Corporate Confidential

Mis-Managing Company Leads to Shorter Sentence

I didn’t realize that it was pay-as-you go for federal jail time.  An appeals court has ordered a new sentence for ex-Qwest CEO Joe Nacchio saying his six-year sentence was too long.

 

That sentence was based on an alleged profit of $28 million.  Nacchio’s attorneys argued that the former CEO “is being punished for the price increase of Qwest stock from 1997.”  They claim his profit would have only been $1.8 million which would have capped his sentence at four years, three months.

 

I’m not sure why but I find this line of reasoning offensive.  I know that the legal system works this way – it isn’t “grand” theft, for example, until your stealing hits a certain monetary threshold.  But it just seems wrong.

 

Nacchio sold a large part of his Qwest shares in April-May 2001 – trades worth almost $39 million.  At that time Qwest was trading between $41.12 and $38.31.

 

Qwest stock then began a sharp decline (to say the least) in May 2001, falling from $38 to below $2 by August 2002. Nacchio resigned from Qwest in June 2002 amid the insider trading rumors

 

However, a three-judge panel at the 10th Circuit Court of Appeals in Denver agreed with Nacchio’s lawyers last Friday that the $52 million figure was too high.  The Appeals Court wrote that Nacchio’s gain should have been calculated in a way that more accurately reflects “the proceeds related to his criminally culpable conduct.”

 

Nacchio’s sentencing calculations were based on net profit from his illegal insider trading.  That means the amount ill-gotten gains after taxes, brokerage, commission fees and  other direct costs of trading have been subtracted.

 

Prosecutors said Nacchio gained $44 million.  The court for sentencing purposes took the prosecutors' figure and subtracted $16 million for taxes.  Nacchio’s six-year sentence was therefore based on an alleged profit of $28 million and even that number turned out to be too high.

 

I’m sure Nacchio intended to make $52 million or more.  The fact that he didn’t was a direct result of his own poor management.  Bad judgment as a CEO resulted in less jail time because he didn’t profit from his illegal trades to the extent that he could have had Qwest been managed better.

 

I see.  If you do some illegal trading it only counts if you make lots of money from it.  The old saying is false, it’s not the principal of the thing.  A white-collar crime is a white-collar crime unless it makes you lots and lots of dimes.

Gag Me With a Proxy Statement

In the news this morning AIG is preparing to pay millions more in “bonuses” to several dozen top executives – after a round of payments a mere four months ago set off a furor.  They’re asking the government for permission in an attempt to shield themselves from additional public outrage.

AIG doesn’t actually need permission but since their current bailout tab stands at around $180 billion they feel that asking, “Mother, may I?” will give them some kind of credible cover.

An AIG official, speaking anonymously – it seems that these days no one is willing to go on record or accept accountability – said, “We want to feel comfortable with what we are doing.”

That is news.  When did these guys ever care about feeling comfortable, let alone being able to look at themselves in the mirror?

And why do these bonuses need to be paid?  Well, for one thing, they were promised a long time ago.

I see.  AIG doesn’t care about breaking promises to their shareholders or to the taxpaying public but oh, no, we can’t break a promise to our executives.  That would be wrong.

AIG explains this further in proxy statements filed last month, which I spent some time reading this morning.  It was hard to keep food down while I read.  They realize that “we need to confront the fact that many of our employees, perhaps the majority, knew that their long-term future with us was limited.”  Well, those with brains, anyway.  As a result they acknowledge the fear that “our key producers could perhaps be lured away.”

Aw darn.  That means they could lose the very people who caused their financial mess.

The proxy statement, which can be found here if you have the stomach for it, further states that: “Allowing departures to erode the strength of our businesses would have damaged our ability to repay taxpayers for their assistance.”

Um AIG?  I’m afraid I have bad news.  You have no strength.  Your strength has already “eroded.”

But AIG’s rationalizations for staying at the public feeding trough don’t acknowledge this.  In fact, attempting to follow their twisted logic is like following Alice down the rabbit hole:

Our only hope of repaying the taxpayers is by spending more of their money to retain the same “top talent” that got us into this mess in the first place so that we can have continuity and they can continue to do more of the same work and lose more money so that we can repay…no, wait, that can’t be right.  Let me try again.

We need to retain these people because it’s the only hope we have of ever repaying the taxpayers.  We’re sure they won’t make the same mistakes again and are, in fact, capable of changing their ways and doing things differently this time around.  Hiring new people, with new ideas, who would be cheaper than retaining the old guys just isn’t a good idea because – because why AIG?

