How to Fix the Compensation Issue… Yesterday!

With all the tone-deafness that followed the great compensation debate of 2009, I have a very simple solution. The problem, despite what people commonly believe, is not the absolute level of compensation. No, it’s the fact that management’s personal incentives and employees’ incentives are aligned–shareholders are still in the wilderness. How many times have we heard the trite, absolutely silly refrain stating “we need to pay the valuable people that know where the bodies are buried so they can dispose of them!”? Way too many. Although, there are dozens of examples of retention bonuses being paid to people as they resign… Idiots.

So, what do I suggest? Add all compensation, beyond a base limit, say $250,000, as T.A.R.P. debt to institutions who have already received funds under the program–and the interest rate from this new debt should be very high. I would suggest… okay, I never merely suggest… I would demand (better!) that this new debt carry a high coupon. Maybe even ensure the interest owed is cutely linked to the way these publicly owned (partially, anyway) institutions are negatively impacting our economy. One example: this new debt could carry an interest rate equal to the greater of the (a) median of the top quartile of credit card interest rates issued by the company in question and (b) 24.99%.

Now, what does this do? It better aligns management and shareholders. How can a C.E.O. allow divisions that lost billions to run up it’s debt? And, how can an institution award these bonuses necessary to pay people, right out of taxpayer money, if they aren’t willing to pay it back later? By definition, every dollar that flows into the pockets of employees can’t go back to the taxpayers whose money saved these same institutions. Once managers need to actually justify why they are paying people, due to the higher cost, I guarantee fewer employees will receive these higher bonuses. Gone will be the cuspy performers who are being paid because Wall St. is a creature of habit. This will create a wholesale re-thinking of compensation at many institutions. And, honestly, it’s long overdue. To be honest, I don’t really view this higher cost as excessive, either. People being paid 8-12% of profits (it’s actually revenue traders are compensated on, but don’t tell anyone that) should wind up actually costing 10%-20% of profits with this excess debt, perhaps as high as 30%–but these employees continue to be employed and able to profit due to taxpayer funds to begin with. It’s time managers are required justify, to their boards and owners, why high compensation for various employees is necessary. And, since companies say a surtax or banning of bonuses is bad and bonuses are absolutely required, they should be more than willing to pay these higher rates–they need these people after all!

Time For The Next Generation of Executives

Dear Shareholders:

I am writing to offer my name into consideration for the executive positions within your company–specifically, the Chief Executive Officer–and hope you will agree I am the perfect fit. I am well educated, resourceful, analytical, ethical, and decisive. However, this mix of qualities can be found in a myriad of candidates. What I would bring to your executive suite is much more valuable in these troubled times.

Before I elaborate, let me deal with an issue that I’m sure is at the forefront of your mind–my expectations for compensation. I am quite aware that there is an eminent move by the Obama administration to limit executive pay, and this is one reason I am currently writing to you. I realize that the common perception is, in the words of James F. Reda, “[that] $500,000 is not a lot of money, particularly if there is no bonus.” I wholeheartedly support others, who also seek this position, declining to be considered because of the meager pay. As a matter of fact, I will take the position for $400,000, if offered. Further, I encourage you to pay me three-quarters of that amount in equity. The reason I would suggest this is closely linked to my qualifications for the job, beyond the aforementioned.

First, I promise to be accountable. In these troubled times transparency is of the utmost importance. Companies’ leaders have to answer to their shareholders, their directors, their employees, and even, in some instances, the government. Uncertainty and the loss of confidence has caused the collapse of many firms. Too many executives have skated through the crisis by blaming problems on their predecessors (using codewords like “legacy assets”) a year or more later. Trumpeting a business model or a plan for months, or even years, to investors and the public alike, and then changing course abruptly shows a lack of leadership and ensures the market will assume the worst. In short, I will take responsibility for what happens on my watch, ensure my decisions are transparent, and will be ready to accept the consequences of my decisions and performance rather than deflect criticism.

Second, I will be a steward of our firm’s reputation and brand. Too many firms have consistently done the exact wrong thing. I will institute rules that ensure our sterling reputation emerges from this crisis intact. Further, I will hold employees accountable for actions that harm our image and will be harsh and swift to send the message that our firm doesn’t tolerate actions that cut against our values. Simultaneously, I will be a strong advocate for defensible decisions and use my position to ensure all relevant stakeholders understand our reasoning–I refuse to let the media scare me into making decisions that aren’t in the best interest of our firm. I will also ensure that tough decisions, like deferring or drastically reducing employee compensation, are made and explained. I promise not to tarnish our firm by repeating half truths and party-line nonsense in defense of the status quo.

