Archive for November, 2009

Creating Quality Compensation

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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeIn a November 19, 2009 article for The Street (Tie Pay to Performance — The Innovators) contributor  Bob Prosen shared a few “characteristics of quality leadership… that ultimately make a superior leader a strong contributor to achieving and accelerating profitability”.

We thought we might share our own list of characteristics of “quality compensation” that can ultimately make your compensation programs strong contributors to achieving and accelerating your business strategy and profits: 

1)  Start by examining your external environment: the public, government, competitors and unions because the external business environment has an enormous influence over the development of executive rewards strategies.

2) Consider the needs of your stakeholders: suppliers, employees, shareholders, partners and customers.  These are the groups that care about the company’s success since in many cases the company’s success influences their own

3) Revisit, renew and refresh your Vision, Mission and Values statements as these provide the guidance for decision makers especially when the decisions get tough.  Good statements promote good decisions.

4) Understand your business strategy: including your general, value chain and specific business strategies.  Align your executive rewards programs with these strategies. 

5) Review the Organizational Capabilities and People strategy: Since organizational capabilities comprise a company’s skills, abilities and expertise and are a direct result of how an organization decides to invest in its human resources. Why is this important? Because a total rewards strategy should be designed to attract and retain the people with the right skills and abilities. 

6) Take a surgical approach to designing compensation programs.  This can help a company to select, retain and mobilize not just its best people but the people best suited to drive success in the future and create true incentives to drive desirable and risk-appropriate behavior. 

7) Consider all the impacts. The organizational impact – how the organization will behave under certain pay scenarios. The employee impact – how the individual employees will behave under certain pay scenarios. The financial impact – how profit will accrue to the organization and the shareholders under certain pay scenarios.  Most companies focus only on the financial impact when making pay decisions.   

8) Address all components of compensation structure.  As important as getting right the compensation amounts (“the money”), it is equally important to get right the combination of pay, incentives, and non cash compensation such as benefits ( “the mix”).  It is also imperative to “get right” the explanation of how the compensation supports the business plan (“the message”.)  Grahall calls the combination of money, mix, and message “M3″ and all three must be done properly.

We pledge to you that if you consider these when design your compensation programs, you will design compensation programs that will better drive behaviors that will help you reach your business goals.

For more information on designing an effective compensation program read the book Effective Executive Compensation  by Grahall’s own Michel Graham contact us.

Contact Grahall’s Editorial Board at edie.kingston@grahall.com

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A Better View

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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeThe November 19, 2009 column in DealBook ran an article entitled Another View: Unintended Consequences on Wall St. by Peter J. Solomon, the chairman of the Peter J. Solomon Company.  Solomon says: “… let’s face a couple of facts. First, there are no absolute standards for determining compensation, particularly in finance…  Second, Wall Street compensation — relative to value added — is fundamentally inequitable… Third, the compensation brouhaha is not constructive…”

Are these the facts?  Well maybe or maybe not.

There may be no “absolute standard for determining compensation” but there are standard processes used to do this.  Traditionally the process used for asset managers and investment bankers to determine compensation is to do benchmarking and competitive analysis.  If you reflect about what the outcomes of competitive analysis are you find that firms who rely on this are always pegging themselves above the median. (I mean who wants to be “average” or God forbid “below average”).  So what happens as these firms set pay at the 50% percentile or more?  The median is driven up year over year.  Firms hire consultants to perform the competitive analysis, justify a 5% to 15% increase, then come back and do it all over again next year.   

On its surface it does seem that Wall Street pay is inequitable.  But we don’t think that most Americans on Main Street begrudge high pay to “financial manipulators, movie stars and guys who hit three-run homers”.  We understand that certain skills and capabilities and certain jobs are “better paying”.  What Americans don’t want is to be “taken”.  Americans weren’t angry that Wall Street executives were highly paid until those same executives almost bankrupted the world and many Americans lost their jobs.  Now they are angry to hear that those same executives are getting mega bonuses paid in part by tax dollars (at TARP companies) while they wait in line at the unemployment office. That is inequitable.

