More people forced into ER and early social security

[traineeinvestor]

I am not a fan of defined benefit schemes - too much uncertainty for both the employer, the employee and the employer's shareholders. As an employee, I much prefer having control over my own money and the certainty of knowing that I am not at risk of having my financial position eroded by actuarial shortfalls or other problems. As an investor, I prefer not to invest in companies which have substantial obligations which are either inadequately funded or which inflate the company's cost structure and render it less competitive than other companies.

In addition, I totally fail to understand why an employer should be expected to take any responsibility for the financial well being of an employee once the employee ceases to be employed (injury on the job or similar being the only exception which comes to mind).

Given the wide range of issues associated with adequately funding retirees' financial needs, I am increasingly a fan of the Australian model - complusory contributions from employers and employees with simple default options for those who do not wish to make decisions on how to invest and a very substantial degree of flexibility for those who wish to manage their own money.

 

[clifp]

I agree with a lot of your post, but don't put all the blame on people for the impending disaster. Sure, people should spend less, but the destruction of the defined benefit pension plan is a major component of the problem and that's down to employers wanting to boost profits and take compensation away form employees to give to shareholders. It worked for a while, but was as shortsighted as spending recklessly.

In the old days people use to have a pension plan is a myth. From my research at no point were more than 1/3 of Americans employed in the private sector ever covered by defined benefit plan and those fully vested probably in the 25% range. Up until the 401K plan most American's had NO retirement plan. The majority of American don't work for either the Government or a Fortune 500 corporation, they work for small or medium business. In fact I think former and even current worker of small or medium business are probably the most underrepresented on this board. Probably because it is hard for them to retire early without the generous benefits offer by government and many megacorps.

It has never been practical for small or medium business to offer pension plan. To which I say thank god, or the pension mess we are currently in
would be even worse.


I think as a society and individually we lived beyond our means for too long. Sadly I don't have clue how to fix the problem, but pining for corporation to bring back the mythical pension of yesteryear is definitely not a solution.

 

[NW-Bound]

I am not a fan of defined benefit schemes - too much uncertainty for both the employer, the employee and the employer's shareholders.

+1.

And some of those schemes are really "schemes"! Has anyone missed the recent thread on the $600K/year pension of the city manager of the town of Bell in California? The one where, somehow, several adjacent towns will have to pitch in to cover that liability?

 

[BTravlin]

In addition, I totally fail to understand why an employer should be expected to take any responsibility for the financial well being of an employee once the employee ceases to be employed (injury on the job or similar being the only exception which comes to mind).

Same for employer provided/subsidized health care. Probably one of the reasons health care is such a mess now.

Given the wide range of issues associated with adequately funding retirees' financial needs, I am increasingly a fan of the Australian model - complusory contributions from employers and employees with simple default options for those who do not wish to make decisions on how to invest and a very substantial degree of flexibility for those who wish to manage their own money.

I would have liked to have operated under such a system.

 

[ziggy29]

And some of those schemes are really "schemes"! Has anyone missed the recent thread on the $600K/year pension of the city manager of the town of Bell in California? The one where, somehow, several adjacent towns will have to pitch in to cover that liability?

They are "schemes" to the taxpayer, but not to those fortunate enough to receive one...

Depends on which side of the fence you're on -- whether you're on the inside or on the outside looking in...

 

[nun]

Agreed.

Rather than vague promises of future payments, I would much prefer to see this money in my paycheck now so that I could save/invest/diversify it myself.

Tim

Me too, the thing is that people didn't see the money in their wage packets. I like 401k plan's versatility are that I have control over them, but most people thought that they were getting a benefit of equal value as well and that wasn't the case.

I once worked for UTC and had a 401k and a DB plan. My division was very small and full of entrepenurial scientists and engineers doing cutting edge research and contracts for the US Government. We had a great "esprit de corps". Then UTC sold us and the new owners didn't have a DB plan so even though the employees all had individual contracts we asked for wage increases worth the future value of the pension. Being physicists and engineers we had all the numbers to hand and a not much of a regard for authority. The new company offered us a Money Purchase Pension Plan (MPPP) that they would fund. We accepted. However, 3 years latter they "improved" our benefits and told use that the MPPP would be replaced by stock options. At this lots of people left and I ended up at a local University. The company was screwed for about 2 years until they could hire new people. They are still in business and have reduced costs so on one level its a success story, but the people who stayed tell me that the atmosphere has been poisoned, their stock options are worthless and they no longer go the extra mile, they do just enough.

