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It's kinda fun, right? The whole point of tying executive compensation to share price was to have them have some rough stake in the business, but even that didn

It's kinda fun, right? The whole point of tying executive compensation to share price was to have them have some rough stake in the business, but even that didn't prove enough: there's always a longer term, and doing a visible, clear NPV boost is usually accretive to market cap even if it introduces long-term risk, because the long term risks are usually hidden from public eye and very mushy. Ironically, I think the poster child for how to properly structure compensation away from this is Hank Greenberg's AIG, where not only was his compensation basically all deferred stock options, they were deferred until retirement, so about as long-term a view as you can get. He was very risk-averse, and his biggest flaw wasn't under his operational ownership but under successor and personnel selection (looking at you, Welch). But at some level, it was just bad people making bad calls. I don't think McNerney thought that this would wreck Boeing, he was just wrong. Even if he was left predictably destitute at the end of such a failure, he probably wouldn't have changed his choices because he thought they were good. You could claim that this is a failure of boards and governance (and, truly, I think boards are by and large really bad and I wish there was a much more pervasive activist investor culture) but at some level I'm not sure how much of this is solvable. I don't know. There's probably a way to do boards well enough that this isn't a problem.

sofixa 2y ago
> But at some level, it was just bad people making bad calls. I don't think McNerney thought that this would wreck Boeing, he was just wrong. Well, he was stupid not to - there's no way he didn't know thay focusing on the short term stock price won't have negative effects on the quality and future of an engineering organisation whose main business, building and selling airplanes, is extremely capital intensive. He came from McDonnell Douglas who nearly bankrupted themselves doing the same sort of crap (pushing suppliers to the edge, cost cutting at every opportunity).
- metaphor 2y ago
  > [McNerney] came from McDonnell Douglas... Cite? Wiki[1] appears to suggest otherwise. [1] https://en.wikipedia.org/wiki/James_McNerney#Career_path https://en.wikipedia.org/wiki/James_McNerney#Career_path
  - sofixa 2y ago
    Oops, my bad, he was just a GE sociopath. That being said, McDonnell Douglas' history was visible to everyone - what they were doing hadn't been working for decades (first as Douglas, then as McDonnell Douglas).
darby_nine 2y ago
We all know boeing won't be "wrecked"; they're too critical for state interests to be allowed to fail. If they're smart they'll either nationalize the company to remove the profit inefficiency or force the company to split to remove the profit inefficiency. Either way, the profit motive and lack of any competition is clearly a national security risk.
- JumpCrisscross 2y ago
  > We all know boeing won't be "wrecked"; they're too critical for state interests to be allowed to fail People keep repeating this without context. The auto companies are strategically significant. That didn't prevent them from going bankrupt [1][2]. Wiping shareholders doesn't mean blowing up the factories. I'm increasingly convinced Boeing needs to go bankrupt. It can then shed unprofitable units--through spin-offs, sales or liquidations--and restructure its obligations. I'm not convinced the union comes out of that better off than it is now. But America sure does. [1] https://en.wikipedia.org/wiki/Chrysler_Chapter_11_reorganization https://en.wikipedia.org/wiki/Chrysler_Chapter_11_reorganiza... [2] https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reor...
  - night862 2y ago
    Maybe so, but I would say cars are different than aerospace. It’s clear that Boeing was able to squeeze costs centers at the expense of quality and business investment all while keeping the coin under shell in the form of regular old stock buybacks. But if/when Boeing goes under who is going to vet all this NDI sitting in their portfolios? They’re just gonna spin it off to another buyer—consisting of who exactly? McDonnel Douglas? Elon Musk? Tencent? Seems like a nightmare for someone, not sure for whom.
    - JumpCrisscross 2y ago
      > But if/when Boeing goes under who is going to vet all this NDI sitting in their portfolios? They’re just gonna spin it off to another buyer—consisting of who exactly? McDonnel Douglas? Elon Musk? Idk, pick one that's American or closely allied [1]. Ideally not one of the three larger than Boeing. Worst case: audit and re-assign the contracts. We'll be better for it in the long run. And I'm not convinced it wouldn't result in quicker, higher-quality deliverables in the short. [1] https://en.wikipedia.org/wiki/List_of_defense_contractors https://en.wikipedia.org/wiki/List_of_defense_contractors
