Will new Executive pay rules cause a brain drain?

[ray245]

AP via Yahoo

NEW YORK – The Obama administration's decision to cut the pay of top executives at companies on taxpayer life support will help quiet the popular outrage over excessive compensation. But it introduces a new concern: brain drain.

The 175 executives targeted by "pay czar" Kenneth Feinberg are not only the highest-paid but also considered among the most talented and productive. And competitors outside the restrictions are likely to woo them, recruiters and compensation expects say.

Losses like that could be devastating to the very companies the government spent so much money to save.

"These people are considered the brains of the machine. They are who can pull you through the tough times," said Steven Hall, who runs an executive compensation firm that bears his name. "This will give them reason to leave."

Feinberg announced Thursday that he has ordered seven companies that have received billions of dollars in taxpayer money to slash the base salaries of their top executives by an average of 90 percent and cut total compensation — cash, stock and perks — in half.

That applies to the five top executives and the next 20 highest-paid employees at Bank of America Corp., American International Group Inc., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial.

Another 525 employees at the companies will also face new curbs on pay from Feinberg, but those details have not yet been released.

Those facing pay restrictions outside the executive suite hold leadership positions in areas like finance and investment banking at the banks, and in manufacturing, brand management and design at the auto companies.

They come with years of experience, whether it's making deals or overseeing car design. For example, Ford Motor Co., which is in far better shape than its two Detroit rivals, could lure auto executives who would be difficult for Chrysler and GM to replace.

"There will be a fallout," said Janice Reals Ellig, co-CEO of the executive search firm Chadick-Ellig. "Talent that is short-term-focused because they have big mortgages, college education payments and other things will feel more pressure to leave."

A Bank of America spokesman, Scott Silvestri, said competitors not subject to pay restrictions "already are exploiting this situation by identifying our top performers and using pay concerns to recruit them away for fair market compensation."

Feinberg, in speaking engagements over the last month, acknowledged the difficulty of balancing "conflicting principles" on pay: Compensation needed to be high enough to attract talent without rewarding risk.

But he also has to deal with Americans angry that their tax dollars have been used to save these companies. The Obama administration has blamed misplaced compensation incentives as one cause of the financial crisis.

Feinberg will limit cash salaries to $500,000. Executives who had been guaranteed certain compensation will have those payments made in company stock to be held over the long term.

Most other pay will also have to come in long-term stock awards, and executives won't be able to sell that stock until the company repays its bailout money. Incentive stock awards can only be paid if executives stick around for three years and the company pays back the government.

Feinberg also gets to sign off on any performance goals used as incentives.

The pay restrictions for all seven companies will also require any executive seeking more than $25,000 in special benefits — things such as country club memberships, private planes and company cars — to get permission for those perks from the government.

Feinberg did say exceptions were made "where necessary to retain talent and protect taxpayer interests." Base salaries above $1 million were approved for the new CEO of AIG, and for two employees of Chrysler Financial.

Under a package approved by Feinberg over the summer, AIG CEO Robert Benmosche will get a pay package of about $10.5 million.

Competitors of all seven companies that have repaid bailout money are free to pay whatever they want — although the Federal Reserve did propose Thursday to monitor executive pay at thousands of banks.

Goldman Sachs, which paid back its $10 billion in government bailout funds in June, has set aside $16.7 billion for compensation and benefits so far this year, on track for a record.

"People who produce the top revenues will always be in demand. They will always be wanted," said recruiter Danny Sarch, president of Leitner Sarch Consultants in White Plains, N.Y. "That's just capitalism."

The economist website is also having a debate on this issue

http://www.economist.com/debate/days/view/403

[aerius]

Frankly the only companies with any brains to lose are GM & Chrysler, and there are times I'm not too sure about those 2 either.

[Mr Bean]

And go do WHAT exactly? These are the same executives, the same goddamn executives that fucked the economy over and lost their companies billions. Were it not for the Government they would have been out of a job months ago with their stock options worthless. Now since they can only take half as much in the way of bonuses they are all going to say screw you guys and work for another industry?

What other industry? No German or Chinese firm is going to touch a former AIG executive with such a proven track record of stupidly. If not for the fact that everyone's friends in the 10 million dollars a year plus club on Wall Street they would not have a job at present.

The 175 executives targeted by "pay czar" Kenneth Feinberg are not only the highest-paid but also considered among the most talented and productive. And competitors outside the restrictions are likely to woo them, recruiters and compensation expects say.

Ahahahahahha Ahhh. Fucking idiots, the only people the Government can limit the pay of is those who companies owe the Government massive amounts of money.

