[REBORN FROM THE ASHES][comment][12.25]

kulewy531UID: 2603031

Rebuttal（反驳） statements

The moderator（arbitrator）'s rebuttal remarks
Oct 23rd 2009 | Adrian Wooldridge  
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It seems that experts are just as passionate on the subject of executive pay as the general public.
Mr Kaplan argues that the most powerful criticism of executive pay-that bosses get upside and no downside-is simply false. He points out that three of the most maligned（speak evil of） bosses in the financial services sector, Vikram Pandit of Citigroup, John Mack of Morgan Stanley and Kenneth Lewis of Bank of America, all lost small fortunes in 2008. CEOs as a group lost roughly 40% of their wealth in 2008.
Ms Minow argues that her rebuttal is being written by the headlines. Financial service companies are once again paying huge bonuses despite the fact that their companies have been propped（support） up by public money. She points out that CEOs enjoy the unique privilege of being able to appoint the people who decide their pay. She also reiterates（repeat） the point that there are plenty of devices such as golden parachutes that cannot possibly be justified by performance.
In his expert evidence，
Rakesh Khurana tries to focus on fundamental questions such as what the purpose of compensation is. He argues that the market for CEOs is a highly distorted one because CEOs themselves can influence the process and performance is hard to measure. He suggests that extreme pay differentials can damage companies by attracting the wrong sort of bosses and demotivating the rank and file. He also worries about the legitimacy of the system. One survey suggests that only 13% of people trust what CEOs say.
So far the voting is going heavily against the motion.
But I wonder how far this is driven by emotion rather than a reasoned assessment of the evidence. I would urge the participants to pay close attention to the wording of the motion-particularly the key phrases ‘one the whole' and ‘deserve'. We need to focus more on the overall picture, around the world as well as in the United States, rather than on a few attention-grabbing anecdotes. And we need to think more closely about the word ‘deserve'. Mr Kaplan's best chance of turning the voting around is to demonstrate that outstanding bosses can boost the performance of the organisations that they head, not only earning their pay but also benefitting workers, shareholders and consumers.


The proposer's rebuttal remarks
Oct 23rd 2009 | Steven N. Kaplan

Nell Minow argues that top executive compensation was a major cause of the financial crisis. She bases her conclusion on two "outlier"( one whose domicile lies at an appreciable distance from one's place of business) examples, Angelo Mozillo and Aubrey McClendon, that she calls "anecdotes". The plural of anecdote is data. And the data, that is the pay at a broad sample of financial companies, simply do not support her conclusion. Ironically, neither does her two anecdotes.
Ms Minow makes the following claims. (1) Incentive compensation rewarded top financial executives for the quantity of transactions, not the quality. (2) Top CEOs, like Mr Mozillo, took large amounts of money out of their companies before their companies failed. (3) The CEOs knew they were making bad investments, but did so anyway because they could make more money doing so. (4) CEOs get upside, but no downside. (5) The post-meltdown awards create incentives that reward management, but damage shareholders and everyone else.
These claims are false. As David Yermack of NYU pointed out in a recent piece in the Wall Street Journal, Vikram Pandit of Citigroup, John Mack of Morgan Stanley and Kenneth Lewis of Bank of America:
"all lost small fortunes in 2008. The 2008 compensation of Messrs Pandit, Mack, and Lewis was approximately minus $105 million, minus $40 million, and minus $108 million, respectively, after taking account of the losses on the stock that each CEO owned in his firm. Other CEOs in the financial industry had similarly bad years. Kerry Killinger of Washington Mutual lost more than $25 million before being ousted(To eject from a position or place; force out) in September, Kennedy Thompson of Wachovia lost more than $30 million before being fired in June, and Jeffrey Immelt of General Electric lost more than $60 million ... These CEOs' financial reversals were part of a robust system of pay-for-performance widely used by most U.S. companies."
Yermack also points out that James Cayne lost most of his billion-dollar fortune when Bear Stearns failed and Richard Fuld of Lehman Brothers lost hundreds of millions of dollars.
The fact is that most financial-company CEOs received the lion's share of their pay in stock and options(期权). And they kept most of that pay as shares in their companies which they never cashed in. When the crisis hit and their stock prices sank, those CEOs lost a large fraction of their wealth and, in many cases, their jobs.
As I wrote in my first entry, this is true, in general, of the overall CEO market. CEOs earn a lot and their stock appreciates(涨价) when their companies perform well. CEOs lose large amounts of wealth and their jobs when their companies perform poorly. It is irresponsible to claim that CEOs do not bear any downside risk. In 2008, CEOs as a group lost roughly 40% of their wealth.
In direct contradiction to Ms Minow's conclusion, the financial CEOs were compensated in the end for the quality of their transactions. The CEOs did not take much off the table. The CEOs had a substantial amount of downside risk. In fact, those CEOs would have been much better off if they had not engaged in the transactions they did.
It is worth adding that David Yermack is a noted researcher on CEO pay who studies large samples over long periods. He has written several articles highly critical of specific CEO pay practices, like corporate jet(公司商务机，公司为商务旅行而购买的专用机型) usage. Nevertheless, his conclusion on the relation of CEO pay to the financial crisis is diametrically (directly) opposed to Ms Minow's (as is his characterization(description) of the CEO market in general).
A study of CEO incentives in a broader group of financial institutions during the crisis by Rudi Fahlenbrach and Rene Stulz of Ohio State (and a former president of the American Finance Association) confirms Yermack's analysis and also clearly refutes Ms Minow's conclusion.
Ironically, even her two anecdotes about Angelo Mozillo of Countrywide and Aubrey McClendon of Chesapeake Energy fail to support her case.
Unlike the other CEOs mentioned above (and most financial-institution CEOs), Mr Mozillo did manage to sell a lot of his stock. Unfortunately for him, the SEC has charged him with securities fraud and insider trading. And it is unlikely to lead to a good outcome for him. If found guilty, he potentially will end up paying three times what he took out. Clearly, he appears to have behaved badly, but he did not get away with it.
As for Mr McClendon, he runs an energy company. How could he possibly have had anything to do with the financial crisis?
The
preponderance (dominance) of the data and, even Ms Minow's "outlier" "anecdotes," therefore, fail to provide any evidence that top executive compensation had much to do with the financial crisis.
Top executive compensation did not cause the financial crisis. Instead, the crisis was caused by loose monetary policy, a global capital glut(充斥), over-high leverage at investment banks, mandates from Congress to provide mortgages to people who could not afford them, flawed ratings from the rating agencies and poor incentives at mortgage origination (not the CEO) level. Consistent with this, the financial crisis has spread to financial institutions in other countries with very different pay practices.