No matter how I rephrase the AIG “logic” it just doesn’t make any sense or stink any less.

A Raise is a Raise...Except When It's Not

A raise by any other name really does not smell as sweet.

 

Citigroup Inc. is increasing the base salaries of many employees -- reportedly by as much as 50 percent for some workers -- as it restructures their compensation amid government restrictions on bonuses, reports the Associated Press.

 

Adjusting the balance between “fixed and variable compensation” is the alleged goal of Citigroup’s new round of salary increases.  Corporate greed has gotten even more creative.

 

It seems only fair, since bonuses haven’t really been bonuses at all but more of a guaranteed payout completely unrelated to performance.

 

So let’s just give the badly performing execs hefty raises and call a spade a spade.

 

But wait, they’re not actually raises because bonuses are being lowered.  Huh?  According to an “anonymous person familiar with the matter” the changes would not affect the total amount of an employee’s compensation.  So it’s not a raise, per se.  But they would allow Citi to pay as well as they did in 2008 – and what a year that was! – while appearing to adhere to the government’s new bonus caps.

 

As one economist put it, this is merely a “change in the composition of total compensation.”

 

Let me see if I can follow this logic:  Base salaries should be at least equal to total 2008 compensation because they could never do any worse than that so we should never pay them any less.

 

Citi and the other banks say they need to do this if they want to hold on to their talented employees.  Yes, those same talented employees who caused the financial sector to implode taking down the rest of our economy with them.  I can certainly see why they want to retain that talent pool.

 

Citigroup has received $45 billion from the government. A portion of those funds will soon be converted to common stock, giving the government a 34 percent stake in the bank – and the right to scrutinize compensation.  So don’t call them bonuses call them a reformulated balance of compensation components.  Whatever you call it, it still stinks.

 

AIG: Absolutely Insane Gluttony

That must be what it stands for.

As usual, this morning my inbox held “Today’s Papers” from Slate Magazine and my driveway the New York Times, both leading with the story about AIG bonuses being paid out to the very executives responsible for trashing the economy.

 

I know this is going to sound terribly naïve, but shouldn’t bonuses be tied to performance? 

 

It seems AIG is “contractually obligated” to pay out $165 million in bonuses to 400 employees in its Financial Products division although AIG’s government-appointed chairman, Edward M. Liddy, expressed his disgust: “I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them.”

 

No word from the previous chairman, who put the compensation program in place.

 

Ironically, there are AIG employees suffering, but they are those not working for Financial Products.  AIG is slashing bonuses -- but for people in other parts of the company who had no direct involvement with the derivatives.

 

A commenter on the NYT's website sums it up well: "This is so outrageous it is almost humorous."

Yeah, that’s one way to put it.

 

On the “bright” side, the top 25 executives at the Financial Products division have agreed to work for $1 for the rest of 2009.  Big of them.  If you gave me $165 million I would work for free for the rest of the year too!

 

I want either a true government takeover of AIG, or force them into bankruptcy proceedings. That way they can get out of their "contractual obligations" and we'll know where our money goes. Problem solved.

 

Historically a “bonus” was defined as:

 

• An additional payment (or other remuneration) to employees as a means of increasing output.
• A payment in addition to normal pay. Often related to performance and typically paid as a one-off lump sum.

New words enter the dictionary each year as they become commonly used.  I propose a new definition for the word bonus:

 

“A reward in direct proportion to the amount of damage, financial and otherwise, an employee inflicts both on his or her own employer as well as the world at large.”

 

Resources:

 

Gretchen Morgenson, who is one of my heroes, has written a great piece in the Times on this, entitled “At AIG, Good Luck Following the Money.”  One concern she highlights is the fact that there has been a lot of secrecy around the $50 billion funneled to AIG’s counterparties so far.  The government has resisted revealing these companies’ identities even though they are getting our money.  This is so Orwellian I don’t even know what to say.  Click here to read her article.

 

Sign a petition demanding transparency in the government bailout here.

Obama to Auto Executives: Take the Money and Run.

Please.

 

Top Democratic lawmakers have “blasted” auto industry leaders.  President-elect Barack Obama accused car company executives of having a “head in the sand” management approach.  We’ll give you the money if you’ll just go away.  Here’s your check now don’t let the car door hit you in the behind on your way out.

 

Auto industry leaders are not getting hit in their pocketbooks but in a place that might hurt almost as much:  Their gigantic egos.

