Archive for March, 2010

It’s a Sticky Subject

by  

No Comments | Share/Save

Expert Perspective by Grahall’s OmniMedia Editorial Board

After all the dire predictions of the exodus of top talent from TARPS firms, Eric Dash says in his article for the Wall Street Journal March 22, 2010  (Few Fled Companies Constrained by Pay Limits): “New data… suggests the departures were more of a trickle than a flood. Of the 104 senior executives whose pay was set by the federal pay regulator in the last two years, 88 executives, or nearly 85 percent, are still with the companies even though their pay was drastically cut back, according to people briefed on the government data.”
 
One hopes that those who remain are the ones best suited to lead the company in the future.   We sincerely doubt that these 85% who remain are the “losers” who couldn’t find another job.  We think that the fear was overblown, perhaps intentionally, in the hopes that the risk of losing key talent would keep Fienberg from slicing too deeply into executives’ pay. 

It is important to remember that the question “should I stay or should I go?” is influenced by many factors. 
Continue reading “It’s a Sticky Subject” »

Filed under: Expert Perspective



If it’s broken fix it! But is it broken?

by  

No Comments | Share/Save

Expert Perspective by Grahall’s OmniMedia Editorial Board

In his March 16, 2010 article for the Huffington Post (Insurance Executives: A Big Part of Our Health Care Problem) William Lazonick says:  “Among the most powerful and vociferous opponents of health care reform are the executives of publicly listed health insurance companies and their lobbyists… Corporate profits are necessary to fund the investments that generate higher quality, lower cost goods and services. But that is not how the largest corporate health insurers have been using their profits over the past decade. Rather, virtually all of their profits have been spent on buying back their own stock for the sole purpose of jacking up their stock prices.”

Let’s take a small step back and remember that the primary goal of publically traded companies is to increase stock price.   Shareholders purchase stock for this reason (and maybe for dividends), and the Boards of Directors at these companies are in place to ensure that shareholders’ interests (that being increases in stock price) are considered first and foremost.  Of course some shareholders are also executives and very likely ALL executives are also shareholders (think Venn diagram with a little circle representing executives in the center of a bigger circle representing all shareholders). 

Are stock buybacks bad or were they the wrong thing to do? As Matt Koppenheffer said in his September 21, 2009 article for the Motley Fool (Your Company Did a Terrible Thing):  “There are really only a handful of options for using the cash produced by a business: organically expanding the business, making acquisitions, paying down debt and improving the balance sheet, paying a dividend, and repurchasing stock…. [companies should] choose the option that provides the best return.”

And by this he means the best return to shareholders (please refer to the Venn diagram described above). 

Perhaps buybacks were the option that, at the time, provided the best return. And based on the increase in stock prices for the Health Insurance companies that Lazonick mentions, it looks like these buybacks helped to fuel some pretty strong stock price increases.
• For Aetna, from about $7 in January 2000 to its high of about $54 in November 2007
• For Wellpoint, from about $21 in November 2001 to near $90 in December 2007
• For UnitedHealth Group, from about $7.60 in January 2000 to about $50 in January 2008.
   
But again does this make it wrong? Well, as Lazonick so clearly points out, it appears that “…these health insurers increase[d] their profits by raising premia, excluding people with pre-existing conditions, and capping lifetime benefits… to do more stock buybacks.”

For Americans who were not fortunate enough to be part of the shareholder Venn diagram for these companies but rather “just” customers, the results of these decisions were not so positive and may call into question the applicability of this business model: publically traded companies providing essential health care services.  

Perhaps Health Care Reform should demand that every health care insurer establish the following as their mission statement: “A customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so.” (Mahatma Ghandi)

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

Filed under: Expert Perspective



“The truth is… never simple” (Oscar Wilde)

by  

No Comments | Share/Save

Expert Perspective by Grahall’s Omnimedia Editorial Board

A March 23, 2010article in Free Press (freep.com) by Brent Snavely (Mulally compensation hits $12.87M at Ford Union angry about white-collar pay) got our Editorial Board talking.

Snavely says: “Ford President and CEO Alan Mulally’s compensation of $12.87 million in 2009 might look unreasonable to some, but it is based on smart executive compensation practices, experts say.”

Snavely quotes Daniel Moynihan, principal of Compensation Resources saying of Mulally’s compensation: “It looks like they have a true pay-for-performance package there. Their stock price is doing well, and his fixed compensation went down.”