The opposition's rebuttal remarks
Oct 23rd 2009 |  Nell Minow

The headlines are writing my rebuttal for me.
Goldman Sachs set aside $16.7 billion for compensation and benefits in the first nine months of 2009, up 46% from a year ago.
While its net income has tripled, its core investment banking business is down 31%. The Toronto Star quotes Goldman’s CFO, David Viniar, using an unforgivable oxymoron(矛盾修饰法)
in a conference call with reporters: "Our competitors are paying people quite well [and are] very willing to pay employees guaranteed bonuses of very high amounts." (emphasis added)
Mr. Viniar also showed that he has a very short memory, arguing that Goldman is operating without any government guarantee, ignoring the reality of the government guarantee that kept the system going just a year ago.
These bonuses have nothing to do with paying for performance. How much of Goldman's bouncing back is due to the government's guarantees and the hundreds of billions of dollars it poured into Goldman, Wall Street, and other subsidies and outright(openly) welfare payments to the very institutions that came close to bringing down the entire economy? Shouldn't the American people expect some sort of discounted calculation of the bonuses that reflect a market-based assessment of performance? Once again, Wall Street is all about capitalism when it comes to the upside, but all about socialism when it comes to the downside, that is, from each, according to his ability, to each, whatever he can get away with.
Also this week, we had the testimony of Neil Barofsky, the special inspector general for the government's financial rescue program before the House Committee on Oversight and Government Reform. The serial offender AIG has promised $198m in bonus pay to its employees next March, according to the testimony, and there is very little the government or anyone else Cando about it. Because the bonus agreements were entered into before the bailout, the government has no legal authority to stop them. All Special Master Kenneth Feinberg can do is to ask the company not to pay the bonuses and rattle his saber(以战争恫吓) about the pay he can control going forward, hoping that the threat of clamping down on the 25 executives at each of the covered companies he does have authority over will be enough of an incentive to force a change. In the meantime, once again, pay is uncoupled(disconnect) from performance. Even the company has given up on trying to make that case, relying instead on opportunity costs to justify the bonuses and arguing that these kinds of payments are necessary in order to keep the employees from leaving. Based on their past performance and their unwillingness to tie future pay to genuine measures of sustainable growth, I suggest that the best choice for shareholders is to let them leave.
Mr Barofksy gave the committee a Treasury Department(财政部) report on the last set of outrageous AIG bonuses. It concluded in part that "Treasury invested $40 billion of taxpayer funds in AIG, designed AIG's contractual(Of, relating to, or having the nature of a contract) executive compensation restrictions, and helped manage the Government's majority stake(股份) in AIG for several months, all without having any detailed information about the scope of AIG's very substantial, and very controversial, executive compensation obligations." If a private entity had been asked for emergency funds, it is unthinkable that any money would have been advanced without establishing some control overcompensation. There are two reasons for this. The first is agency costs. Anyone (other than Secretary Henry Paulson, apparently) putting money at risk will want to ensure that it will not be inappropriately appropriated. The second is the high likelihood that the previous incentive structure was a significant factor in the bad decisions and catastrophic risk management that created the need for the funds in the first place.
And really, that is all the argument one needs.
By definition, the incentive compensation was badly designed, as proved by the results. However, I will respond to some of the points raised by Professor Kaplan.
First, we disagree on the calculations that support the conclusion that CEO play has been declining. Our figures, based not on theoretical pay but on realised pay, are as follows.