[Duckie]

Let alone that executive pay isn't so high in most other countries. If these executives want to leave America and go to somewhere sane in Europe, they'll have to take a paycut that drops an entire 0 off their paycheck on average. Nobody would take a job to go work for 10 times less.

America actually has such a salary problem that I've heard of companies purposefully headquartering out of America and selecting Japanese or European persons as their CEO just to avoid the expectations of executive pay here.

[Lord of the Abyss]

If the "brains" at those companies were so good, the companies in question wouldn't be on "taxpayer life support". If the result is the people who were responsible for their corporate disaster leave, and new, less greedy people replace them it is likely to be an improvement. They should have been fired; even offering to let them still work there at reduced pay is rather generous.

[Elessar]

"People who produce the top revenues will always be in demand. They will always be wanted," said recruiter Danny Sarch, president of Leitner Sarch Consultants in White Plains, N.Y. "That's just capitalism."

It's always amazing how executive officers of a corporation are attributed such amazing prowess at making money, while simultaneously dodging their own failures and maintaining an unbelievable golden parachute. No other employee gets that kind of benefit, but executives do.

But I guess that's just capitalism.

[Broomstick]

Personally, I'd like those "top CEOs" to be standing in front of me in the unemployment line so I kick them in the ass. Or behind me, so I can turn around and kick them in the nuts.

Naw... too good for them.

How about living in a cardboard box under a freeway overpass?

[Napoleon the Clown]

No, no cardboard box. They'd have likely scammed some drunk homeless guy out of his box.


What would be interesting is seeing how these companies end up doing long-term versus those that don't hack down the pay of their top level execs. If the companies that are doing so end up doing better in the long run, can we expect changes to be made? Or is the business world, by and large, too stupid to think ahead?

[ray245]

Economist debate:

Pro high executive pay

Nell Minow argues that top executive compensation was a major cause of the financial crisis. She bases her conclusion on two "outlier" examples, Angelo Mozillo and Aubrey McClendon, that she calls "anecdotes". The plural of anecdote is data. And the data, that is the pay at a broad sample of financial companies, simply do not support her conclusion. Ironically, neither do her two anecdotes.

Ms Minow makes the following claims. (1) Incentive compensation rewarded top financial executives for the quantity of transactions, not the quality. (2) Top CEOs, like Mr Mozillo, took large amounts of money out of their companies before their companies failed. (3) The CEOs knew they were making bad investments, but did so anyway because they could make more money doing so. (4) CEOs get upside, but no downside. (5) The post-meltdown awards create incentives that reward management, but damage shareholders and everyone else.

These claims are false. As David Yermack of NYU pointed out in a recent piece in the Wall Street Journal, Vikram Pandit of Citigroup, John Mack of Morgan Stanley and Kenneth Lewis of Bank of America:

"all lost small fortunes in 2008. The 2008 compensation of Messrs Pandit, Mack, and Lewis was approximately minus $105 million, minus $40 million, and minus $108 million, respectively, after taking account of the losses on the stock that each CEO owned in his firm. Other CEOs in the financial industry had similarly bad years. Kerry Killinger of Washington Mutual lost more than $25 million before being ousted in September, Kennedy Thompson of Wachovia lost more than $30 million before being fired in June, and Jeffrey Immelt of General Electric lost more than $60 million ... These CEOs' financial reversals were part of a robust system of pay-for-performance widely used by most U.S. companies."

Yermack also points out that James Cayne lost most of his billion-dollar fortune when Bear Stearns failed and Richard Fuld of Lehman Brothers lost hundreds of millions of dollars.

The fact is that most financial-company CEOs received the lion's share of their pay in stock and options. And they kept most of that pay as shares in their companies which they never cashed in. When the crisis hit and their stock prices sank, those CEOs lost a large fraction of their wealth and, in many cases, their jobs.

As I wrote in my first entry, this is true, in general, of the overall CEO market. CEOs earn a lot and their stock appreciates when their companies perform well. CEOs lose large amounts of wealth and their jobs when their companies perform poorly. It is irresponsible to claim that CEOs do not bear any downside risk. In 2008, CEOs as a group lost roughly 40% of their wealth.

In direct contradiction to Ms Minow's conclusion, the financial CEOs were compensated in the end for the quality of their transactions. The CEOs did not take much off the table. The CEOs had a substantial amount of downside risk. In fact, those CEOs would have been much better off if they had not engaged in the transactions they did.

It is worth adding that David Yermack is a noted researcher on CEO pay who studies large samples over long periods. He has written several articles highly critical of specific CEO pay practices, like corporate jet usage. Nevertheless, his conclusion on the relation of CEO pay to the financial crisis is diametrically opposed to Ms Minow's (as is his characterisation of the CEO market in general).