Yes, Ford did very well in 2009 as compared with other car companies and some other companies in other industries. And to its credit, Ford did it without the need for government support. But it is simplistic to compare Mullaly’s compensation and Ford’s stock price and conclude that it is ”true-pay-for-performance.”
Continue reading ““The truth is… never simple” (Oscar Wilde)” »

Filed under: Expert Perspective



An Uneasy Alliance

by  

No Comments | Share/Save

Expert Perspective by Grahall’s OmniMedia Editorial Board

In his March 22, 2010 article for Dealbook (Feinberg to Examine Past Pay at 419 Firms in TARP) Eric Dash discloses that “..Kenneth R. Feinberg is planning to examine past executive payouts at 419 firms that received government bailout money in fall 2008… Mr. Feinberg will look at whether any of the 25 top executives at any of these firms received more than $500,000 from October 2008, when money from the Troubled Asset Relief Program was given out, until Feb. 17, when federal law limited executive pay at firms receiving TARP money…”

Let’s compare the political climate then and now.
Continue reading “An Uneasy Alliance” »

Filed under: Expert Perspective



Walking on Water For the Rest of Us Mortals

by  

No Comments | Share/Save

Expert Perspective by Grahall’s OmniMedia Editorial Board

The March 12, 2010 article “Closer Look at Berkshire’s Executive Compensation Policy” author Ravi Nagarajan says:  “Berkshire Hathaway’s 2010 Proxy Statement was released yesterday and… Mr. Buffett’s total compensation remained at $175,000 which included $100,000 of salary and $75,000 in director’s fees from the Washington Post… The $100,000 salary for Mr. Buffett and Mr. Munger has remained constant for 29 years, during which time inflation has eroded over 60 percent of the purchasing power of a dollar… Mr. Buffett has over 98 percent of his net worth in Berkshire while Mr. Munger’s family has over 80 percent invested in the company. Both men wish to set an example by ensuring that their fortunes move in lockstep with the results for investors…”

Although this stance is very admirable on the part of Messrs: Buffett and Munger, it is  a formula that would be neither commendable nor wise in most other companies.
Continue reading “Walking on Water For the Rest of Us Mortals” »

Filed under: Expert Perspective



The Hurd Locker

by  

1 Comment | Share/Save

Expert Perspective by Grahall’s OmniMedia Editorial Board

The March 11, 2010 article from The Economist print edition (Cheques and balances: Efforts to reform how bosses’ salaries are set are unlikely to work) begins: “SPRING is in the air, bringing with it angry thoughts about executive pay. This year the economic downturn is adding extra emotion to the season’s familiar fury…There is even a new fad nicknamed the “pity bonus”, paid to bosses who failed to qualify for a big enough payout under the established bonus scheme due to the unforgiving economy. Mark Hurd, the boss of HP, was given an extra $1m bonus on top of the $15m he received under the firm’s annual incentive scheme to reflect the board’s view that he had not been “fully rewarded” for relative outperformance against competitors…” 

(The article also bashed IBM, GE, Starbucks, BP and Goldman Sachs for their executive bonuses.)

Yes, the bonus numbers are very big, and with millions of Americans still unemployed, it appears there is a lot to be angry about. But on the other hand it is important to consider a few facts that might provide a more balanced perspective.
Continue reading “The Hurd Locker” »

Filed under: Expert Perspective



Rank and Yank… or Not

by  

No Comments | Share/Save

Expert Perspective by Grahall’s OmniMedia Editorial Board

In her MARCH 10, 2010 article for the Wall Street Journal (AIG’s Rankings Will Weigh on Pay) author Serena Ng says: “American International Group Inc. is basing its upcoming round of bonuses and incentive pay on its new “forced ranking” system that measures the performances of about 10,000 employees… to demonstrate to the public and the government that AIG is paying employees for their performance and not just for staying at the company.”

As US taxpayers and therefore part owners for the company, we hope AIG has carefully thought this through.  Forced ranking systems are not “plug and play” type tools.  The success of this methodology is highly dependent on how it is implemented.  And when implemented improperly, it can create or exacerbate human resource problems. AIG has a boat load of those problems in that arena.
Continue reading “Rank and Yank… or Not” »

Filed under: Expert Perspective



Now that Health Care Reform has Passed, What’s Next for Employers”

by  

No Comments | Share/Save

10:47 PM Sunday March 21st, 2010 Health Care Reform Passed the House with a Vote of 219 to 212.  About 10 minutes later the “fixes” to the Senate bill pass by one vote more. As Yahoo News Blog “House Passes Second Historic Healthcare Vote”  says:

“While the senate still has to weigh in on an amended bill, most observers think that shouldn’t be much more than a formality especially at this late stage of the process. At the very least, the House vote ensure that there will be a health care bill on President Obama’s desk, perhaps as early as the end of this week.  And the president’s signature will set I motion the most dramatic change to American health care since Lyndon Johnson signed Medicare into law in 1965.

