About Me

A blog wherein a literary agent will sometimes discuss his business, sometimes discuss the movies he sees, the tennis he watches, or the world around him. In which he will often wish he could say more, but will be obliged by business necessity and basic politeness and simple civility to hold his tongue. Rankings are done on a scale of one to five Slithy Toads, where a 0 is a complete waste of time, a 2 is a completely innocuous way to spend your time, and a 4 is intended as a geas compelling you to make the time.

Thursday, March 19, 2009

The first thing we do, let's kill all the lawyers.

I should really be reading the first draft of The Desert Spear right now, which I'm around halfway through.  But this "tax the bonuses" law has me in a bit of a ranting mode.

According to that NY Times article:

“The people have said ‘no,’ ” Representative Earl Pomeroy, Democrat of North Dakota, shouted on the House floor. “In fact, they said ‘hell no, and give us our money back.’ ”

“Have the recipients of these checks no shame at all?” Mr. Pomeroy continued. Summing up his personal view of the so-far anonymous A.I.G. executives, he said: “You are disgraced professional losers. And by the way, give us our money back.”

But... 

For oh so many years now, I've been reading proxy statements for most of the companies I've held shares in, and I've been casting endless "withhold all" on the board elections because I stare at the proxy reports and look at the money that's being handed over, and it's been apparent for ten of fifteen years that executive compensation in this country is ludicrous.  So where have you all been?

Let's pluck the Johnson & Johnson proxy statement from last year, which I have on my shelf where I rotate each year's in.  The SEC required companies to explain their executive compensation more fully, so like most companies the Johnson & Johnson proxy statement drones on for 22 pages before you get to the summary compensation table, and then has several more pages following to explain the option grants and stock awards that come in many many varieties.

 Johnson & Johnson sells some consumer products like Band Aids and Baby Powder, and then sells pharmaceuticals and medical devices. 

So of course they start out by determining compensation as against a "peer group" that includes companies like Altria (cigarettes), Coca Cola and Pepsi (beverages), General Electric and IBM, 3M,  and Procter & Gambler.  Oh, also other companies Bristol-Myers that are actually in the same business as Johnson & Johnson.  But PUHLEASE!  Altria makes cigarettes, Johnson & Johnson markets Nicorette, so those are very similar.  GE makes most of its money from its GE Capital unit, and Johnson & Johnson sells stuff to Walmart on Net Plus 30 terms, which is kind of like financing the purchase of an airplane, right?  Coke and Pepsi make beverages, and contact lens solution is a liquid, so those are really similar.  I don't mean to say that there aren't parts of the business of Procter & Gamble that overlap with Johnson & Johnson, but anyone looking at this proxy statement that couldn't have said for years on now that the deck was kind of stacked in favor of a predetermined outcome isn't reading at all.

And as is almost always the case, Johnson & Johnson feels its executives should be targeted to be paid at the 50th to 75th percentile, which means that Johnson & Johnson should always be seen as average or above.  Well, the world isn't full of average and above.  Just like No Child Left Behind is fundamentally ludicrous because it requires that every student read at grade level by Year X this either guaranteeing that every school will fail or that every school will establish standards sufficiently low to ensure that everyone can be at grade level, it's ludicrous that virtually every company and its executives and its compensation consultants start out with the premise that every company must always be at or above the average.

When you start with that premise, you aren't likely to establish a bonus structure that would have your actual compensation at the 10th percentile if your company goes into the tank some year.  

The next many pages of the proxy statement...  When my posts on technology get to that point, I will discuss how publishers reacted to the plea from agents for better information on royalty statements.  In many instances, it was to present the information in the most long-winded baffling way it could possibly be presented, a kind of "you want information, I'll give you information..." approach.  Proxy statements have taken that same approach to the SEC requirements to explain executive compensation.  So if Johnson & Johnson takes 18 pages to explain the different bonus targets with fancy charts and tables to explain the metrics, then this must be Very Serious Stuff Indeed and All Very Proper.

Yeah, right.

So you get to the final results, and the CEO of Johnson & Johnson is getting "planned compensation" of $16M, and his official total compensation after accounting for pension payments and the like is just shy of $32M.

So where was the outrage a year ago?