 

Am I too optimistic in believing that while failing is rewarded financially it might hurt just a little being shown the door at the same time?  Or is money everything to these guys?  Will they laugh all the way to the bank in their private jets?

 

I don’t know.  I think there will be a small voice in the back of their heads saying, “You blew it, jackass.”  Maybe it will be their father’s voice, or their mentor’s or just their wounded pride but these kinds of men love power and prestige just about as much as they love money.  They don’t like being wrong, especially in public.

 

In his comments on NBC’s Meet The Press Obama did not single out any individual executive.  He indicted the American auto industry as a whole saying, “What we haven’t seen is a sense of urgency and the willingness to make tough decisions.  And what we still see are executive compensation packages for the auto industry that are out of line compared to their competitors, their Japanese competitors, who are doing a lot better.”

 

But what kind of world would we live in if we tied executive compensation to performance?  We can’t hold these executives accountable for their companies’ financial outcomes.  Obama’s comments imply that rewarding failure with outlandish compensation is wrong.  That’s crazy talk!

 

Feeling No Pain on Wall Street

As opposed to Main Street.

News Flash:  Corporate greed is alive and well in America.

 

My retirement account is down by almost half.  Foreclosures are at record numbers.  Bankruptcies are skyrocketing because people can’t afford healthcare.  But you'll be happy to know that Wall Street is OK.

 

That bailout was sure worth it.

 

The Associated Press reports that despite the meltdown, despite the plunging stock markets worldwide and despite the bailout America’s biggest banks are still preparing to pay their workers as much as last year – or more.  This news was splashed across the front page of The Santa Fe New Mexican, my local paper.  Went down real well with the morning coffee.

 

Excuse me a moment, I have to put some more stop loss orders in on my deflating brokerage account.  I also have to vomit.

 

When this started, the pension fund I manage for my (very) small business was about 30% in cash.  It’s now more than 50%.  And that’s certainly not because the cash grew.  But those Wall Street tycoons won’t feel a thing!

 

One of the goals of the rescue was supposed to be eliminating the king-sized incentives that got us into this mess in the first place because they encouraged risk-taking.  If these guys feel no pain then what’s their incentive to change their behavior?  If you’re rewarded equally for failure and success what’s your motivation to ensure the latter?  This seems like very simple psychology to me but apparently Wall Street’s goal is insulation from pain.

 

And insulation, it appears, from the real world that the rest of have to live in.

 

They make the mess.  We bail them out.  They get rewarded all the same.

 

Nice.

 

Bailout Booty, Part I

I have written a lot of columns criticizing corporate greed, but anything I could have imagined just got blown out of the water by the real-life development of the proposed $700 billion bailout.

700 Billion.  Dollars.  Because:

·         Financial institutions got stupidly avaricious and gave mortgage loans to just about anyone who could breathe.  Oh wait, I think towards the end of this financial free-for-all breathing was optional.

·         When these loans started to stink these same institutions packaged them as investment vehicles and sold them to investors who were supposed to be “sophisticated” – e.g. pension plans.

·         When those “sophisticated” investors wondered where their returns were the financial institutions who had sold the kettle of crap basically said, tough luck.

 

And now we’re supposed to bail them out.  You and me.

 

Treasury Secretary Henry Paulson, when initially floating his plan, insisted that the massive executive compensation and bonus packages should not be excluded from the bailout booty because that would make it too “complicated” to administer.

The executives who all along were bellied up to the trough should not feel any pain.  And if we don’t help them the economy will collapse.  The sky is falling!  The sky is falling!

Paulson demanded total authority over the rescue: $700 billion to be used at his discretion, with immunity for future review.  Should that be King Paulson?  Luckily Congress is balking at that and also calling for – gasp – limits on executive pay at firms that get federal money.

On the other hand, according to a New York Times editorial, Paulson has long opposed what is probably the best way to help Americans stay in their homes: allowing a bankruptcy court to reduce the size of bankrupt borrowers’ mortgages. Unfortunately, but predictably, drafts of the bailout plan circulated late Thursday do not mention that relief.

In addition, this bailout plan won’t help those who are already in foreclosure. 

Paulson's plan won’t help ordinary homeowners who are about to become homeless or small investors watching their 401Ks tank but it will get those stinky assets off of the big guys’ balance sheets.  And it will ensure that no big Wall Street executive entirely loses his or her compensation.

Whew!  I know I’ll sleep better at night.

 

If you have to ask, you can't afford them!