The ironic thing is that the University where I work has a DB and a 401k plan, both are funded by 11% mandatory deductions and a 5% match from the University, and I chose the 401k plan as I knew that it would be less than 10 years until I ERed. So 401ks are great in some circumstances.

 

[MichaelB]

When large layoffs became a common management tool (mid to late 80’s), execs then said it was due to skill mismatch, and it was up to employees to make sure their skill sets were what companies needed. Similar to the pension discussion we’re having here.

US business has learned to extract value from labor while reducing benefit cost, holding compensation, and limiting training and education. This has led to historically high labor productivity and profit margins. Profits, however, have not been reinvested in labor either directly (training) or indirectly (taxes, then skill development). They have, however, been used to reward senior corporate management. Hundreds of billions have been transferred via stock compensation and little tax has been paid on that (relative to average labor tax rates).

Yes, it is up to people to make the right choices early in life, in education as well as finances. The deck is stacked against the average family, however, and as long as senior corporate management benefits personally (and obscenely), it’s hard to see how this will change.

 

[dex]

They have, however, been used to reward senior corporate management. Hundreds of billions have been transferred via stock compensation and little tax has been paid on that (relative to average labor tax rates).

Heads of large US Corps do get paid more than foreign corps and higher than prior to the mid 80s (my guess). But this compensation issue is a dividing point and doesn't help anyone. The amount of money doesn't move the needle on the P&L of large corps. Take away all the compensation from all the executives of large corps and we would still be in the same place.

 

[clifp]

Heads of large US Corps do get paid more than foreign corps and higher than prior to the mid 80s (my guess). But this compensation issue is a dividing point and doesn't help anyone. The amount of money doesn't move the needle on the P&L of large corps. Take away all the compensation from all the executives of large corps and we would still be in the same place.

I agree while certainly in individual case the pay is obscene given the poor performance of the CEO. Collectively it isn't a huge amount of money. Collectively last Fortune 500 CEOs made 5.7 billion compared to earnings of 391 billion.and revenues of 10.7 trillion. By way of comparison the payroll of Major league baseball is 2.8 billion, and the average salary is 3.3 million. So on average the Fortune 500 CEO earns three times a baseball player. Is this really that outrageous?

 

[harley]

Heads of large US Corps do get paid more than foreign corps and higher than prior to the mid 80s (my guess). But this compensation issue is a dividing point and doesn't help anyone. The amount of money doesn't move the needle on the P&L of large corps. Take away all the compensation from all the executives of large corps and we would still be in the same place.

True as far as it goes, but on an individual basis this is a lot of money and it can cause the executives to make incredibly unsafe bets in order to get the short term jump in corporate value that drives those salaries and bonuses.

I agree while certainly in individual case the pay is obscene given the poor performance of the CEO. Collectively it isn't a huge amount of money. Collectively last Fortune 500 CEOs made 5.7 billion compared to earnings of 391 billion.and revenues of 10.7 trillion. By way of comparison the payroll of Major league baseball is 2.8 billion, and the average salary is 3.3 million. So on average the Fortune 500 CEO earns three times a baseball player. Is this really that outrageous?

Yes it is. In the frst place a baseball player is (or should be) paid based on his relatively short term perfomance. It is measurable, and it is known that he's going to burn out and possibly be crippled or in pain for the rest of his life. Most, but not all, pro athletes earn what they are paid. Plus, they are entertaining. CEO pay is based on the same concept, but the measurements are easily manipulated. At least the cheating ball player is putting the steroids in their own bodies. The executives are shooting up the shareholders without their knowledge.

