My blog has moved! Redirecting...

You should be automatically redirected. If not, visit and update your bookmarks.

Monday, April 5, 2010

Ritholtz: CEO's Paid for Volatility, Not Performance

Making the Janitor's Annual Salary . . . Every 3 Hours!

The inimitable (and frequently bombastic) Barry Ritholtz, author of The Big Picture blog, has a great post today dissecting absurd CEO compensation titled "American Pastime: Overpaying CEO's."

His piece basically picks up where my post last Thursday ("Parsing Occidental CEO Ray Irani's 'Excellent Performance'") left off.

If you don't have time to read my post, here's a one sentence summary: Occidental's Ray Irani got paid more than $1.5 billion since 1990 for deftly outperforming the overall stock market by . . . less than 2%!

In fact, once you scrutinize Occidental's board of directors and how they got there, it would be more accurate to say that Irani paid himself that money.

The only thing I omitted from my post was a stunning little factoid explaining why galloping exec comp seems to have slowed down in recent years.

Namely, sometime in the last decade, The Conference Board, which represents CEO's at the largest publicly traded companies, successfully led an effort to redefine the ratio of CEO pay to that of the rank-and-file.

So, whereas for decades the ratio had been "top-to-bottom," i.e., comparing the CEO to the janitor, in recent years it has been redefined as the CEO's pay relative to the average worker's pay.

Ergo, you get an instant, big contraction in the ratio.

As a result, instead of (accurately) reporting that exec comp has ballooned from 30:1 to something like 1,000:1 in the last 30 years or so, the mainstream media ("msm") now universally reports that the ratio is "only" 400:1.

How . . . 1984-ish.

Ritholtz on Exec Pay

But I digress.

Once you navigate the assorted F-bomb's and "colorful language" in a typical Ritholtz post, his underlying arguments and logic are unassailable:
Five Steps to Shareholder Wealth Transfer

1. The Board of Directors, usually cronies of the CEO (often hand picked by him) forms a compensation committee. To appear “objective,” the committee hires an outside compensation consultant.

2. The compensation consultants are themselves well paid whores, who rather than turning tricks outside the Holland tunnel, offer up absurdly generous comp package. They deliver what they are paid to: They provide cover for the boards to make an otherwise indefensible giveaway of shareholder monies in the form of cash and stock options. It is typically called “Pay for Performance,” but that is a horrific misnomer, as we see in step #3. The comp committee approves the consultants’ nonsense, forwards it to the Board, who rubber stamps it.

3. Here’s where things get interesting: If the stock price rallies, the exec can exercise and cash out, risk free. If the stock price falls, the exec requests a new round of options — or even easier, asks for a repricing of the old ones.

4. After the options are repriced, the exec simply waits. Whether the market rallies or falls . . . you simply go back to step three. Repeat until stock options are in the money. There is no risk or outlay of cash on the part of execs.

5. True “performance” is not a factor. Stock prices can rally for a vast range of reasons having nothing whatsoever to do with management or CEO performance. The market can rally, a sector can come into favor, or even when the Fed can cut rates.

This is not pay for performance, it is pay for stock price volatility.

Actual performance would look at factors such as peer profitability, sector performance, SPX index gains. Bonus payments and stock option exercise should be for gains OVER AND ABOVE these factors — but sadly, rarely if ever are.

--Barry Ritholtz, The Big Picture

Ritholtz's policy prescription is equally blunt, on target -- and politically far fetched (which he readily acknowledges).

Read the full post for the particulars . . .

1 comment:

Ritholtz said...

No F bombs in this post, just some colorful language !