danielheath 2y ago
> even that didn't prove enough It did the opposite. Humans respond - on some level - to incentives. Tying compensation to short-term performance creates perverse incentives which make it much harder to accept the idea that your plans might be ruining the company.
- JackYoustra 2y ago
  There are four year vests, my point is that it’s not long term enough
InDubioProRubio 2y ago
Bad people brought to fruit by a MBAd culture whos claim to success is mostly inherited inertia.. Longterm Losers with an Attitude and shortterm numbers to silence doubters.
AmericanChopper 2y ago
Then blame the board imo. They define the objectives for the CEO, the incentives for achieving them, and the governance framework for governing their execution. If shareholders want this “short term thinking” that always gets brought up, then they have every right to it. Of course this “short term thinking” trope is just a meme that the armchair commentators like to pedal out. If the system was dysfunctional enough to prioritise short term profit seeking to this extent, then all a competitor would have to do to monopolise any market is do enough “long term thinking” to outlast all their failing competitors. Investors would notice this and reallocate their capital accordingly. But none of this is what happens in reality. If anything I would say the market is over-interested in long term strategies. The popularity of the growth over profit model that we observe amongst most prolific capital allocators takes “long term thinking” to absurd lengths.
- photonthug 2y ago
  > If the system was dysfunctional enough to prioritise short term profit seeking to this extent, then all a competitor would have to do to monopolise any market is do enough “long term thinking” to outlast all their failing competitors. This makes it sound like my broker, the finance community in general, or maybe the state is better able to handle long term thinking than our industry leaders, but why would anyone believe that? Aren’t they all looking quarter to quarter and retiring next year no matter how bad they wreck the company/economy/country?
  - M95D 2y ago
    Stock is sold and bought all the time with no tax. It's in the investor's intrest to sink a company for short-term profits. When the s*it hits the fan, they can sell the falling stock, short-sell even, to some clueless pension funds and invest the money in a competitor instead. When only one company remains, profit +++. This is how stock markets work. Why are you surprised?
- immibis 2y ago
  Long term thinking is often incompatible with short term thinking. It doesn't matter if your company is long term sustainable if it's short term unsustainable. See dumping.
avidphantasm 2y ago
Would love to see a shift towards something like deferred options for executives. Or, ya know, a fixed multiplier on median employee pay, like managers make 3x median, VPs 5x, CEOs 7x. I’m okay with people who have crazy responsibilities making good money, but it doesn’t have to be obscene.
- timfsu 2y ago
  This sounds like an incentive to fire/outsource all of your lower-paid employees
  - avidphantasm 2y ago
    Good point. It would have to include contractor pay in the calculation.
jandrese 2y ago
> The whole point of tying executive compensation to share price was to have them have some rough stake in the business This reasoning was always flawed. The Stock Market is not real life. It consists of the opinions of a bunch of guys who sit in towers in New York, London, Shanghai, etc... In theory there are fundamentals that should drive the price, but in practice the market is not rational. It's not a good metric for the long term health of a company. Even worse, Goodhart's law applies in spades: "When a measure becomes a target, it ceases to be a good measure." Time and time again we see CEOs playing games with the stock price in order to get a big payday. We see management sacrificing long term stability in order to maximize their year end bonus. Imagine if every time you remember a now dead company do a stock buyback they instead invested that money into R&D, or simply lowered their prices to be more competitive in the market? Maybe they paid their employees better and didn't have constant turnover problems and had higher quality output. How many of those now failed companies would still be around today?
- JackYoustra 2y ago
  Yeah, that's my point. A stock buyback is a visible boost to NPV, whereas the drawback (opportunity cost of not investing in core businesses) is much harder to measure. Sometimes, they don't need any additional investment. Other times, it's Boeing.