If a company wants to pay a corporate hotshot to run it, I have no problem with that. If they put in their 10, 20, or 30 years, then give them a hefty (but reasonable) pension. But I think any BoD worth their salt should insist on clawback clauses in the contract, and these multi-million dollar pensions after working for 14 months are absurd.

Oh well, just one more thing to put in the "if I ran the world" folder.

 

[haha]

True as far as it goes, but on an individual basis this is a lot of money and it can cause the executives to make incredibly unsafe bets in order to get the short term jump in corporate value that drives those salaries and bonuses.

This is huge. Also often misunderstood is the amount of actual cash generated that goes out the back door as stock grants and options. Sometime look at the algebraic total of stock buybacks and flotations as compared to the year over year change in share count. Stock buybacks get sold to the stock buying public as returning money to the shareholders, but in tech companies in particular this is rearely true. Buybacks are mostly used to sterilize or partially sterilize options excercised and stock grants. Another (deliberate) obfuscation is the way that options are valued in the expense accounts. They should be valued by the Black -Scholes formaula at the time of granting, although there may be acompany somewhere that does this I don't know which one it is.

Most of what is written about this is poorly informed speculation.

Microsoft is a relatively clean company with its executive and employee compensation practices and accounting.

Ha

 

[ziggy29]

Yes it is. In the frst place a baseball player is (or should be) paid based on his relatively short term perfomance. It is measurable, and it is known that he's going to burn out and possibly be crippled or in pain for the rest of his life. Most, but not all, pro athletes earn what they are paid. Plus, they are entertaining. CEO pay is based on the same concept, but the measurements are easily manipulated. At least the cheating ball player is putting the steroids in their own bodies. The executives are shooting up the shareholders without their knowledge.

Some corporate executives clearly add so much value to their businesses and to the overall economy that they probably are worth what they are paid and maybe even more. Warren Buffett and Steve Jobs come to mind.

Unfortunately I think they are outliers.

Having said that, in terms of moving the overall corporate needle CEO pay is often fairly insignificant to a corporation that reports annual revenues in the tens of billions (if not more). But to the degree it creates unrest and agitation for change, it is a symbolic reminder of the erosion of the middle class and the slow but steady increase in the gap between haves and have-nots and may not be the best prescription for keeping the domestic peace. Many revolutions have been waged over too much wealth concentration in too few hands.

 

[haha]

Some corporate executives clearly add so much value to their businesses and to the overall economy that they probably are worth what they are paid and maybe even more. Warren Buffett and Steve Jobs come to mind.

Unfortunately I think they are outliers.

Having said that, in terms of moving the overall corporate needle CEO pay is often fairly insignificant to a corporation that reports annual revenues in the tens of billions (if not more).

Revenue is the wrong metric. Compare value that goes to the insiders vs. value that goes to the shareholders. Sometimes the execs get 1/10.

Ha

 

[ziggy29]

Revenue is the wrong metric. Compare value that goes to the insiders vs. value that goes to the shareholders. Sometimes the execs get 1/10.

Maybe, but I wasn't intending to produce an optimal metric, just a general observation about how the impact of executive pay on overall corporate operations is probably overrated in a lot of cases.

 

[clifp]

Yes it is. In the frst place a baseball player is (or should be) paid based on his relatively short term perfomance. It is measurable, and it is known that he's going to burn out and possibly be crippled or in pain for the rest of his life. Most, but not all, pro athletes earn what they are paid. Plus, they are entertaining. CEO pay is based on the same concept, but the measurements are easily manipulated. At least the cheating ball player is putting the steroids in their own bodies. The executives are shooting up the shareholders without their knowledge.

If a company wants to pay a corporate hotshot to run it, I have no problem with that. If they put in their 10, 20, or 30 years, then give them a hefty (but reasonable) pension. But I think any BoD worth their salt should insist on clawback clauses in the contract, and these multi-million dollar pensions after working for 14 months are absurd.

Oh well, just one more thing to put in the "if I ran the world" folder.