A study of CEO incentives in a broader group of financial institutions during the crisis by Rudi Fahlenbrach and Rene Stulz of Ohio State (and a former president of the American Finance Association) confirms Yermack's analysis and also clearly refutes Ms Minow's conclusion.

Ironically, even her two anecdotes about Angelo Mozillo of Countrywide and Aubrey McClendon of Chesapeake Energy fail to support her case.

Unlike the other CEOs mentioned above (and most financial-institution CEOs), Mr Mozillo did manage to sell a lot of his stock. Unfortunately for him, the SEC has charged him with securities fraud and insider trading. And it is unlikely to lead to a good outcome for him. If found guilty, he potentially will end up paying three times what he took out. Clearly, he appears to have behaved badly, but he did not get away with it.

As for Mr McClendon, he runs an energy company. How could he possibly have had anything to do with the financial crisis?

The preponderance of the data and, even Ms Minow's "outlier" "anecdotes," therefore, fail to provide any evidence that top executive compensation had much to do with the financial crisis.

Top executive compensation did not cause the financial crisis. Instead, the crisis was caused by loose monetary policy, a global capital glut, over-high leverage at investment banks, mandates from Congress to provide mortgages to people who could not afford them, flawed ratings from the rating agencies and poor incentives at mortgage origination (not the CEO) level. Consistent with this, the financial crisis has spread to financial institutions in other countries with very different pay practices.

[aerius]

Top executive compensation did not cause the financial crisis. Instead, the crisis was caused by loose monetary policy, a global capital glut, over-high leverage at investment banks, mandates from Congress to provide mortgages to people who could not afford them, flawed ratings from the rating agencies and poor incentives at mortgage origination (not the CEO) level. Consistent with this, the financial crisis has spread to financial institutions in other countries with very different pay practices.

What a fucking load of shit. Who the fuck lobbied Congress to enable all this crap? Oh yeah, that's right, the executives in the companies in question. And the part about mortgages is a complete lie, there is no fucking law anywhere on the books which says banks have to give mortgages to people who can't afford them.

[Lord of the Abyss]

What would be interesting is seeing how these companies end up doing long-term versus those that don't hack down the pay of their top level execs. If the companies that are doing so end up doing better in the long run, can we expect changes to be made? Or is the business world, by and large, too stupid to think ahead?

Is it really stupidity? After all, the people making those decisions...are the executives. It's only stupid if they actually consider the welfare of the company more important than filling their bank accounts.

[Napoleon the Clown]

I'd like to bring forth the example of Warren Buffet, who transformed a textile manufacturer into the company that owns all of GEICO and a shitload of other companies, including See's Candy, Dairy Queen, RC Willy's, etc. His base pay-rate as of 2006 was $100,000 per year. He's filthy rich because he's a smart businessman that knows how to handle money on a personal level and on a company-wide level. The business world needs more people who know how to handle a company both in the long-term and in the short-term. He's by no means one of a kind.


Lord of the Abyss: Look at what such behavior has resulted in. Yeah, it's called being stupid and greedy. Also, if the CEO doesn't hold enough shares, he can get fired for incompetence.

[dragon]

Sorry but high pay should be based off performance. So if the company does good then they get better pay.

[Knife]

I really don't see any kind of an Atlas Shrugged coming, nobody is going to pay these guys what they are used to and what they want overseas, so if they want to go, go. There is plenty of people more than happy to take a crack at their jobs, with the same schooling, same technical knowledge, and same ambition, and would probably do it for less than the current crop in this recession. To think it is a brain-drain implies that anyone who knows how to do it will go else where, which is ridiculous and self serving to the current crop.

[weemadando]

And lets not forget that ridiculous goddamn pay for executives seems to be a mainly Anglophile thing.

The english speaking countries seemed to have followed the path of "if you pay peanuts you get monkeys" "guiding hand of the free market" ultra-capitalism to it's logical conclusion and have the executive salaries many orders of magnitude above the average wage for the corporations employees (in 2005 this was apparently more than 800 times the minimum wage).

Meanwhile Japan, France, Germany and others (who still manage somehow to be G8 members despite not bowing to ridiculous ultra-capitalism) have executive pay rates of generally only 4-10x average employee wage.

Who knows how this came along - but if these fuckers still want to be bloodthirsty leeches on their companies then they'll really have no choice but to remain where they are as no one else is going to pay them that exorbitantly. And really, I'm sure that if they have their pay capped at 500k then their bonuses, options and other fringe benefits will still take them to well above what most other executive dream of earning.

