholder value.
The problem is that in reality only a few percent of the execs are actually that good. But all of them think they are that good, and what is more, most companies want to believe that THEIR execs are just as good as everyone elses. There isn't much chance that some comp committee is going to say "Yeah, Joe is a very average executive, and we think we should keep him since he does a good job, and pay him a very average salary...".
Instead everyone wants to believe that they are rock stars, and the people they employ are rock stars, and we should all be paid accordingly.
Quote from: Berkut on September 02, 2011, 08:42:39 AM
I suspect there is also a problem of "me-too"itis. I bet the really top notch executives are probably worth their huge salaries, from the perspective of what they add to the potential shareholder value.
The problem is that in reality only a few percent of the execs are actually that good. But all of them think they are that good, and what is more, most companies want to believe that THEIR execs are just as good as everyone elses. There isn't much chance that some comp committee is going to say "Yeah, Joe is a very average executive, and we think we should keep him since he does a good job, and pay him a very average salary...".
Instead everyone wants to believe that they are rock stars, and the people they employ are rock stars, and we should all be paid accordingly.
I agree that's going to be part of it.
Add all of these factors together, and you get a system that acts like a one-way ratchet - compensation on average always goes up but no mechanism to make it on average go down ... untill you get some sort of major shock or failure. And even that doesn't seem to create a fundamental revamping.
Quote from: Siege on September 02, 2011, 03:17:13 AM
Quote from: Razgovory on September 02, 2011, 01:36:02 AM
Quote from: Siege on September 01, 2011, 07:53:29 PM
Quote from: Admiral Yi on September 01, 2011, 02:01:11 PM
Quote from: Razgovory on September 01, 2011, 01:59:47 PM
You listening to Glen Beck now Yi?
No.
I do.
He's a mormon. To him, you are gentile. Hell, he verges on anti-semitism in his rants (which is why Fox canceled his show). And plugs anti-semetic books on show.
Minsky told me to vote for him, and Minsky is way smarter than you and me.
I'm pretty sure Minsky did not tell you to vote for Glen Beck.