Should Wall Street direct a portion of bonuses to shareholder dividends?

[steelyman]

I suppose the subject says it all. There's lots of talk over the past couple of years about taxpayer bailouts and ongoing quite large Street bonuses. Complicating the matter are tax increases, likely inflation, and attacks on unions.

I wonder what people think about the option of redirecting at least a portion of bonuses handed out on Wall Street towards shareholders of those firms. Dividend increases of a few pennies are common, it seems the shareholders (many of whom are indirectly holding through index funds intended to fund their retirements) might welcome them.

 

[M Paquette]

It's a nice idea, but the C-suite crowd isn't likely to go for it.

"What? Give some of our hard-earned bonuses to shareholders? Outrageous!"

"Hrmph! Damn shareholders act like they own the company sometimes..."

 

[MichaelB]

Shareholders are there to accept the consequences - and losses - when unforeseeable events result in unpredictable and unavoidable losses for companies. On the other hand, profit growth is always the outcome of excellent strategy choice and implementation by corporate leadership. If not properly compensated, corporate leaders will simply quit and go work for someone else. Think for all the risk these CEOs are taking.

In addition, executive compensation is always determined by BoD compensation committees that act in the best interest of shareholders but are chosen and compensated by the CEOs their recommendations will affect. No possibility of conflict of interest, right?

One interesting aspect of corporate executive compensation is how most CEOs are paid above the average of all the CEOs in their peer group. Do the math on that for a while and see what happens.

 

[ERD50]

steelyman - regardless of whether you or I think it is a good idea or not, what would be the mechanism for this to happen? And why should anyone else be telling a private company what they should do with their money?

I do think there is too much "good ol' boy" networking going on between CEOs and BODs - fix that and the other problems will fix themselves. One of the areas where I thing govt involvement is warranted is when one group gains monopoly-like power over others. But I'd prefer to see govt level the playing field and let nature take its course, over any attempt to micro-manage the game.

In addition, executive compensation is always determined by BoD compensation committees that act in the best interest of shareholders but are chosen and compensated by the CEOs their recommendations will affect. No possibility of conflict of interest, right?

This sounds a lot like the problem with public unions voting en block for the candidates that will have input on negotiations with those unions. No possibility of conflict of interest, right? Hopefully, both problems will be resolved, but I'm not holding my breath.

One interesting aspect of corporate executive compensation is how most CEOs are paid above the average of all the CEOs in their peer group. Do the math on that for a while and see what happens

.

Where did that 'statistic' come from?

-ERD50

 

[NW-Bound]

Think for all the risk these CEOs are taking...

Yep!

Head, the corp makes good money, CEO gets $50M bonus.

Tail, the corp's balance sheet is in the toilet. CEO bails out with a golden parachute of $10M.

Man, tough risk!

 

[clifp]

To me one of the biggest problems is that large institutional shareholders are not doing a good job acting like owners. All to often mutual fund just go along with whatever management suggests for compensation.

It is actually one of the hidden dangers of index funds. It used to be a corporate "raiders" like Carl Ichan, would tell management you need to do a better job in make us owner money and not yourself. If you don't I'm going work hard to get you fired. Even active fund manager and some pension plans, would sometimes complain to management and more importantly would vote with the their dollars, if the company was making the CEO rich at the expense of the shareholders, they'd sell the stock.

With some much of S&P 500 owned by index funds, or closet index funds there is no practical way for shareholders to punish bad/greedy managers.

Full disclosure I always ignore proxy statements, cause I figure it is like voting in a Iran, we know the results why bother.

 

[kyounge1956]

(snip)One interesting aspect of corporate executive compensation is how most CEOs are paid above the average of all the CEOs in their peer group. (snip)

Is that mathematically possible?

 

[M Paquette]

Is that mathematically possible?

I think he was referring to the wonderful world of executive compensation committees. These folks pay for compensation surveys that show statistics on executive compensation sliced and diced into various categories such as company size, sector or market. They pick out the slice that they wish their firm was in and look at the average compensation. Since their CEO must be above average or the board wouldn't have hired him, they naturally set the compensation well above the average so the CEO won't be upset and leave.

The math works, for small values of work. It helps if you are a big fan of geometric growth of top end salaries.

 

[steelyman]

steelyman - regardless of whether you or I think it is a good idea or not, what would be the mechanism for this to happen? And why should anyone else be telling a private company what they should do with their money?

-ERD50

My answer is almost certainly naive, but: the mechanism is that the companies increase dividends and reduce bonuses. As for the second: these are public companies, not private. If they don't want outside input, then go private.

 

[MichaelB]

Is that mathematically possible?

M Paquette got it. I used to read 10-K and proxy statements. It was amazing how many followed the same template: define a series of measurements, indicate a target peer group, and then declare their CEO to be paid in the top 1st or 2nd quartile if targets were achieved.

The math clearly projects exponential growth in compensation, which is what has happened over the past 20 years.

This sounds a lot like the problem with public unions voting en block for the candidates that will have input on negotiations with those unions. No possibility of conflict of interest, right? Hopefully, both problems will be resolved, but I'm not holding my breath. -ERD50

The problem with US corporate executive compensation is not likely to be fixed anytime soon because 1) shareholders have no rights to influence compensation, 2) shareholders cannot nominate directors (notwithstanding the recent change which is too limiting in scope), and 3) in the US the CEO and the chairman of the BoD are the same. Conflict is built into the system. These rules are court tested in Delaware and will only change if Federally mandated.

Public sector employee compensation is a problem but if there is conflict of interest it does not reside with the employees or unions, it resides with the leadership - governors, mayors, and other State and local leaders. The real problem is not the excessive compensation but not recording the financial liabilities.

The key difference is that the situation with public employees is simple to correct.

 

[youbet]

The key difference is that the situation with public employees is simple to correct.

Yeah, just ask the merchants, business owners and residents of the downtown Madison, Wis, area.

 

[MichaelB]

Yeah, just ask the merchants, business owners and residents of the downtown Madison, Wis, area.

I didn't say it would be easy. It won't. It will be painful and politically difficult. But it is not complex. Reducing budget and funding future liabilities means cutting compensation and jobs.