Archive for 2008

Workers may shoulder more risk as firms struggle to meet funding requirements

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Published in Market Watch December 16, 2008 by Christopher Hinton

Pension portfolios at some of the nation’s top corporations have seen a sharp drop in value this year as the recession hammers away at the stock market, leaving many pension plans without enough funds to cover their promised benefits.

That leaves companies in a sticky situation. Though U.S. law says defined-pension plans don’t have to be fully funded until 2013, Standard & Poor’s 500 companies are still looking at a combined 20% shortfall for their programs this year at a time many need to preserve cash to weather the current economic malaise.

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Commentary on: Firms Using Stock to Help Pension Funds

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expert perspective telescopeExpert Perspective by Grahall’s Robert Cirkiel

In an article published in Market Watch on December 16, 2008, Christopher Hinton (journalist for Market Watch) addresses the issue of pension plan funding and says: “Some companies think they have a solution though by contributing their own stock to the plan in lieu of cash, particularly if they think the market is undervaluing their shares.”

With the advent of PPA funding rules in 2009, and with pension funding levels very low due to market losses, a number of public companies will fund their pension plan with stock in lieu of cash. This is a double-edged sword.   For example, the article points out that the plan potentially can gain tremendous influence over the company. Also, the plan now has more at risk since pension distributions tend to be counter-cyclical to company performance (since staff terminations and retirements increase in those times.) Said another way, when the plan most needs money, it will have the least. Email Robert Cirkiel at robert.cirkiel@grahall.com

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401k Plans are Easy to Fix: Use A Hammer

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expert perspective telescopeExpert Perepsective by Grahall’s Robert Cirkiel

In the December 13, 2008 article by Anne Tergesen (journalist for The Wall Street Journal), published in the in the Wall Street Journal the author suggests that “[t]he financial meltdown has fueled a call to change – or replace – [401k] retirement accounts.”

Well here’s my thinking. I say, Start Over!!!


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The Poorer (Performers) Get Richer

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Expert Perspective by Grahall’s Robert Cirkiel

A December 9, 2008 article  published in SeekingAlpha.com  says that research has found that          “…the executives who are delivering the worst performance are collecting the highest compensation.”  So just how linked is poor performance to excessive executive pay?

About 15 years ago I was involved in an executive comp study that, believe it or not, found that pay was inversely proportional to company performance! In other words, the crummier the performance, the higher the pay.  The CEO of our client, perhaps trying to justify his pay, explained that the poorer the performance of the company, the harder the CEO’s job and therefore justifying the survey findings.  I kid you not.

I guess that’s why garbage collectors make more than major league baseball players – oops never mind.  Needless to say it was an honor for me to bask in his wisdom. 

Actually what I think the survey illustrated is that the high paid CEO of a poor performing company is nothing more than a mercenary.  
Of course it begs the question – what is the appropriate pay for bad performance? Email Robert Cirkiel at robert.cirkiel@grahall.com

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The Real Problem With Long Term Incentives

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Expert Perspective by Grahall’s Michael Dennis Graham

What is missing in the December 7, 2008 opinion piece in Financial Week authored by Gregg D. Polsky, professor of law at the Florida State University College of Law is an understanding of time.  Stock options for most organizations’ executives fully vest over 3, 4, or 5 years. In fact almost all of the long-term incentives are stock option based and vest ratably over these periods. So a stock option that vests ratably over 3 years is therefore 1/3 vested after 1 year, and 2/3’s vested after 2 years, and so on.


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Opinion: The problem with performance-based compensation

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Published in Financial Week December 7, 2008 by Gregg D. Polsky

A major cause of the current economic crisis was the simple failure of financial institutions to adequately price risk. Former Federal Reserve chairman Alan Greenspan recently testified that he was “in a state of shocked disbelief” that the “self-interest of lending institutions” failed so markedly to protect shareholders. One question is whether a provision of the tax code that encourages companies to use significant amounts of performance-based compensation may have contributed to the current dire situation.

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As Firms Face CEO Pay Scandals, Directors Quit

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Expert Perspective by Grahall’s Garry Rogers

Two recent Wall Street Journal articles present a most interesting  contrast.  The first is an opinion piece dated December 4, 2008 titled “Since Enron, Little has Changed”; and the second is a news article dated November 21, 2008 titled “As Firms Founder, Directors Quit”, by Joann S. Lubin (journalist for The New York Times).  Let me summarize and quote from the articles.

· CEO compensation is screwed-up because too often Boards failed at the task of governance. Were these boards incompetent, uninformed, or simply intimidated by powerful CEOs? The answer is not entirely clear. Whatever the reason, the outcome was the same: they failed in their fiduciary duty to govern.

· Primarily because of excessive time demands, the number of Directors not standing for reelection is on the rise. So far this year, 46 outside directors who are CEOs or chief financial officers left the boards of 42 companies in three struggling industries — financial services, retail and residential construction. … During the same period three years ago, 31 directors with those titles left.

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Since Enron, Little Has Changed

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Published in the Wall Street Journal, December 4, 2008 by Malcolm Slater & Bill George

Enron’s demise in 2001 and the collapse of some of our most prominent financial institutions this fall share a common root cause: a shocking breakdown in corporate governance resulting from the endorsement of perverse financial incentives by directors, coupled with ineffective monitoring of firm-wide risk.

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Assessing the ‘Reasonableness’ of Executive Compensation in Closely Held Corporations

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Published in the New York Law Journal April 23, 2009 by David E. Kahen and Elliot Pisem

Every tax advisor to closely held corporations is confronted from time to time with the question of whether compensation paid to the chief executive or other senior officer of a closely held corporation will be fully deductible under Internal Revenue Code section 162(a), which permits a deduction for ordinary and necessary expenses paid or incurred in carrying on a business, including “a reasonable allowance for salaries or other compensation for personal services actually rendered”.

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