4 ms·

Executive pay doesn’t seem to follow the high-risk-high-reward scenario; they keep the “high reward” but see apparently none of the “high risk”. A much more ba

Executive pay doesn’t seem to follow the high-risk-high-reward scenario; they keep the “high reward” but see apparently none of the “high risk”. A much more balanced system would be something like, for each executive: - Your base pay is $51 million. - If you FAIL at your task, YOU OWE THE COMPANY $50 million. - If you succeed, you receive an extra $20 million. If you choose to split $15 million of this reward with employees in terms of stock however, your portion of the stock will be doubled. That would put some skin in the game. And if a failing executive is forking over most of his millions back to the company, they could probably avoid quite a few layoffs. And if the executive doesn’t fail and has a direct incentive to share success with employees, the workers would be even more loyal to the cause.

ams6110 11y ago
I do agree with the point that the executives often don't appear to suffer the pain of failure, but if the layoffs are of the scope mentioned, the number of jobs that could be saved with $50,000,000 is somewhere on the order of a rounding error.
- makecheck 11y ago
  Per executive. Assuming a generous $100k cost per employee, that’s still 500 jobs. And really, I think saving 10 jobs or 5 jobs is still fine, if that were the number. No single person can be so good at a job that it warrants sending hundreds more out the door. Any company that thinks this should try an experiment: fire the executive, ask any employee at all in the company to take over the job for 1/20th the salary and see if the outcome is measurably worse.
dogma1138 11y ago
That's not that far from how it works except for the last part. Many executive have a low base pay but a very high bonus component especially CEO's it's usually not 50 to 1 (unless they take a "symbolic" salary when it ends up being usually millions to one) but it's quite high. Now granted it's not if you fail at your task you owe a company money but you don't get it, the owe a company money could happen it's usually common in some countries (UK for example) where the CEO gets a "loan" for X amount which is spread out over some years, it's again not usually to put skin in the game but to lock a CEO to the company, the CEO change at Sage about a year ago had a loan component to it.
- maxxxxx 11y ago
  These loans are later often forgiven.
  - dogma1138 11y ago
    They are always forgiven after a certain time period thats what they are used for to lock the CEO into the company for X amount of years.
PakG1 11y ago
- If you FAIL at your task, YOU OWE THE COMPANY $50 million. No sane person would take a CEO job with that type of compensation clause. While the CEO bears responsibility, the world doesn't make it easy. 1. Today's stock market doesn't reward long-term disruptive thinking that isn't guaranteed to be a sure bet. Heck, and there are no sure bets anyway. The stock market rewards profits here and now that also extrapolate to good future profit trends. Why screw up a good thing to grab something unproven? That's why BlackBerry's stock was so high as the iPhone was coming out. CEOs are indirectly pressured to not take risks. If they do and they fail, they deserve to pay a huge penalty? Exactly what could Blockbuster have done with all of its investments into real estate and retail employees to win against the Internet? There is no scenario where they could have won without decimating everything the company used to do. 2. Black swan events are extremely unpredictable precisely because * nobody* sees them coming. If I ran an ice harvesting business, how could I have predicted the invention of freon? Once I learned about freon, how should I have responded with all of my investments made into labour and equipment for sawing ice out of frozen lakes? There aren't many situations where a win is easy if an entire industry gets destroyed because of some black swan event. 3. All of the above goes double when the new CEO is supposed to lead a turnaround. They negotiate their parachutes first so that they can focus 100% of their energy on saving the company instead of worrying about themselves. It's why on airplanes they explain to you to put your own oxygen mask on first and then help others. You can't help others if you yourself are in trouble. Not to mention, turnarounds are not fun. They're also paid for stress and the need to make often uncomfortable decisions where they must play the villain.
- ryandrake 11y ago
  > No sane person would take a CEO job with that type of compensation clause. While the CEO bears responsibility, the world doesn't make it easy. Wait, what? $51M salary, if I fail I give back $50M? I pocket at least $1M risk-free. Sign me up. That's more than most people make total throughout their entire lives.
  - PakG1 11y ago
    Well, first, guess let's assume that's after-tax money. If that's before-tax, you end up losing money. Secondly, let's be honest. That's not really a $51M base salary. That's a $1M base salary with a $50M signing bonus that you can't spend. Because if it goes south and you need to pay the $50M back, you better not have spent it buying some nice house and other stuff. What sane person would risk the chance of going bankrupt to pay back a salary after they received the money? The smart decision is to just not touch the money until the clause is up. So put into perspective, it's not a $51M base salary at all. Besides that, the issue is that these decisions aren't made in a vacuum, and the rewards are too short-term to make it really viable. The CEO will consider the offer and compare it to other opportunities out there. Free agents always have options if they're that good. It happens in sports, and it happens in business. So you have candidates comparing options, and those options drive up the price. If the price is driven up because options exist, any sane person would be a fool to not take the best price if the opportunity also fits right. "Sorry, your offer is the best offer, but I'm going to turn it down because this other company wants me to give back 98% of my salary if I fail. That's more my cup of tea." I don't deny there can be non-monetary factors that may be more important than money in these decisions. But I'm talking about an all-else-equal decision. Especially when it's a turnaround situation. Nobody wants a turnaround job unless they enjoy pain. The money is to compensate for that pain. Nortel had a really tough time finding its last couple of CEOs. In Canada, it was known as the CEO job that nobody wanted. How do you attract someone for that kind of job unless you guarantee them nice money? Finally, the market does reward for the short-term. When IBM made the big switch to go all-in into services with the purchase of PwC Consulting, mass global hiring for labour-intensive work, and so on, they opened up a huge profit tap. Palmisano was hugely rewarded for growing this decade-long windfall. He parachuted into retirement with a very nice package. Never mind that the strategy worked for only a decade and created a big mess of financial misallocation that his successor would need to clean up. Should he have been able to predict that IT was changing and that this huge IT services workforce that he had hired would turn into a huge albatross that Rometty would need to slay in order to ensure IBM remains a relevant company? Maybe. Is it fair that Rometty is left dealing with the albatross while Palmisano is happily and richly retired? Yeah, Rometty was part of executing that services strategy as a senior executive before she became CEO (in fact, she was apparently the one responsible for integrating the PwC acquisition), but the question stands. Under the proposed scheme, why is Palmisano rewarded and Rometty not? Rometty is dealing with the fallout of a changing industry overshadowing what made perfect sense to Palmisano at the time. They were hit by technological trends that they didn't predict well. Compensation is a complex subject, especially at the executive level.
deleted 11y ago
[deleted]
morgante 11y ago
Every sane CEO realizes that even if they're really good there's still an element of chance. At the very least, you'd have to make the expected value of their compensation greater than it is today. So if they succeed they get an extra $60 million but if they fail they lose $50 million (with a baseline of $51 million). Then you would incentivize risk-taking CEOs. Of course, that's not actually far off from what we have today: CEOs receive a majority of the compensation in stock, which does have risk. Maybe it would make sense to set the strike prices much more aggressively instead though.
spydum 11y ago
Isn't the point of compensation being mainly in stock options part of having "skin in the game"? If I was granted 100k shares at $10/share, even if market values it higher, it costs me something to excercise them up front, right?