First I confess I don't follow baseball at all, so I maybe wrong here.
But in general when team signs a contract with a player they are looking at recent past performance and projecting it to the future. So when A Rod get his 275 million for a 10 year contract it is based on his early amazing career. He is hitting .260 this year and presumably put fans in seats. But I don't think even the Yankees would pay 33 million for a .260 hitter and I doubt there is a clawback provision if he finished his career as 250 hitter with 10 15 HR/season. i guess that A Rod gets bonus for certain achievements but the bulk of his salary is guaranteed regardless of his performance.

CEO also sign contracts based on past performance. At least the good boards try to tie the pay of CEOs based on performance, in particular the stock performance. Now you are right the downside of options and restricted stocks is it does encourage CEOs to take excessive risks. For both CEOs and sports stars there are severe penalties for their employer to cancel the contracts which is why we end up with golden parachutes and large pension but that is a function of contracts in this country.

I agree that there is a lot that is wrong with executive compensation and in particular corporate democracy is completely broken. That said the numbers don't lie and $5.7 billion is 1/2 of 1% of Fortune 500 revenues, neither cutting every CEO salary to $1 year or doubling them would make much a difference to our economy.

 

[NW-Bound]

CEOs like Warren Buffett and Steve Jobs are far and few in between. I dare say that most CEOs can be fired and the corporation would not miss them. Many may even prosper.

 

[ziggy29]

CEOs like Warren Buffett and Steve Jobs are far and few in between. I dare say that most CEOs can be fired and the corporation would not miss them. Many may even prosper.

Agreed. Which is why I called them "outliers."

 

[clifp]

CEOs like Warren Buffett and Steve Jobs are far and few in between. I dare say that most CEOs can be fired and the corporation would not miss them. Many may even prosper.

I disagree of the score of CEOs I've meet ranging from entrepreneurs leading 10 people to the CEO of Adobe, Compaq, IBM, Intel, Lotus,Microsoft employing ten or even hundred thousands. I have found the vast majority of them are significantly smarter than I am and all work much harder. (Now I'll admit to being lazy but not stupid.)

 

[harley]

First I confess I don't follow baseball at all, so I maybe wrong here.
But in general when team signs a contract with a player they are looking at recent past performance and projecting it to the future. So when A Rod get his 275 million for a 10 year contract it is based on his early amazing career. He is hitting .260 this year and presumably put fans in seats. But I don't think even the Yankees would pay 33 million for a .260 hitter and I doubt there is a clawback provision if he finished his career as 250 hitter with 10 15 HR/season. i guess that A Rod gets bonus for certain achievements but the bulk of his salary is guaranteed regardless of his performance.

CEO also sign contracts based on past performance. At least the good boards try to tie the pay of CEOs based on performance, in particular the stock performance. Now you are right the downside of options and restricted stocks is it does encourage CEOs to take excessive risks. For both CEOs and sports stars there are severe penalties for their employer to cancel the contracts which is why we end up with golden parachutes and large pension but that is a function of contracts in this country.

I agree that there is a lot that is wrong with executive compensation and in particular corporate democracy is completely broken. That said the numbers don't lie and $5.7 billion is 1/2 of 1% of Fortune 500 revenues, neither cutting every CEO salary to $1 year or doubling them would make much a difference to our economy.

I don't follow baseball either. The only players whose names I know have been called before congressional hearings.

IMo, only the gov't, the MSM, and the TV watching public think lowering executive pay will improve the bottom line monetarily. Those with reasoning skills realize it's not the dollars going out of the companies, it's the dollars going into the executives pockets. Hey, it may be the same amount of dollars, but it's the reason for the change that is important. I disagree that cutting the CEo salaries wouldn't make a difference to the economy. I believe that if a way could be found to compensate executives fairly and without serious conflicts of interest it would make a HUGE difference in the economy, because they would be paying attention to the corporate bottom line and future, instead of so much their own.

That said, don't ask me how. I can tell when somethings broke, but not always how to fix it.

 

[NW-Bound]

I myself have not had the chances of meeting many CEOs, and only learn of their ability by observing their actions, and by reading reports by the media. There aren't many that I would call "stupid". In fact, I have no doubt that most of them are smarter and surely work a lot harder than this loafer (heh heh heh I spend a lot of time here, don't I).

