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Monday, November 06, 2006

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Arthur Eckart

There's so much concern about top executive pay. Yet, there seems to be almost no concern about high pay of actors, musicians, sports stars, etc. Society seems to value entertainment (including stereos, televisions, computer games, etc.) more than anything else, and it's willing to be more forgiving when entertainers fall below (lower) moral standards.

Lafayette

AE: "Yet, there seems to be almost no concern about high pay of actors, musicians, sports stars, etc."

One can appreciate (or not) the value of a performer, whether in the arts or sports. It tends to be obvious.

This is not always the case with executives. Some studies were done in a period when American industry was in a very dynamic acquisition phase that showed no or little shareholder value added, over time, by the acquisitions. The sum of the equity values before were almost equal to the whole after.

Then there are the accusations of Compensation Committees not being overly rigorous with their estimations of an executive's value. There are far too many instances when compensation went up when shareholder equity was heading down. Not to mention the current scandal of stock-option back dating ...

"Paying a competitive salary" is a head-hunter's favorite byword. The higher the initial salary, the more their commission. So, they will bump up a salary anywhere they can.

All this leads to a dark suspicion that, as regards corporate governance, compensation is not fairly estimated but in the hands of the CEO who fixes it as his/her whimsy. And, that will not change until there are more rules (laws?) about how Boards of Directors run companies. For the moment, they have pretty much full reign to do as they please with shareholder equity value - since the shareholder base is only remotely related to the decision making process. Business is not democratic and never has been.

Frankly, it would help if CEO pay would be capped at a level, say 100 times the average in the company, including stock options. And let the cards fall where they may. This would go a long way towards correcting the imbalance of 80% of America's generated wealth going to only 20% of its population - the other bit being stiffer inheritance laws.

Arthur Eckart

Lafayette, there will always be crooked top executives and I'm sure they'll get lots of media attention. However, given how much value they create for society, they seem underpaid, particularly compared to at least some entertainers (for example, were those actors on Friends really worth $1 million an episode?). It's unfair to place caps on some professions and not on others. Who will place them, the government?

Lafayette

AE: "given how much value they create for society, "

If only. The above should read "given how much value they create for themselves".

The crooked executives that are going to jail are only the tip of the iceberg. Manipulation of corporate equity, for the personal benefit of top directors, is worse than ANYONE is willing to imagine because it is so subtle and below the radar line.

The "unfair" attribution of corporate equity assets to a class of people (who all know one another very well being in cross-BOD positions of companies) is as if they had a common license to plunder corporate treasuries. You stroke my back and I'll stroke yours.

If you or I rob a bank of a $100,000, we are bound to go to jail for 20 years. But, these people "derive" corporate assets by the millions ... and its all legal.

Let's wake up. The realm of corporate management requires legislation. Whether I own ten or ten thousand shares of any given company does not amount to a hill of beans. And, yet in terms of equity I do OWN corporate assets that are being stolen from right under my eyes. What can I do about it? Nada.

(And Spitzer only scratched the surface.)

Corporate success is due to excellent execution of a well-formulated strategy by competent individuals (meaning, by the hundreds or thousands in the rest of the company). A CEO is lucky if he/she puts together the right ingredients (including a good idea) and the recipe works. Another CEO putting together a similar recipe will get awful results. Its uncanny that, given similar circumstances, one wins and the other loses - and no one can understand why.

So, success is simply a matter of luck. Consider this - Bill Gates had three tremendous pieces of luck that made his fortune: (1) the developer of competitive CP/M operating system, Gary Kildall, died in an airplane accident, and CP/M as an MS-DOS killer died with him, (2) Steve Jobs let Bill Gates get too close to the Macintosh engineering team and (3) when Jobs finally tried to stop Gates, a judge subsequently determined that Windows and the Macintosh were "different pieces of software" and the former therefore not a derivative of the latter.

All the rest of Microsoft's "success story" is mostly Balmer and Gates driving hard to impose its operating system hegemony and then leveraging it. For which the company was found guilty of abuse of a dominant position.

Can one blame them for doing so. Of course not. Was it "fair"? No, not fair either. You and I paid monopolistic prices for MS products and we still do today.

Did anyone go to jail for ripping off the public with monopolistic pricing for two decades? Nah .... nothing succeeds like success.

Arthur Eckart

Lafayette, the performance of U.S. corporations prove top executives are generally doing excellent work. Revenues and profits are growing at high rates, while balance sheets have become strong. If illegal activity in corporations is rampant, as you suggest, there would be many more executives going to jail rather than a few. Honest mistakes can be made when there's a great deal of regulation. Running a large corporation successfully is not easy. Also, I wouldn't attribute Bill Gates success to luck. Many skillful decisions had to be made. An old saying is "luck is the residual of design." People are willing to pay $100 for a (standardized) operating system, because it's worth more than $100 (and Gates is worth $50 billion, because he created more than $50 billion of value to society). In the late '90s, 3,000 Microsoft employees became millionaires working for Microsoft. So, a lot of value was created by Microsoft.

Lafayette

AE: "People are willing to pay $100 for a (standardized) operating system, because it's worth more than $100 (and Gates is worth $50 billion, because he created more than $50 billion of value to society)."

He did so in a monopolistic market. That Microsoft had a "natural monopoly" is not disputed. But, it was condemned for its abuse of a dominant position for "bundling" - exactly the same reason that IBM was also found guilty in the 60s/70s. Fines were inflicted but no one went to jail.

Crime pays, especially corporate crime, which is not only the manipulation of markets but compensation derived from BODs packed by complaisant business cronies. It has become a culture. Why? Because there is no legislation that regulates "prudent business decision making" by these people have a fiduciary responsibility to oversee communal property owned by stockholders. Why is malpractice punishable under law if performed by a doctor? Why not executives?

Once again, your sole term of reference is profit, profit, profit. These guys are making profit so they must be doing something right, and that means they "deserve" comp & ben that is a 1000 times the average salary of the company. I don't hold with that. General Motors is more than around two hundred or so "Executives" who rake in most of the compensation. It's also the thousands of others who do the grunt work. Where's their "stakeholder stock-options"?

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I think its relatively easy to convince people that something can feel good about what they did, and I do continue.

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