Clearly actual pay is the better measure of pay effectiveness. I also question the validity of the Equilar survey figures. They are based on the reported total compensation in the summary compensation table, which is even further from reality than the "expected pay", asset is just an accounting cost.
I do not understand why he brings up the net worth of CEOs; that has no relationship whatsoever to their pay, its relationship to performance, or its effectiveness at aligning CEOs' interests with shareholders'.
Second, Professor Kaplan states, "The typical CEO is paid for performance. Boards increasingly fire CEOs for poor performance." The second sentence has no relationship to the first. Boards may fire CEOs for poor performance, but they pay them boatloads of money for that performance on the way out of the door. Just look at Ken Lewis's departure from Bank of America. Disastrous performance that apparently included lying (about what else? bonuses) and an unprecedented vote of no confidence from shareholders that removed him as chairman, may indeed have caused him to be fired (though the board did not use that term). But his $53mretirement package does not feel like pay for performance to me.
Professor Kaplan tries to obscure the point by bringing in law firm partners, athletes and other highly-paid professionals. Partners in law firms are paid according to formulas set by the partnership. As in any other private firm, there are no agency costs to worry about and they can do whatever they like. Athletes, movie stars and recording artists, who have a much greater range and far greater elasticity in compensation, engage in vigorous arm's length(a distance sufficient to exclude intimacy) negotiations on pay; their pay is not set by boards they appoint, as CEOs' is.
And it is hard for me to understand how anyone could point to the US or UK government authorizing excessive pay as a validation of the system. As noted above, the government has repeatedly failed as regulator or as provider of capital in curbing outrageously destructive executive compensation.
Here are seven deadly sins found in executive compensation plans. Each of them is conclusive evidence that the system is out of whack.
1.    Making up for losses in stock value with other grants of cash or stock.
2.    Imputed years of service to increase retirement benefits.
3.    Setting the performance goals too low or other phony metrics to trigger bonuses.
4.    Dividends on unvested stock.
5.    Outrageous departure packages.
6.    Stock options that are not performance-based or indexed.
7.    Perquisites and gross-ups.

In my next response, I will explain how to do it right.


Comments：
Under the circumstance of financial crisis, it is not proper to distribute large sums to the CEOs without a robust set of structure of pay and performance. As the director of a company, a CEO’s responsibility is much larger than anyone else and his incomes should be strictly connected to the welfare of all the company’s stuff. In the proposer’s rebuttal, they only claims that CEO’s suffers from loses and some of them are ousted, which they regard as unfair. But, as the global economy is sinking, the phenomenon is not unreasonable. On the other hand, the dissenter brings out evidence that diametrically points out CEO’s parts of salary that they do not deserve.

KiKi~淇水滺滺UID: 2679824

Comment

In the rebuttal statements, both sides present more insightful debates. However, I really think that we need to have a relatively fair heart about this topic. In my point of view, both of the two writers may be right as they focus on different aspects about the topic about executive payment. Mr Kaplan argues that the most powerful criticism of executive pay-that bosses get upside and no downside-is simply false. He took CEOs as a group lost roughly 40% of their wealth in 2008 as a proof. While Nell Minow argues that top executive compensation was a major cause of the financial crisis. She bases her conclusion on two "outlier" examples, Angelo Mozillo and Aubrey McClendon, that she calls "anecdotes".

Financial crisis is an event affecting the environment and the life around all common people. But according to their evidence and perspectives, we can find that they are just talking different fields about this topic. So they may be both right.