The bill, which the Congressional Budget Office says will cost $940 billion over the 10 years, is expected to cover 32 million Americans who are presently uninsured”

Now what?  We asked Grahall’s Robert Cirkiel what’s next for employers.  Here are Robert’s recommendations.
Continue reading “Now that Health Care Reform has Passed, What’s Next for Employers”” »

Filed under: Ask the Expert



Tools of the Retention Trade

by  

No Comments | Share/Save

Expert Perspective by Grahall’s OmniMedia Editorial Board

A couple of recent articles on retirement programs caught our eye.  First was the February 27, 2010 article by Dan Fitzpatrick in the Wall Street Journal (Retirement Benefits for BofA’s Lewis: $83 Million).  The article’s title alone is eye opening, and Fitzpatrick goes on to say:  Mr. Lewis, who retired Dec. 31 …. According to [a securities] filing … is eligible for about $57 million in pension benefits, about $11 million in deferred compensation and an additional $4.6 million in vested and unvested stock.” 

Wow, we hope Mr. Lewis has a pretty big nest built to hold that retirement nest egg!  Lewis’s retirement payment seems even more fantastical when contrasted to the February 10th article in World at Work “Employers Plan to Restore 401(k) Match in 2010, Survey Finds” that says: “… high on employers’ priority lists for 2010: restoring company 401(k) matches that were suspended or reduced during the market downfall…”.  The article goes on to say: “… [there is] a continued emphasis among employers on automating 401(k) plans to help workers maximize the benefits of their retirement plans.” 

Few companies still offer defined benefit retirement plans to employees. In the early 80’s a cheaper option appeared in the form of 401(k) plans, and before long many companies froze employee pensions and replaced these expensive balance sheet drainers with 401(k) plans.  For employees who contribute their own money many companies will kick in a matching amount, most often around 3% of employee pay (assuming the employee puts in 6% of pay). 

So without defined benefit pensions what might an employee with only a 401(k) retirement savings expect to have as a nest egg? 

An article titled “What are Average Retirement Savings for Different Age Groups?” (taking data from the Congressional Research Service (CRS), Retirement Savings and Household Wealth in 2007), 401(k) Planning.org says, “The more time that a person has until reaching retirement (i.e. the younger), the greater the opportunity to make additional contributions and for investment earnings to build up his or her retirement account balance. Unfortunately, the best retirement savings by age data available predates the 2008-09 financial meltdown.”

If we look at this data for the group of folks most close in age to the 62 year old Mr. Lewis, the average account balance (for people age 55-64) is $272,000 and the median is $100,000–a far cry from $83 million.

In our November 9th blog, “The Haves vs. The Have Not” we say:  “SERPs have the ability to create an elite “management aristocracy” (based on money not bloodline) with the management “haves” having lots and lots of money with which to retire.   There is no question in our minds that a backlash from Main Street, coupled with pressure from media and government will soon bring heightened focus onto these non-qualified plans.” 

But let’s go a behind the numbers. 

There are other significant differences between executive pensions and employee retirement programs.  The first is that executive pensions–especially those that result in numbers like $83 million– are “unfunded and non-qualified”.  They are called SERPs (supplemental executive retirement programs) and essentially they are unprotected benefits.  Executive pensioners would stand behind general creditors for payment in the case that a company went bankrupt.  401(k) plans are fully funded and are protected from creditors, if not from market losses. 

Another major difference between SERPs and 401(k)s are that SERPs are used as powerful retention tools when they are properly designed.  401(k) plans, on the other hand are best known for their portability.  That is, you can take your account with you when you leave a company and roll it over to an IRA or a new employer’s plan without tax consequences. Retention tools, they are not.

For more Grahall perspectives on employee and executive benefits read:

• What It Really Means to Have Only a 401(k) Plan for Your Retirement

• 401k Plans are Easy to Fix: Use A Hammer 

And for more on the implications of low retirement savings on workforce design read:

• From Here to Eternity 

• It’s Complicated 

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

Filed under: Expert Perspective



There’s No “We” in Team

by  

No Comments | Share/Save

Expert Perspective by Grahall’s OmniMedia Editorial Board

In his March 4, 2010 article for the Wall Street Journal (How Much Does Pay Matter?) author Alan Murray concludes his article by saying:  “The bottom line is this: Incentive pay is an effective tool in situations where performance can be fairly measured and where it is based largely on individual effort. But it is less effective in situations – common in today’s workplace – where the measurements are highly subjective and the work is done by teams.”

We agree that there are situations where incentive pay might be ineffective but the scenarios where we find that to be the case differ from those suggested by Mr. Murray.
Continue reading “There’s No “We” in Team” »

Filed under: Expert Perspective