But I simply doubt that most of them truly deserve the compensation of hundreds of million that they get, or that the success of their company is due to their leadership and not the economic wind direction or some fate.

 

[ziggy29]

I disagree of the score of CEOs I've meet ranging from entrepreneurs leading 10 people to the CEO of Adobe, Compaq, IBM, Intel, Lotus,Microsoft employing ten or even hundred thousands. I have found the vast majority of them are significantly smarter than I am and all work much harder. (Now I'll admit to being lazy but not stupid.)

I'm sure most are more savvy and "business smart" than most. But do they individually add THAT much more value than someone else who might be available just below the CEO level?

I'm going to use what I think is a pretty apt comparison. In baseball, stat geeks have a statistic called "WARP" which stands for "Wins Above Replacement Player." In other words, in a season of 162 games, how many more games does this team win because this player and not a typical "replacement" level caliber in AAA (the highest level of the minor leagues) or on a major league bench was in the lineup every day? Keep in mind that a good AAA player makes very little and a major leaguer makes about $450,000 at minimum and over $10 million a year on the high end; a AAA player probably doesn't get over $30-40K. And even a mediocre AAA player is a far better baseball player than we'll ever be.

A really good player might have a WARP score of 5; that is, the team wins 5 more games over the course of 162 *because* they have this star player instead of another "average" substitute. If you're giving a huge contract to someone with a WARP of 1 or 2, at best, you are probably overpaying for little outperformance.

That is the appropriate benchmark, IMO -- there are a lot of folks who are "smarter" and with more "business sense" than you or me. The real question is -- how much value does THIS CEO add compared to the typical aspiring executive in the "wannabe" pool?

Guys like Buffett and Jobs are off the charts. Buffett adds ridiculous value at a salary that even I exceed. (Obviously he owns so much Berkshire stock that his "pay" is measured in the appreciation of Berkshire stock and his salary doesn't move the needle.) Apple was alive and thriving until the late 1980s, started floundering and was almost dead in the mid 1990s only to stage a Lazarus-like comeback. The common theme in prospering? Jobs. When he was gone, Apple was dying. When he was there it thrived and thrives again today.

Buffett and Jobs have a corporate "WARP" off the charts and are worth an awful lot to the business. Many other corporate CEOs are barely better (if at all) than those who are "on the bench" and would do the job at a much lower level of pay.

 

[harley]

That's an excellent analogy and explanation. Good job!

 

[MichaelB]

Yes, it is a problem, and is so much bigger and broader than most people acknowledge.

Ha – exactly. It’s right there in the hidden depths of the 150 page 10k statements written by lawyers.

Ziggy – only Buffet stands alone, because he is the only one to have acquired all his wealth through his share ownership and not stock options or other transfers. Not even Jobs or Gates can say that.

From mid 80’s to today probably 10% - 20% of total market cap value of corporations has been transferred from shareholders to corporate management. This started with CEOs, and as the amounts grew, others came to get their share. Lawyers and bankers, because they help to keep it obscure and keep the taxes low. BoD, then senior management, 1-2 levels below the CEO and company directors, because otherwise they wouldn’t support the outrageous compensation the CEOs were getting.

Now it is a self-sustaining sub-segment of the economy. You can see it in the income distribution data where there is a huge bubble in the top 1%.

Corporations can point to increasing profit margins as proof of merit, and they are telling the truth. But not the whole truth, because it is at the expense of investing in the US infrastructure and workforce. Now the golden goose is starting to look a bit dull.

I gotta go do the dishes...

 

[Otter]

CEOs like Warren Buffett and Steve Jobs are far and few in between. I dare say that most CEOs can be fired and the corporation would not miss them. Many may even prosper.

That may be why one congressman after hearing the CEO of BP said aside, "Anyone can do his job."

 

[Gumby]

Excessive executive compensation distorts the essence of capitalism itself. We no longer have corporations run as profit maximizing enterprises for the benefit of the equity owners/shareholders, but as wage and bonus maximizing enterprises for senior management. This can and does lead to suboptimal allocations of capital and substantial inefficiencies in operations.