[General Zod]

I'd like to bring forth the example of Warren Buffet, who transformed a textile manufacturer into the company that owns all of GEICO and a shitload of other companies, including See's Candy, Dairy Queen, RC Willy's, etc. His base pay-rate as of 2006 was $100,000 per year. He's filthy rich because he's a smart businessman that knows how to handle money on a personal level and on a company-wide level. The business world needs more people who know how to handle a company both in the long-term and in the short-term. He's by no means one of a kind.


Lord of the Abyss: Look at what such behavior has resulted in. Yeah, it's called being stupid and greedy. Also, if the CEO doesn't hold enough shares, he can get fired for incompetence.

Base pay rate is pretty much meaningless for CEOs anyway, since most executives make the big bucks through their bonuses, which is often fixed according to their contract regardless of performance. The company I work for manages a lot of financial data, and if you want obscene you really need to look no further than energy industry executives. At least a handful of them on some of the salary surveys I've seen are pulling in a $27 million per year bonus.

[Napoleon the Clown]

Based off what I read, Buffet's bonuses aren't all that high, either. He's one of those people who could turn a twenty dollar bill into enough to live comfortably off of, so most of his income comes from knowing how to invest his money and when to sell and all that fun stuff.


I could have misunderstood, of course.

[Broomstick]

Sorry but high pay should be based off performance. So if the company does good then they get better pay.

And if the company does poorly they should receive less and if it goes belly up they should be out on the street, but that's not what happened.

[Chris OFarrell]

Based off what I read, Buffet's bonuses aren't all that high, either. He's one of those people who could turn a twenty dollar bill into enough to live comfortably off of, so most of his income comes from knowing how to invest his money and when to sell and all that fun stuff.

I could have misunderstood, of course.

Yes, but Buffet is probably the smartest guy on Wall Street by far.

He is also on a whole heap of boards, but he is not on a SINGLE remuneration board. None of the Wall Street club want him there because, funny enough, he doesn't think anyone deserves more then a few hundred thousand at max, for just working on the street. Of course, among his peers, this is not exactly the prevailing view...

[weemadando]

I also appreciate Buffett's ethics of "sure I'll help out my family members get an education, but I ain't buying them a degree and they sure as shit aren't getting any jobs or favours because of nepotism."

[Simon_Jester]

Great! Executive brain drain! Given the average caliber of the American executive class, this is probably a good thing. Sewage should be drained away.

[Darth Wong]

I'm honestly a bit surprised Kast hasn't posted yet in order to affirm his unwavering faith in the rationality of US executive pay scales. He has been prone to outright ridicule of anyone who doesn't believe in it. In any case:

NEW YORK – The Obama administration's decision to cut the pay of top executives at companies on taxpayer life support will help quiet the popular outrage over excessive compensation. But it introduces a new concern: brain drain.

The 175 executives targeted by "pay czar" Kenneth Feinberg are not only the highest-paid but also considered among the most talented and productive. And competitors outside the restrictions are likely to woo them, recruiters and compensation expects say.

Precisely how do we know that they are the most talented and productive executives in the world? Especially since they are helming companies that are doing very badly? Do we look at the head coaches of the five worst teams in the NFL when we're searching for the most talented and productive football coaches in the world?

Losses like that could be devastating to the very companies the government spent so much money to save.

"These people are considered the brains of the machine. They are who can pull you through the tough times," said Steven Hall, who runs an executive compensation firm that bears his name. "This will give them reason to leave."

Feinberg announced Thursday that he has ordered seven companies that have received billions of dollars in taxpayer money to slash the base salaries of their top executives by an average of 90 percent and cut total compensation — cash, stock and perks — in half.

That applies to the five top executives and the next 20 highest-paid employees at Bank of America Corp., American International Group Inc., Citigroup Inc., General Motors, GMAC, Chrysler and Chrysler Financial.

Another 525 employees at the companies will also face new curbs on pay from Feinberg, but those details have not yet been released.

Those facing pay restrictions outside the executive suite hold leadership positions in areas like finance and investment banking at the banks, and in manufacturing, brand management and design at the auto companies.

I thought the idea of massive executive pay in profitable companies was that it would create incentive for good performance. If they continue to get massive executive pay even when the company does poorly, then there is no incentive for good performance. The entire rationale for high executive pay goes completely out the window in that case, and is shown to be a self-serving lie. Is this not obvious to anyone with a functioning brain?

They come with years of experience, whether it's making deals or overseeing car design. For example, Ford Motor Co., which is in far better shape than its two Detroit rivals, could lure auto executives who would be difficult for Chrysler and GM to replace.

