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June 16, 2006



I ahve no problem with founders of companies making large figures, they created the company and should own a large percentage of the proceeds. However, I have a problem with CEO's of companies getting these huge packages before they have doen anything. Also, many of these packages are tied to short-term growth, either of stock prices or "profit margins", leading to eiter fraud in the case of Enron, or a short term outlook, increasing profits in the next quarter or at most 4 qtrs. This is what I believe caused much of the problems at many US companies. They make ill considered aquisitions, and then are quite often forced to sell parts of the company that don't have much potential for revenue growth, but have steady reliable profit margins. It's like investing all of your money in penny stocks, losing it and then having to sell your T-bills to pay your bills.
It has gotten to the point where CEO and other senior executives pay is cutting into the profitability of some companies.

John Robb

I am not sure I understand it either. This idea that the professional managers of public companies, particularly big ones, are entrepreneurs. At least that is how politicos refer to them. NOT true at all. They are stewards and should be paid as if they have replacable skill sets.


John, have you seen the International Crisis Groups latest publication on the Iraqi insurgency? Link: http://www.crisisgroup.org/home/index.cfm?l=1&id=3953

One of the conclusions from the paper is this:

"The insurgency increasingly is dominated by a few large groups with sophisticated communications. It no longer is a scattered, erratic, chaotic phenomenon. Groups are well organised, produce regular publications, react rapidly to political developments and appear surprisingly centralised."


John Robb

There is an analytical problem here. It worked from the statements back to the conclusion that there are only several large groups.

A better conclusion is that the insurgency has several media groups that react quickly to crisis and produce regular publications.


What about the lucrative tax shelters available only to the very top?


The Economist has been attempting to make hay out of this issue for years. I think it is a bit silly and does not really offer any real economic insight. The distribution of wealth will always be skewed in favor of the wealthy. What is relevant is whether or not the total amount of wealth is increasing and whether or not the opportunities to create wealth exists. The real threat to the economy (U.S.) today is that many of the opportunities to create wealth are being regulated, taxed, and inflated away.

If CEO's are being "over" payed or "unfairly" payed is only relevant at individual companies. If the top talent percieves that they are not being fairly rewarded they will either go to a competitor or start their own business. The company suffers. Also, most CEOs are not compensated on profit margins or the actual stock price. Most CEOs are compensated on EPS and Sales; two metrics that Hewitt (the top compensation consultants) has been bashing for years and telling boards not use. The problem is the boards do not listen. You can't blame the CEOs because some one decides to pay them five and half million to sell toothpaste at Colgate (you can only blame them when they make mistakes, which rarely happens) a job most people can do. Large shareholders and boards are not taking responsibility and in the end it is the shareholders that matter. If they do not care, then there is no problem.

May apologies for the long post, I was at a seminar yesterday where several of these issues were discussed.


John Robb

TDL, isn't this a governance problem? If boards can't find a way to adequately manage CEO compensation, are they poorly governed?


I absolutely agree. I was a being a bit glib so my post would not go too long. In fact it seems as though the metrics are rather clearly understod (ROE's or ROIC's are much better) for what is a better comp structure. I was listening to a discussion between a M.D. from CSFB, a couple of hedgies, and a few folks from Hewitt that were pretty clear as to how the comp structure for the executive sweet is completely misaligned. Hewitt repeatedly tells the boards, but they never act. The pensions funds and large mutual funds seem completely disinterested (but then again they are not interested in actual returns, just aggregating assets) and they are the real shareholder power. In the end this will be resolved by multiple failures in the Fortune 500. It is an unfortunate, and completely aviodable, way for the issue to be resolved.

The problem is that this is the result of multiple issues, not just one. Increased governance regs will only exacerbate the issue.



While it may sound simplistic, it seems as if that old adage "the rich get richer and the poor get poorer" is, sadly, true. What's worse is that the Middle Class is experiencing such a crunch that they no longer feel like the middle rung of the ladder but are slipping perilously close to the bottom.

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