You know that old saying, “If you have to ask you can’t afford it?”  Apparently that’s the government’s approach to executive pay.  Two years ago the S.E.C. put rules in place requiring companies to explain how they determined compensation and incentive pay for executives and as of 2007 less than half have complied.  The hope was that this transparency would perhaps shame corporations out of the habit of fat compensation for thin results.

And what are the consequences for these companies figuratively thumbing their nose at the S.E.C.?  Oh right, the government gave them a loophole:  Corporations did not have to comply if they felt the disclosure would put them at a disadvantage in their industry.

So sorry, I just don’t feel like it.  And who gets duped?  Shareholders.  You and me.

Gretchen Morgenson in the NY Times states that according to the proxy filings covering 2007 only 47% of the companies made the required disclosure concerning short-term incentives such as cash bonuses.  23% complied in 2006, so perhaps we’re on an upward trend, but this is still disconcerting to say the least.

On long-term incentive pay, according to the Morgenson column, the results are better with 62% of companies complying last year.

As long as the S.E.C. does not enforce its own rule the corporate excuse list will just keep growing:  if we reveal our incentives then our competitors might try to steal our talent; we will lose the flexibility to give bonuses whenever we feel like it if they have to be tied to actual goals; it’s just too darned hard!

What you often find when you shed a light on the corporate gravy train is that the incentive bar is set stupidly low.  Lower than what they are telling Wall Street:

“The goals companies are using for bonus plans may be a lot lower than what they are telling analysts they reasonably expect to meet,” said James F. Reda, a pay consultant quoted by  Morgenson.

It’s a classic double standard.  The benchmarks a corporation is announcing to the world are not even close to the bonus thresholds they set internally for their executives.  These guys may cost way more than I, a simple shareholder, can afford – especially on a day like today with the Dow losing more than 500 points -- but I’m going to ask anyway.

4% v. $64 Million

I’m visiting my boyfriend for a week.  He’s putting in God awful hours.  Getting up at 6, even earlier, to leave for work.  This morning we were both woken up by a neighbor’s barking dog and he saw it was 5:50.  “I’m late,” he said.

This is a self-imposed deadline, as are the 12-hour plus days.  He’s not a shift worker.  “Just playing the game at work,” he tells me when I make sympathetic sounds.  I go back to bed and he dresses and leaves.

I was hoping that he would be able to take it a little bit easier during my visit so that we could spend some time together.  He had told me he would be able to get home early one day.  “Early” turned out to be 6:30.

He explains that this is because he had out of the ordinariy meetings all of last week.  Colleagues from around the world were in town, it was some kind of special thing.

“But the work didn’t go away,” he added.  They tacked on almost 40 hours of mandatory meetings but his work load didn’t change.  Something’s gotta give.

This brings me to one of the many reasons I will never be a star in corporate America:  When something’s got to give, it’s never going to be me.

In his shoes, I would have gone to my boss and asked him or her to help me prioritize my work load. I would have made it clear that, due to the special meetings, it was going to take a couple of weeks for me to get back on schedule.  But his boss, J points out to me, took 20 hours worth of work home himself last weekend, and spent Super Bowl Sunday in front of the TV with his laptop.  Therefore, my boyfriend hardly feels justified whining about his own work load.

For his efforts, J has recently received two awards his company distributes.  The company is in the music industry, so these are called “You Rock” awards.

That’s nice, I think.  I ask him, “Does any actual money accompany these awards?”

No.  But while it doesn't guarantee the maximum raise possible at his next review, it raises the odds enormously.

So that I could fully grasp the magnitude of this honor I asked him, “What was the maximum raise given out this past year?”

4% he told me.

Four whole percent.  For killing yourself working 60 hour weeks and taking home work on weekends.  And that's the upside.

I immediately asked for directions to the HR department so I, too, could partake of this bounty.

Not.

What is wrong with people?  That’s what I want to know.  I love my boyfriend but I have to wonder why someone would sacrifice his time, his health, his life and his relationships for the upside potential of 4%???

Or perhaps the warm glow of receiving an atta boy in the form of a “You Rock” makes it all worthwhile.  Augh.

Meanwhile, I go online and research compensation for the executives at this company.  It’s a public corporation, after all, so this information should be readily available.

The AFL-CIO keeps an executive paywatch site.

Here’s what I found.  Bernard A. Girod, CEO of Harman International Industries Inc., received $7,361,628 in total compensation including stock option grants.  From previous years’ stock option grants he cashed out $4,318,161 in stock option exercises.