sofixa 2y ago

> But at some level, it was just bad people making bad calls. I don't think McNerney thought that this would wreck Boeing, he was just wrong. Well, he was stupid not to - there's no way he didn't know thay focusing on the short term stock price won't have negative effects on the quality and future of an engineering organisation whose main business, building and selling airplanes, is extremely capital intensive. He came from McDonnell Douglas who nearly bankrupted themselves doing the same sort of crap (pushing suppliers to the edge, cost cutting at every opportunity).

metaphor 2y ago
> [McNerney] came from McDonnell Douglas... Cite? Wiki[1] appears to suggest otherwise. [1] https://en.wikipedia.org/wiki/James_McNerney#Career_path https://en.wikipedia.org/wiki/James_McNerney#Career_path
- sofixa 2y ago
  Oops, my bad, he was just a GE sociopath. That being said, McDonnell Douglas' history was visible to everyone - what they were doing hadn't been working for decades (first as Douglas, then as McDonnell Douglas).

darby_nine 2y ago

We all know boeing won't be "wrecked"; they're too critical for state interests to be allowed to fail. If they're smart they'll either nationalize the company to remove the profit inefficiency or force the company to split to remove the profit inefficiency. Either way, the profit motive and lack of any competition is clearly a national security risk.

JumpCrisscross 2y ago
> We all know boeing won't be "wrecked"; they're too critical for state interests to be allowed to fail People keep repeating this without context. The auto companies are strategically significant. That didn't prevent them from going bankrupt [1][2]. Wiping shareholders doesn't mean blowing up the factories. I'm increasingly convinced Boeing needs to go bankrupt. It can then shed unprofitable units--through spin-offs, sales or liquidations--and restructure its obligations. I'm not convinced the union comes out of that better off than it is now. But America sure does. [1] https://en.wikipedia.org/wiki/Chrysler_Chapter_11_reorganization https://en.wikipedia.org/wiki/Chrysler_Chapter_11_reorganiza... [2] https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reor...
- night862 2y ago
  Maybe so, but I would say cars are different than aerospace. It’s clear that Boeing was able to squeeze costs centers at the expense of quality and business investment all while keeping the coin under shell in the form of regular old stock buybacks. But if/when Boeing goes under who is going to vet all this NDI sitting in their portfolios? They’re just gonna spin it off to another buyer—consisting of who exactly? McDonnel Douglas? Elon Musk? Tencent? Seems like a nightmare for someone, not sure for whom.
  - JumpCrisscross 2y ago
    > But if/when Boeing goes under who is going to vet all this NDI sitting in their portfolios? They’re just gonna spin it off to another buyer—consisting of who exactly? McDonnel Douglas? Elon Musk? Idk, pick one that's American or closely allied [1]. Ideally not one of the three larger than Boeing. Worst case: audit and re-assign the contracts. We'll be better for it in the long run. And I'm not convinced it wouldn't result in quicker, higher-quality deliverables in the short. [1] https://en.wikipedia.org/wiki/List_of_defense_contractors https://en.wikipedia.org/wiki/List_of_defense_contractors

danielheath 2y ago

> even that didn't prove enough It did the opposite. Humans respond - on some level - to incentives. Tying compensation to short-term performance creates perverse incentives which make it much harder to accept the idea that your plans might be ruining the company.

JackYoustra 2y ago
There are four year vests, my point is that it’s not long term enough

InDubioProRubio 2y ago

Bad people brought to fruit by a MBAd culture whos claim to success is mostly inherited inertia.. Longterm Losers with an Attitude and shortterm numbers to silence doubters.

AmericanChopper 2y ago

Then blame the board imo. They define the objectives for the CEO, the incentives for achieving them, and the governance framework for governing their execution. If shareholders want this “short term thinking” that always gets brought up, then they have every right to it. Of course this “short term thinking” trope is just a meme that the armchair commentators like to pedal out. If the system was dysfunctional enough to prioritise short term profit seeking to this extent, then all a competitor would have to do to monopolise any market is do enough “long term thinking” to outlast all their failing competitors. Investors would notice this and reallocate their capital accordingly. But none of this is what happens in reality. If anything I would say the market is over-interested in long term strategies. The popularity of the growth over profit model that we observe amongst most prolific capital allocators takes “long term thinking” to absurd lengths.

photonthug 2y ago
> If the system was dysfunctional enough to prioritise short term profit seeking to this extent, then all a competitor would have to do to monopolise any market is do enough “long term thinking” to outlast all their failing competitors. This makes it sound like my broker, the finance community in general, or maybe the state is better able to handle long term thinking than our industry leaders, but why would anyone believe that? Aren’t they all looking quarter to quarter and retiring next year no matter how bad they wreck the company/economy/country?
- M95D 2y ago
  Stock is sold and bought all the time with no tax. It's in the investor's intrest to sink a company for short-term profits. When the s*it hits the fan, they can sell the falling stock, short-sell even, to some clueless pension funds and invest the money in a competitor instead. When only one company remains, profit +++. This is how stock markets work. Why are you surprised?
immibis 2y ago
Long term thinking is often incompatible with short term thinking. It doesn't matter if your company is long term sustainable if it's short term unsustainable. See dumping.

avidphantasm 2y ago

Would love to see a shift towards something like deferred options for executives. Or, ya know, a fixed multiplier on median employee pay, like managers make 3x median, VPs 5x, CEOs 7x. I’m okay with people who have crazy responsibilities making good money, but it doesn’t have to be obscene.

timfsu 2y ago
This sounds like an incentive to fire/outsource all of your lower-paid employees
- avidphantasm 2y ago
  Good point. It would have to include contractor pay in the calculation.

jandrese 2y ago

> The whole point of tying executive compensation to share price was to have them have some rough stake in the business This reasoning was always flawed. The Stock Market is not real life. It consists of the opinions of a bunch of guys who sit in towers in New York, London, Shanghai, etc... In theory there are fundamentals that should drive the price, but in practice the market is not rational. It's not a good metric for the long term health of a company. Even worse, Goodhart's law applies in spades: "When a measure becomes a target, it ceases to be a good measure." Time and time again we see CEOs playing games with the stock price in order to get a big payday. We see management sacrificing long term stability in order to maximize their year end bonus. Imagine if every time you remember a now dead company do a stock buyback they instead invested that money into R&D, or simply lowered their prices to be more competitive in the market? Maybe they paid their employees better and didn't have constant turnover problems and had higher quality output. How many of those now failed companies would still be around today?

JackYoustra 2y ago
Yeah, that's my point. A stock buyback is a visible boost to NPV, whereas the drawback (opportunity cost of not investing in core businesses) is much harder to measure. Sometimes, they don't need any additional investment. Other times, it's Boeing.