ams6110 11y ago

I do agree with the point that the executives often don't appear to suffer the pain of failure, but if the layoffs are of the scope mentioned, the number of jobs that could be saved with $50,000,000 is somewhere on the order of a rounding error.

makecheck 11y ago
Per executive. Assuming a generous $100k cost per employee, that’s still 500 jobs. And really, I think saving 10 jobs or 5 jobs is still fine, if that were the number. No single person can be so good at a job that it warrants sending hundreds more out the door. Any company that thinks this should try an experiment: fire the executive, ask any employee at all in the company to take over the job for 1/20th the salary and see if the outcome is measurably worse.

dogma1138 11y ago

That's not that far from how it works except for the last part. Many executive have a low base pay but a very high bonus component especially CEO's it's usually not 50 to 1 (unless they take a "symbolic" salary when it ends up being usually millions to one) but it's quite high. Now granted it's not if you fail at your task you owe a company money but you don't get it, the owe a company money could happen it's usually common in some countries (UK for example) where the CEO gets a "loan" for X amount which is spread out over some years, it's again not usually to put skin in the game but to lock a CEO to the company, the CEO change at Sage about a year ago had a loan component to it.

maxxxxx 11y ago
These loans are later often forgiven.
- dogma1138 11y ago
  They are always forgiven after a certain time period thats what they are used for to lock the CEO into the company for X amount of years.