The furor over compensation has certainly used up a lot of ink (and virtual ink) in the media, the talking heads of right, left and center leaning outlets all have something to say. It might not make for smooth sailing toward “achieving a new regulatory landscape” but that is the democratic process.  It can be ugly and difficult and time consuming but it’s the best one we have.  

So gentle reader we recommend that you consider the facts.  In fact, consider them all.

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

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On the outside looking in

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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeIn her November 20, 2009 article, “Goldman Holders Miffed at Bonuses Some Investors in the Stock Urge That More of the Riches Be Passed Along to Them”,  Susanne Craig says:  “Some of the largest shareholders in Goldman Sachs Group Inc. have urged the Wall Street firm to reduce the size of its bonus pool, arguing that it should pass along more of its blockbuster earnings to investors…”

Shareholders are certainly a group of folks whose concerns Boards need to address.  The interesting situation here though is that Goldman was a private partnership for 130 years (founded in 1869) before going public in 1999.  The May 17, 1999 issue of Business Week contained an article titled “Goldman Sachs: How Public is this IPO” by Leah Nathans Spiro.  That article shared that at the time of the IPO in 1999 “By far the biggest chunk of Goldman–some 48.3%–is still owned by the 221 former partners… The next biggest chunk, some 21.2%, is owned by Goldman nonpartner employees. Some 17.9% is owned by retired Goldman partners and two longtime investors, Sumitomo Bank Ltd. and Hawaii’s Kamehameha Activities Assn.  That leaves 12.6% of the stock for the public. But on closer inspection, few of the public shareholders were folks who happened to be lucky enough to “snare a few shares”. The articles goes on to say that of this 12.6%, Goldman placed “almost every share in the hands of its own customers.”

So for 130 years as a private partnership, Goldman’s partners kept all the profits for themselves.  At the time of the IPO nearly 90% of the stock  was in the hands of Goldman Partners, Goldman employees, and Goldman retirees.  That “shareholder block” was pretty powerful, essentially ensuring that Goldman could do what they wanted without fear of much uproar from shareholders. 

Fundamentally, in a publically traded company there are perhaps 2 or maybe 3 external forums that could impact decisions about executive pay and bonuses.  First there are the shareholders who, if they don’t like pay decisions, can vote differently than management recommends attempting to replace directors or by voicing their concerns if a “say on pay” vote is included. Shareholders can also “vote with their feet” by investing their money differently.  However, Goldman has been a great investment for shareholders and it’s not likely that many would sell their stock to make a statement over compensation decisions (especially since the largest block of shareholders still remains Goldman’s own partners, employees and retirees). 

Second (and maybe third) there are regulators and legislators.  The SEC create some issues by questioning Goldman’s CD&A but as we said in our recent blog Read Our Lips  the  only “enforcement” power that the SEC holds …  is to write a letter requesting a rewrite of the CD&A along with a proxy amendment. While some might consider the need to amend a proxy may raise red flags with securities analysts, the CD&A is a relatively unimportant part of the proxy disclosure and proxy amendments resulting from changes in the CD&A would not cause the analysts much concern.  And unless our legislators (i.e., our government) is a significant shareholder (think Citibank, BofA and AIG) it is unlikely they would have much impact on compensation.

So with the deck stacked in their favor, Goldman will keep on being Goldman. Perhaps they are reveling in being the highest payers and the highest paid. Goldman partners are likely saying among themselves “We are king of the hill and we don’t care who knows it, since it is great for recruiting and retention of the best talent.  And anyway, according to Lloyd Blankfein we are doing ‘God’s work’, so He must be on our side.”

