[pdmunro]

From Warren Buffett's recent (2009 Financial Year) Letter to shareholders:

"In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.

It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well."

http://www.berkshire...ers/2009ltr.pdf

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My personal opinion

I recently heard a TV interviewer ask President Obama if there was anything that could be done to force the top financiers to get "their snouts of the trough". My personal opinion is that this is the wrong question - it is not pointed enough. I think it should be: "What is being done to force these top financiers to get their hands out of the till?" I honestly believe they are committing robbery. Robbing both shareholders and customers. They are committing crimes and have got away with it because we have an implicit trust that there are mechanisms in place to stop people from stealing.

For their part, the top financiers probably twist their undeserved remuneration packages in their own minds to be nothing more than equivalent to having "won the lottery". We go along with it, looking upon multi-million dollar paymernts with a mixture of envy (secretly hoping we might get to that level) and blind acceptance that they must be worth it. Do our minds misconstrue $20 million as some small multiple of the average worker's $50 000 pay packet? In fact the CEO is receiving 400 times the average.

Are we unable to appreciate that no one can work 400 times harder than the average? Are we unable to see that this is unsustainable? That it is damaging the business? That it is robbery?

And where is the financial press in all this? Why is there no examination of the role that these multi-million dollar robberies play in wrecking a financial system?

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[Jlall]

haters gonna hate

[Lobowolf]

pdmunro, on Apr 16 2010, 11:48 PM, said:

Do our minds misconstrue $20 million as some small multiple of the average worker's $50 000 pay packet?  In fact the CEO is receiving 400 times the average. 

Are we unable to appreciate that no one can work 400 times harder than the average? Are we unable to see that this is unsustainable?  That it is damaging the business? That it is robbery?

I'm pretty sure my gardener works harder than my doctor, or darn close to it, but if they charged the same amount, I wouldn't want anything to do with one of them, if not both.

[rogerclee]

I don't know a whole lot about this subject but:

1) A lot of the huge figures that people read about actually come from long term incentives for CEOs. If it says a CEO of some company made x millions of dollars in stock options some year, it is usually a result of a long term incentive plan, not just one year's work.
2) Management talent is actually in high demand. A lot of foreign firms are willing to pay American executives millions of dollars in order to recruit them and modernize their companies. Consequently American executive salaries must be high enough to convince them not to work elsewhere.
3) CEO pay must be tied to company performance, because paying a CEO by what he does doesn't really make any sense; it's not observable. Thus the theory says to tie their salary with company performance in order to motivate them. It's also why CEOs of successful companies get paid a lot of money.

Also the idea that people should be paid according to their effort works neither in theory nor in practice.

Not saying there isn't anything wrong with the way CEO pay is handled in America, but basically, it's not as ridiculous as it looks from first glance.

[pdmunro]

rogerclee, on Apr 17 2010, 02:21 AM, said:

2) Management talent is actually in high demand. A lot of foreign firms are willing to pay American executives millions of dollars in order to recruit them and modernize their companies. Consequently American executive salaries must be high enough to convince them not to work elsewhere.

You might be interested to know that in Australia where I live, the reasoning continually given by our renumeration committees for the outrageous remuneration packages given to CEO's is that if we don't pay them multi-millions then the chief executives will head off to the US. In other words this talk about CEO's going elsewhere is primarily self-serving spin.

I recall from the distant past, a senior executive of a multi-national saying that the idea that the high-flyers under him needed high salaries to motivate them was pure baloney. His words were memorable: "In fact, they are so driven by the need to compete, they would work for coke bottles". And I am assuming, he was talking about empty coke bottles that they could take to the corner store for a refund.

I work for a very successful not-for-profit company attached to a university. The first day on the job the CEO invited me into his office for a coffee. I recall him mentioning to me in jest, that, unfortunately, we were not-for-profit. The implication being that, if we could keep the profits, then instead of the money having to be plowed back into improving the services to our clients, he could simply pocket a few million and slip quietly into retirement.

I guess he earns about 3 times my $75 000. So about $200 000. I am sure he would say that this is a fair compensation for his workload and stress.

[EricK]

The issue is not how well they do when their copmanies do well, but how well they do when their companies do badly.

[pdmunro]

EricK, on Apr 17 2010, 03:50 AM, said:

The issue is not how well they do when their copmanies (sic) do well

As I see it, this actually a key part of the problem. My natural instinct is to save for a rainy day. Why throw all that money away? Surely it creates a bigger boom-bust cycle,

Isn't the world trying to work through the following scenario?

Following the lead of the US, we saw governments around the world implement policies to encourage lower-middle income earners to buy their own home. Under government pressure, central banks set their interest rates at low levels. Entities such as Freddie Mac et al. lent to all comers.

Under these stimulii, economies boomed. So should Freddie Mac et al.'s chief executives be allowed to put their hands into this multi-billion doallar till? I don't see how this can be prudent.

If the authorities judge that the situation is truly sustainable, then the excess money should surely be used to ensure that home loan rates remain at levels that lower middle-income earners can afford. Instead, the industry entered a phase where home loan rates were merely held low for an initial two years, then set to double - an event guaranteed to trigger a high level of defaults.

Surely it was the financiers' job to know that the whole appearence that the economy, and in particular the finance industry, was doing well was illusionary. Unfortunately, this seems beyond their capabilities. As one of our senior banking officials put it here in Australia, "A lifetime in the industry has taught me one thing: bankers have no memory."

I find that a terrible, yet understandable, indictment of the industry. Obviously people get so caught up in their excitement (Did I hear you say "hubris"?) that they believe that the party will never end.

In times of irrational exuberance, it becomes the duty of cooler heads in central banks to pour cold water on the financiers:- To examine the credit risks that banks are taking. To impose conditions on banks that will force them to tighten lending. To forcefully remind the bankers that the economy is merely experiencing another credit boom.

So can the bonus culture - surely, a root cause of irrational exuberance - be regulated? As the lender of last resort, central banks must have influence over bank bonuses. Can't they insist that share options are "marked to market" and put on the banks' books as an expense? Don't the share holders deserve to know what the true profits are after the bankers have taken their bonuses?

Also, the governement as guarantor to Freddie Mac's operations, should have mandated control over the bonuses in that operation. How can a "no-doc" loan be regarded with anything but suspicion? Why should bonuses be paid to executives who encourage such reckless lending?

I guess the whole "bonus culture" is a hot topic in government circles. But as far as I can tell, it is all taking place behind closed doors. When will it be brought out into the open?

[Winstonm]

Lobowolf, on Apr 17 2010, 01:11 AM, said:

pdmunro, on Apr 16 2010, 11:48 PM, said:

Do our minds misconstrue $20 million as some small multiple of the average worker's $50 000 pay packet?   In fact the CEO is receiving 400 times the average. 

Are we unable to appreciate that no one can work 400 times harder than the average? Are we unable to see that this is unsustainable?  That it is damaging the business? That it is robbery?

I'm pretty sure my gardener works harder than my doctor, or darn close to it, but if they charged the same amount, I wouldn't want anything to do with one of them, if not both.

Yes, but what if your gardner WAS your doctor but he used residents and interns who actually did the doctoring while he paid himself millions in guaranteed bonuses whether or not the business made or lost money?