Not a single person reading this blog can in my opinion claim that William C. Weldon or anyone else requires $32M to be incentivized to lead Johnson & Johnson.  It just doesn't hold water.  I don't say this out of any disrespect to the man.  Johnson & Johnson is I think a very well run company, and Mr. Weldon has done a very good job.  But $32M is a lot of money.

If you can pay someone $20M to do the same job, that somebody can make J&J as much as $11M less than the wonderfully and uniquely talented William C. Weldon, and J&J has come out on top.

That $32M includes the usual stuff you find when you read these things.  His base salary was $1.725M.  So of course J&J pays for monitoring on his home security system.  Because when you're only making $1.725M, how could he afford his own?  

He gets a personal car and driver.  When there was all that fuss about the auto folk flying to DC in their private jets I thought it was a little overblown because you can make a good argument that somebody in charge of GM maybe shouldn't be spending his time driving his own car because of the opportunity cost of doing so.  But then again, if somebody's base salary is $1.725M, can't they maybe afford their own car and driver if it's that important to them?

Now I'm fixating on little things here.  These AIG bonuses are a spit in the ocean of bail-out money.  When Merrill Lynch is writing off billions of dollars really what does a few thousand dollars for John Thain's commode matter.  

But what I'm trying to say is that these little things are going on up and down the line in company after company and in proxy statement after proxy statement, and they are utterly reflective of a compensation system gone totally awry and been awry for way too long.

Most of the politicians now decrying the $165M in AIG bonuses have been carrying water for the corporations up and down this great country that have been pissing away far bigger sums.  They don't object when companies end their pension plans for employees while keeping lavish ones for CEOs.  Who, when earning $1.725M base, ought to be able to fund their own retirements.  They're politicians who've pushed back at efforts to get companies to list options as an expense.  The companies are kind of right to say that it's hard to value an option.  It is true that William C. Weldon has stock options that might not be worth much right now because J&J stock is less now than 2 years ago like most companies.  But how do companies value their inventory?  At first in first out or last in first out?  So the idea that an option shouldn't be counted as an expense because it can't be precisely valued has always been ludicrous when earnings reports are already full of guesses and valuation decisions on things like good will or the value of your inventory or the overage or shortfall in your pension funds.

One problem here is that even though many of us own stock, many of us do it thru mutual funds where we don't get to vote directly on boards of directors and other ballot measures at companies.  Mutual funds weren't happy that they were finally required to at least tell us how they voted on proxy ballots.  But what are they worried about, because this is another example of how too much information is as useless as none at all because really how many of us have time to pore over a 1429 page report for Vanguard's Total Stock Market Index?  Fidelity at least you can more easily find your way to checking on votes for a specific company from a specific fund.

So this is a failure of a capitalist system, where it's kind of hard for any one person to do something about this, but yet we have a government system where dollars do cast votes and our leaders are much more likely to listen to Johnson & Johnson which has a lot more money to give to politicians than you or I.

So from that standpoint I guess it's good that the populist outrage has finally gotten loud enough that our politicians are thinking of us little guys.  But when they're done passing punitive tax bills against AIG and BoA, will they still be there where it counts?  Will they stop carrying water for these rich executives and the companies that make them that way? 

Probably not.

The things is, I'm full of populist outrage, I've been full of it for a long time. At the same time, these retroactive taxes don't sound like a very nice idea to me.  Almost as not nice as the system that got us here in the first place.  So what will happen when the outrage dies down?  Will we have systematic changes that might make things a little fairer for all of us, or will the politicians go back to trying to keep hedge fund manager tax rates nice and low?

Enough venting for now.


Oh, for the current proxy statement that went up for J&J recently, the boss got a boost in his base salary though his total compensation plummeted to only $29M.  Times are tight for all of us...  Can't wait to see next year's!

1 comment:

Maria said...

The real kicker is that the pols knew about those bonuses and had more than one chance to take care of it--but they passed (or carried water around as you said). I think it has to do with your statement:

"They don't object when companies end their pension plans for employees while keeping lavish ones for CEOs."

Congress has their own healthcare, pension and security -- they don't want to shine the light on the fact that Congress doesn't have to use Medicare or live off of social security or save in a 401k/roth/ira like the rest of us. No siree, they leave the executives alone on those issues because it would be the pot calling the kettle. While they underfund or don't fund Medicare, while they cut service and talk about adding services, while they wander around talking a good story--they don't actually have to live with the results. They, like the CEOs exempted themselves a long time ago.