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

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Grahall Named America’s Healthiest Consulting Firm

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Expert Perspective by Grahall’s Robert Cirkiel

expert perspective telescopeIn a recent United Health Foundation study, “The Healthiest and Unhealthiest States”, Vermont — which is the home of the beautiful Grahall Properties  and birthplace of Grahall partner Michael Graham — finished first.  Forbes published the study finding.  We are extremely proud of this achievement.  For the record, full disclosure, and transparency we have no relationship with either Forbes or the Foundation that would affect these findings.

The study considers the 22 factors they consider to be most important, but let me discuss my personal eight which are somewhat different.  I discovered them a few years ago in Italy.  At the time, I was chaperoning my son’s eighth grade class trip. My job was to be the “surrogate parent” – I did the “parenting” so that the teacher would be free to do the teaching.  In one week’s time, I lost ten pounds along with all of my little aches and pains and rediscovered my energy.  For the record I am a “50 something” who expected the constant touring and pasta consumption to have the opposite effect.

So, to what do I attribute this? Was it happiness, engagement, meaningfulness, achievement, exercise, sunshine, rest, and food quality?  Notice I did not say stress-less.  In fact, keeping an eighth grade Latin class out of the Arno is anything but.   But it was good stress, as in what I was doing was difficult but important and getting the students home in one piece and with fine memories was all the achievement and satisfaction I needed. 

Seems like such a simple formula, right?  I submit that it is a contributing factor to why Italians spend 9% of GDP on health care and we spend over 16%.  We can pass all the laws we want and vilify insurance companies, doctors and the government all we want but until we get healthier our spending will never come under control. 

Employers need to take a close look at my list because they can impact every item on it.  For many, the workplace is their primary source of engagement, meaningfulness and achievement.  The workplace must engender these things.  And, while an employer cannot turn unhappy people into happy people or fix everything that is wrong in an employee’s life, it does control what happens during the work day.  And, employers certainly can have a large influence on wellness by using the company medical plan to drive it and all employers should do so.

As far as our country’s efforts to get our health equation under control via Federal legislation, note that Massachusetts, the State with the laws most closely resembling the bills before Congress, finished third in the study.  This suggests that legislation can help.  But at the end of the day, the Vermont model with its outdoorsy lifestyle and ample supply of medical services works even better.

Grahall can help your organization get control of your medical costs, improve outcomes, and increase productivity.  Contact us and let us show you how.  

For more information about renting Grahall Properties for conferences, training sessions or simply for rest and relaxation in an environment that inspires reflection and creative thinking contact Robert Cirkiel at robert.cirkiel@grahall.com.

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Show Me the Money

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Published in New York Magazine November 27, 2009 by Gabriel Sherman

Shortly after 11:00 on the morning of November 4, Robert Benmosche, the 65-year-old Brooklyn-born CEO of the American International Group, sat across an oval conference table from Kenneth R. Feinberg, the special master for TARP executive compensation of the U.S. Treasury. Benmosche was flanked by AIG’s board of directors, which had requested that Feinberg come to the mahogany-paneled boardroom on the eighteenth floor of AIG’s Pine Street headquarters to explain himself. Light sandwiches and soda were served from a buffet in the hallway.
The mood was distinctly somber. Two weeks before, Feinberg had ruled that a dozen of AIG’s 25 highest-paid executives would have their 2009 income slashed by 91 percent and that salaries could not exceed $500,000 without “good cause.” About half of the executives on this list came from AIG Financial Products, the vilified trading division that had written the disastrous credit-default swaps that brought the civilized world to the brink and forced taxpayers to extend $182 billion (and counting) in financial support for the firm. Benmosche was deeply angry over Feinberg’s decision to limit his executives’ pay. But his traders were even angrier. Though the government had saved their company from imploding last September, they saw themselves as victims, scapegoats—and they were ready to fight back, departing en masse on March 16, 2010, the day after the contracts are due to be paid, if their demands weren’t met.