PakG1 11y ago

- If you FAIL at your task, YOU OWE THE COMPANY $50 million. No sane person would take a CEO job with that type of compensation clause. While the CEO bears responsibility, the world doesn't make it easy. 1. Today's stock market doesn't reward long-term disruptive thinking that isn't guaranteed to be a sure bet. Heck, and there are no sure bets anyway. The stock market rewards profits here and now that also extrapolate to good future profit trends. Why screw up a good thing to grab something unproven? That's why BlackBerry's stock was so high as the iPhone was coming out. CEOs are indirectly pressured to not take risks. If they do and they fail, they deserve to pay a huge penalty? Exactly what could Blockbuster have done with all of its investments into real estate and retail employees to win against the Internet? There is no scenario where they could have won without decimating everything the company used to do. 2. Black swan events are extremely unpredictable precisely because * nobody* sees them coming. If I ran an ice harvesting business, how could I have predicted the invention of freon? Once I learned about freon, how should I have responded with all of my investments made into labour and equipment for sawing ice out of frozen lakes? There aren't many situations where a win is easy if an entire industry gets destroyed because of some black swan event. 3. All of the above goes double when the new CEO is supposed to lead a turnaround. They negotiate their parachutes first so that they can focus 100% of their energy on saving the company instead of worrying about themselves. It's why on airplanes they explain to you to put your own oxygen mask on first and then help others. You can't help others if you yourself are in trouble. Not to mention, turnarounds are not fun. They're also paid for stress and the need to make often uncomfortable decisions where they must play the villain.

ryandrake 11y ago
> No sane person would take a CEO job with that type of compensation clause. While the CEO bears responsibility, the world doesn't make it easy. Wait, what? $51M salary, if I fail I give back $50M? I pocket at least $1M risk-free. Sign me up. That's more than most people make total throughout their entire lives.
- PakG1 11y ago
  Well, first, guess let's assume that's after-tax money. If that's before-tax, you end up losing money. Secondly, let's be honest. That's not really a $51M base salary. That's a $1M base salary with a $50M signing bonus that you can't spend. Because if it goes south and you need to pay the $50M back, you better not have spent it buying some nice house and other stuff. What sane person would risk the chance of going bankrupt to pay back a salary after they received the money? The smart decision is to just not touch the money until the clause is up. So put into perspective, it's not a $51M base salary at all. Besides that, the issue is that these decisions aren't made in a vacuum, and the rewards are too short-term to make it really viable. The CEO will consider the offer and compare it to other opportunities out there. Free agents always have options if they're that good. It happens in sports, and it happens in business. So you have candidates comparing options, and those options drive up the price. If the price is driven up because options exist, any sane person would be a fool to not take the best price if the opportunity also fits right. "Sorry, your offer is the best offer, but I'm going to turn it down because this other company wants me to give back 98% of my salary if I fail. That's more my cup of tea." I don't deny there can be non-monetary factors that may be more important than money in these decisions. But I'm talking about an all-else-equal decision. Especially when it's a turnaround situation. Nobody wants a turnaround job unless they enjoy pain. The money is to compensate for that pain. Nortel had a really tough time finding its last couple of CEOs. In Canada, it was known as the CEO job that nobody wanted. How do you attract someone for that kind of job unless you guarantee them nice money? Finally, the market does reward for the short-term. When IBM made the big switch to go all-in into services with the purchase of PwC Consulting, mass global hiring for labour-intensive work, and so on, they opened up a huge profit tap. Palmisano was hugely rewarded for growing this decade-long windfall. He parachuted into retirement with a very nice package. Never mind that the strategy worked for only a decade and created a big mess of financial misallocation that his successor would need to clean up. Should he have been able to predict that IT was changing and that this huge IT services workforce that he had hired would turn into a huge albatross that Rometty would need to slay in order to ensure IBM remains a relevant company? Maybe. Is it fair that Rometty is left dealing with the albatross while Palmisano is happily and richly retired? Yeah, Rometty was part of executing that services strategy as a senior executive before she became CEO (in fact, she was apparently the one responsible for integrating the PwC acquisition), but the question stands. Under the proposed scheme, why is Palmisano rewarded and Rometty not? Rometty is dealing with the fallout of a changing industry overshadowing what made perfect sense to Palmisano at the time. They were hit by technological trends that they didn't predict well. Compensation is a complex subject, especially at the executive level.

deleted 11y ago

[deleted]

morgante 11y ago

Every sane CEO realizes that even if they're really good there's still an element of chance. At the very least, you'd have to make the expected value of their compensation greater than it is today. So if they succeed they get an extra $60 million but if they fail they lose $50 million (with a baseline of $51 million). Then you would incentivize risk-taking CEOs. Of course, that's not actually far off from what we have today: CEOs receive a majority of the compensation in stock, which does have risk. Maybe it would make sense to set the strike prices much more aggressively instead though.

spydum 11y ago

Isn't the point of compensation being mainly in stock options part of having "skin in the game"? If I was granted 100k shares at $10/share, even if market values it higher, it costs me something to excercise them up front, right?