Third, I promise to not be ruled by quarterly results and short-term gains. How many assets could have been sold and moved off of firm’s balance sheets, but for executives’ reluctance to miss out on any “upside” of these assets? How many buybacks and ill-conceived mergers were executed because they were the flavor of the day? How much more leverage was taken on because interest rates were low and competitors were doing the same? I will not bow to these “fads” and optical enhancements to earnings, at the expense of logic and long-term strength.

Fourth, I promise to get involved with every aspect of our business. I will make it my job to ensure I am very familiar with all of our products. Further, I promise to dive deeply enough into our business that I will be able to make intelligent decisions where others will not. If no one is asking the difficult questions, I will. If there is a poor incentive structure that leads to poor controls, risk management, or business practices, I promise to find out about it myself, not be told about the problem(s) when it starts adversely affect our firm.

Fifth, and lastly, I promise to eschew the trappings associated with being an executive–I will lead by example. I will set the example for our employees. I will maintain a modest office, fly commercial whenever possible (and that does not translate to “whenever I want to”), and ensure the company never incurs expenses for my comfort or convenience. In an era where travel and expenses are highly restricted for legitimate business purposes, for me to use my position for my own convenience would be inappropriate.

It is clear to me that I will bring exactly the sort of fundamental, common sense changes to your executive office that your firm needs. The past few weeks have shown us all that the current generation of executives, seemingly uniformly, completely fail to meet the obvious standards needed to lead our companies. Recent events have left companies’ equity values depressed, morale crushed, and, in some instances, partial or total financial collapse because of executives’ poor decisions, poor management of their brand and perception, refusal to take personal responsibility, and inability to think objectively and dispassionately about their business. And, when these executives have been forced out, they have been paid handsomely for doing an atrocious job by any objective measure. Simply put, I offer something different–any reward I will reap will come from the same reward you, as an investor, expect: an increase in the value of the firm’s equity.

I hope you agree with me that I am a great fit for an executive position–specifically, Chief Executive Officer–at your firm. Should you have any further questions, please feel free to contact me at DearJohnThain@gmail.com. I look forward to hearing back from you.

Sincerely,

Dear John Thain

Semblance of Rationality in Compensation Structure, Finally

It’s finally occurred. As I just read on Clusterstock, there is officially some sort rationality creeping into Wall St. payment structures. Claw-backs are here, as I suggested previously (I was hardly alone). Now, I wonder what the real impetus behind this sort of decision really is. Is it public officials railing against bonuses? Traders who were paid millions to put on the positions that are now sinking their (former) employers? Or, perhaps it’s the fact the C.E.O.’s and executives who are used to taking no risk whatsoever, as Felix also intuits, and are used to being compensated in the ponzi scheme that has the slogan, “in line with our peers.” This sort of groupthink, parading as transparency (that only pertains to rising compensation, obviously) has been championed by familiar names. But, other familiar names have been railing against exactly this sort of thing (yes, all of those links are to distinct posts on the Icahn Report …). I wonder if some of those executives are angry at having to give up theirs and not being able to inflict the same on their minions… Not totally unjustifiable, after all it wasn’t John Mack who persoanlly took the positions that have caused writedowns at his firm, just like it wasn’t Vikram at Citi. Still, when the kings get stung you know the subjects will feel it.

This relates to some other topics on anti-competitive behavior, but I’ll leave those for the time being.

The Return: An Interesting Sign of Confidence

In the beginning, there was Charles Schwab returning to the epononymous firm. Then there was the return of John Mack to Morgan Stanley. Then, there was Jeff Kornthal’s return to Merrill. And now, there is Mike Gelband returning to Lehman Brothers. High level executives coming back into the fray seems to be both a huge vote of confidence and a harbinger of the worst being behind or nearly over.

This, to me, sends a huge signal. If you left, when things were good, and then an unmeasurable storm sets in, why would you return? One would need to be very confident that things were over. A returning executive would need to have a high degree of comfort that the problems internally were well understood and able to be fixed. If these sorts of tests weren’t met then why would one re-marry their fate to a firm they specifically took a financial risk divorcing? One thing never lies, I’ve noticed–the people indicators. Now, Mr. Gelband might be wrong, or things might get worse, but still…

Disclosure: I recently bought some shares of LEH … and I’m feeling pretty good about that move right about now.