No mention whether any of these were back dated.

In addition, Bernard A. Girod has another $64,241,106 in unexercised options.  Now that rocks.

And I’ll bet Bernie didn’t take work home last weekend.

Year End is The End for Some

And a bonanza beyond belief for a few -- very few -- others.

As if I needed more proof of the callow and heartless nature of corporate America, the New York Times ran an article on Christmas Eve, "Stressed? It’s Not the Gifts or the Parties. It’s the Job".

According to the Times article, a growing number of workers have their compensation and job security linked to quarterly and year-end performance targets. So vacation days are abandoned and the holiday office parties are ignored because end-of-the-year projects have to be finished — or else.

The article quotes David Wyss, chief economist of Standard & Poor’s, who pointed to the spike in labor costs during the first quarter of recent years as evidence that bonuses based on hitting year-end performance targets are fairly widespread. “Bonuses are getting to be a bigger and bigger part of total compensation, and we’re not just talking about investment bankers and hedge fund managers by any means,” Mr. Wyss said.

Not only the lure of bonuses, but also the fear of losing a job adds to the seasonal strain on workers.

In the somewhat more moral past, when companies had at least a bit of a conscience, they would try to hold off making layoffs during the holiday season.  Not anymore.

“The fourth quarter has become the most common time for layoff announcements,” said John Challenger, chief executive of Challenger, Gray & Christmas, an outplacement firm.

“There’s no stigma anymore,” he said. “Companies are under great pressure to meet their year-end profit goals. If it becomes clear they will not hit them, the executives are under pressure to cut costs.”

Since Thanksgiving, well-known companies announcing large job cuts include the Bank of New York, Pfizer and DuPont.

Hmm. Pfizer, huh? On December 22^nd the Associated Press reported that former Pfizer CEO Hank McKinnell -- who was forced into early retirement in part because of investor anger about his rich retirement benefits -- will get every penny of his lucrative retirement package and perhaps more.

Mr. McKinnell’s package, which the company disclosed in a filing with the Securities and Exchange Commission, amounts to more than $180 million. It includes an estimated $82.3 million in pension benefits, $77.9 million in deferred compensation, and cash and stock exceeding $20.7 million.

The total value could grow to almost $200 million if Mr. McKinnell gets a $18.3 million stock award, but that is contingent on the future performance of the company’s stock.  Ironically, McKinnell’s departure might actually help the stock’s future performance – kind of a win-win for him.

Beyond that, Pfizer will pay a lump-sum severance of $11.9 million and will fully vest stock grants worth $5.8 million, according to the filing. He will also receive $2.2 million for 2005 bonus payments, $305,644 for unused vacation time – no forfeiting of vacation time for Mr. McKinnell! – and $576,573 for benefits he would have received had he stayed at the company.  It’s simply mind boggling.

While I’m on the subject of mind boggling, according to a poll by Harris Interactive, American workers gave back 574 million vacation days last year, or the equivalent of more than 20,000 lifetimes. The survey, conducted on behalf of the online travel service Expedia.com, estimated the value of those days, using the average hourly wage, at $75 billion.

It’s no surprise, then, that as the calendar winds down, many workers don’t have the time for holiday spirit, and regard the company holiday party as a time-wasting distraction: 57 percent of workers say a holiday party is not important to them, and nearly half do not feel obligated to attend, according to a Harris Interactive poll cited in the Times.  Not to mention the fact that these days workers have to pay for the privilege of attending their companies’ holiday parties.

So forfeit that vacation time, skip those parties, order the presents online (just not from work!) and if you’re lucky you’ll survive the axe and contribute to the massive year-end bonuses of those lucky few at the top.  The likes of Lloyd C. Blankfein, for example.

Mr. Blankfein, the chairman of Goldman Sachs, the big investment bank, learned last week that the company would pay him a bonus of $53.4 million this year.  This is in addition to his regular salary of $600,000 and the $250,000 or so that the company paid for his car and driver and other perquisites.

Mark A. Stein did the math in the Times:

$53.4 million works out to a bonus of more than $1 million a week, or more than $200,000 a day for a regular five-day workweek (but only $146,301 a day if one assumes that he worked seven days a week).

Even assuming that Mr. Blankfein worked 24 hours a day, seven days a week, the bonus breaks down to almost $6,100 an hour, or more than $100 a minute. Every minute. Of every hour. Of every day. For the entire year.

And I’m willing to bet he doesn’t forgo any of his vacation days, either.