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No Lessons Learned on Wall Street

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Published in The New York Times November 24, 2009 by Albert R. Hunt 

Let’s stipulate: Lloyd Blankfein and Jamie Dimon are enlightened, broad-gauge chief executive officers, among the finest in the world.
Their firms, Goldman Sachs and JPMorgan Chase, are indispensable in raising capital for companies, creating wealth. They’ve paid the government assistance money received in the financial crisis and are showing record profits today. Finally, I am no expert on the ways of Wall Street.
Still, if Goldman and JPMorgan hand out record bonuses next month — reportedly they’re planning more than $20 billion combined — in this economic and political climate, it will underscore why, whatever their Wall Street colleagues think of them, they are hated by Main Street.
The leading edge of this anger could be seen in Congress last week when Treasury Secretary Timothy F. Geithner faced calls to resign. One lawmaker said he should never have been hired.

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Read Our Lips

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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeCompliance Week summarized a November 9, 2009 speech by Shelly Parratt, deputy director of the SEC’s Division of Corporation Finance, in their November 10, 2009 article SEC on 2009 Proxy Season, Expectations for 2010saying “Note to those tasked with drafting the Compensation Discussion and Analysis [CD&A] section of the proxy: Pay particular attention to your analysis and performance targets disclosures, because the Securities and Exchange Commission staff will.”  The article concludes with a quote from Parratt saying “Read our guidance”.

Essentially, when preparing analysis and performance targets disclosures in the CD&A, Boards are supposed to say why they chose to pay executives in a certain way and provide background on whether the executives did or did not meet goals, supporting that with and description of the company’s goals.  The SEC provides way to dodge some of these requirements
Continue reading “Read Our Lips” »

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Employment Tectonics: The Coming Quake

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Executive Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeIn her November 16, 2009 article, Businesses Mount Efforts to Retain Valued Employees  Sarah Needleman says:  “History suggests some of these workers will look elsewhere as the economy improves. So far this year, fewer workers have quit jobs than at any time since the U.S. Labor Department began tracking the data in 2000. But the number of workers quitting jobs jumped 34% between July 2003 and December 2006, during the expansion that followed the prior recession.”

But the fundamental considerations are who will leave and why and what can companies do about it?
Continue reading “Employment Tectonics: The Coming Quake” »

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He’s ‘Done’ It

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Expert Perspective from Grahall’s OmniMedia Editorial Board

expert perspective telescopeTwo articles this week addressed the comments made by AIG’s CEO, Robert Benmosche, as a result of limitations imposed by Kenneth Fienberg, The Obama Administration’s “Pay Czar”.   First on November 11, 2009  Wall Street Journal reporters Liam Pleven, Serena Ng and Joann S. Lublin tell us that “At a board meeting last week, the strong-willed industry executive told fellow AIG directors that he was “done” but agreed to think it over after other board members reacted with shock, according to the people.” (AIG’s Benmosche Threatens to Jump Ship  Chafing Under Government Oversight, Chief Executive Tells Board He’s ‘Done’; ‘An Impossible Situation’). 

Reaction: Cry baby!
Continue reading “He’s ‘Done’ It” »

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Shareholders Alone Can’t Correct ‘Too Big to Fail’

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Published in The Nation November 23, 2009 by Zach Carter

During a House Oversight Committee hearing in October, a rare bipartisan consensus appeared to be building around a strategy to rein in executive compensation.
US banks, shareholders actually want their executives to be rewarded for taking on excessive risk.
“We need to empower the stockholders of public companies to better manage the package of pay and the incentive packages of their key executives,” said Representative Darrell Issa of California, the panel’s ranking Republican.
“Some constraints on these companies are necessary to protect the safety and soundness of the entire financial system,” said committee chair Edolphus Towns, a Democrat from New York. “We need to give the shareholders a way to get this under control.”
But while reinforcing shareholder rights may solve other corporate governance problems plaguing the US economy, like sloppy board oversight and managerial incompetence, shareholders are not going to end the bloated pay practices that have sparked outrage over the past year.

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