So? Every executive of every major company in the world comes with years of experience. Why aren't they all paid as well as these guys? What have these guys done to justify extraordinary compensation, far above that of other companies including companies which are more successful than their own companies? How can anyone justify extraordinary compensation on the basis of incentive for good performance while simultaneously rejecting the idea of removing that compensation for bad performance? Do they not understand how incentive works? If I give my dog a treat regardless of whether he rolls over, then guess what: he will eventually learn that he doesn't need to bother rolling over. Hey, maybe we should apply this brilliant logic to education! If you want to attract the best students to your school, give everybody an A, regardless of how well they do!

"There will be a fallout," said Janice Reals Ellig, co-CEO of the executive search firm Chadick-Ellig. "Talent that is short-term-focused because they have big mortgages, college education payments and other things will feel more pressure to leave."

Talent that is SHORT-TERM-FOCUSED? The guy actually admits that these people think short-term, which is precisely the fucking problem!

A Bank of America spokesman, Scott Silvestri, said competitors not subject to pay restrictions "already are exploiting this situation by identifying our top performers and using pay concerns to recruit them away for fair market compensation."

"Fair market compensation" is a farcical term in this case.

Feinberg, in speaking engagements over the last month, acknowledged the difficulty of balancing "conflicting principles" on pay: Compensation needed to be high enough to attract talent without rewarding risk.

But he also has to deal with Americans angry that their tax dollars have been used to save these companies. The Obama administration has blamed misplaced compensation incentives as one cause of the financial crisis.

Feinberg will limit cash salaries to $500,000. Executives who had been guaranteed certain compensation will have those payments made in company stock to be held over the long term.

Most other pay will also have to come in long-term stock awards, and executives won't be able to sell that stock until the company repays its bailout money. Incentive stock awards can only be paid if executives stick around for three years and the company pays back the government.

Feinberg also gets to sign off on any performance goals used as incentives.

The pay restrictions for all seven companies will also require any executive seeking more than $25,000 in special benefits — things such as country club memberships, private planes and company cars — to get permission for those perks from the government.

How outrageous! They might lose their country club memberships and private planes!

Feinberg did say exceptions were made "where necessary to retain talent and protect taxpayer interests." Base salaries above $1 million were approved for the new CEO of AIG, and for two employees of Chrysler Financial.

Under a package approved by Feinberg over the summer, AIG CEO Robert Benmosche will get a pay package of about $10.5 million.

Competitors of all seven companies that have repaid bailout money are free to pay whatever they want — although the Federal Reserve did propose Thursday to monitor executive pay at thousands of banks.

Goldman Sachs, which paid back its $10 billion in government bailout funds in June, has set aside $16.7 billion for compensation and benefits so far this year, on track for a record.

"People who produce the top revenues will always be in demand. They will always be wanted," said recruiter Danny Sarch, president of Leitner Sarch Consultants in White Plains, N.Y. "That's just capitalism."

Even if they produce those top revenues in a reckless or socially irresponsible way. It is capitalism; he's right about that. It's also why we need checks and balances to limit capitalism, and the state must serve that role. It's time Americans stopped treating "capitalism" as a synonym for "righteousness".

[Gramzamber]

It seems to me that these executives have formed a modern day aristocracy, with all the trappings of self-entitlement and incompetence that go with it.
The difference is while aristocrats claim they deserve priviledge through birthright, executives say it's "superior talent" even while the economy is in the sewers thanks to them.

[Darth Wong]

There's a sort of circular logic in the arguments used to justify the high valuation of these people.

Q: "Why are they paid so much?"
A: "Because they're the best there is."
Q: "But how do we know they're the best?"
A: "Because they're the highest paid. Do you think they would get so much money if they weren't the best?"

It would be funny if it weren't happening in real life.

[ThomasP]

You know, I always thought that capitalism encompassed some fairly important bits about fair competition and market-based determination of value, but none of this culture of corporate robbery really seems to have any part of that.

They like to promote it under the banner of capitalism, sure - you too can be like us if only you work hard! - but this has become almost a new kind of ideology in itself. It's like some kind of weird parody created by the relative few wealthy types that have the resources to buy off laws, so that they can rig the game.

All the benefits (to them) of "free market capitalism" with none of the risks. I don't want to sound like an anarcho-libertarian type here, because that's not where I'm going, but you really can't have any sort of fair competition when the wealthy just buy their laws (of course you could just as easily argue that such a thing can't exist in the first place, too).

Frankly I'm about of the mind that these corporate mega-entities shouldn't even be allowed to exist from the outset, simply for the reason that it almost inevitably seems to lead to this kind of bullshit, but that's another issue entirely.