This is a time when big bonuses boost the earnings of the superearners of the business world.
|Ethan Berman - He says that the banker J.P.Morgan once said that he would never lend money to a company where the highest paid employee was paid more than 20 times the lowest paid, as it was in his view, unstable.|
The basic earnings of the CEOs of the four biggest US securities firms earn in the range of $25-$30 million annually. Henry Paulson at Goldman Sachs is set to receive an additional $37 million in stock and options and Richard Fuld at Lehman Brothers will receive $15 million in stock.
Almost 3,000 people working in the City of London are forecast to receive bonuses of at least £1m each this season, according to Brewin Dolphin Wealth Management. That amounts to 1 per cent of the City's workforce of around 300,000, ranging from investment bankers and fund managers to stockbrokers and private equity financiers.
Some City workers - i.e. the 1% - are looking forward to their best bonuses for four years on the back of buoyant stock markets and an upsurge in mergers and acquisitions.
Exception to the grab as much as you can culture of executive pay
In a rare departure from the grab as much as you can culture of executive pay, one Wall Street executive stands apart from the thundering herd.
In a two-page letter to the chairman of his company's compensation committee, this rare executive requested that he receive no increase in salary, zero stock options, a smaller bonus than last year and a piece of the company's profit-sharing pie equal to that received by all 270 employees. This, in a year when his company's revenue grew by more than 40 percent.
Ethan Berman, is founder and chief executive of RiskMetrics, a private company that was formed at J P Morgan Chase and spun out to private investors in 1998. It is expected to report revenues of $100 million in 2005.
Berman had not intended for his letter to be made public and his motivation has not been to appear cool in a sea of competitive conspicuous consumption. However, Arthur Leavitt, the former chairman of the US Securities and Exchange Commission and the head of the Compensation Committee at RiskMetrics, found it notable enough to send it to Gretchen Morgenson to of The New York Times, a sharp critic of runaway executive pay.
In the newspaper, Morgenson says that Leavitt has served on some 20 boards and a dozen compensation committees. ''I never heard a CEO say, 'I didn't do so well, don't give me a bonus,' '' he said. ''It's always, 'I didn't do so well because we couldn't get the parts on time, or the CFO didn't do the job,' or some other excuse.''
Morgenson writes that given his unusual background, it is perhaps not all that surprising that Berman takes a different view on compensation from others on Wall Street. A theater major who graduated from Williams College in 1983, he initially moved to Paris to write plays. Several were performed, but he returned to New York in 1985. He started working for a temporary agency and was dispatched to several Wall Street firms. JP Morgan hired him permanently, and he began doing risk management work for the bank in 1995.
''I wrote the letter because it's something I believe in,'' Berman said. ''But if other people read the letter and say, 'Maybe I should rethink this,' that would be success, to me.''
"Last year I was disappointed in the way I was compensated," Berman wrote in his letter. "I hope it does not happen again in 2005".
Berman, who in 1997 was named by BusinessWeek as one of the new stars of global finance, "was disappointed" not because he was not sufficiently compensated but because "I felt that I was given an overly generous raise". In the letter to the Compensation Committee, he explains that "we should all be entitled to basic benefits in an equal fashion".
Berman quoted the banker J.P. Morgan who once said that he would never lend money to a company where the highest paid employee was paid more than 20 times the lowest paid, as it was in his view, "unstable".
Bremen said while RiskMetrics, which helps institutions and corporations assess risk in their investments, was "a long way from that threshold", he nevertheless wrote that "I felt I was given an overly generous raise putting my salary 20-40 per cent higher than my direct reports".
In 1980 the average CEO of a large firm in the United States was estimated to have made 42 times as much as non-supervisory workers. By 1995, the ratio of inequality between the shop floor and the executive suite had increased to a multiple of 160. In 2000, they were estimated to have been paid 458 times as much as ordinary workers. And the gap continues to widen aftrer a downward trend during the recent bear market.
|Source AFL-CIO - Emmanuel Saez, University of California, Berkeley, Department of Economics|
CEOs of America's 500 biggest companies received an aggregate 54 per cent pay raise in 2004. According to Forbes magazine, as a group, their total compensation amounted to US$5.1 billion versus US$3.3 billion in fiscal 2003.
Many US companies pay taxes due on core elements of executive pay, such as stock grants, signing bonuses and severance packages. There is little reporting on huge pension funding and CEOs who cooperate with bidders for their companies make big killings while employees are fired.
"As the company had a terrific year this year, far better than last year, I would ask that the overall subjective bonuses be significantly higher than in 2004." Except Berman's own. "I do not feel my own performance was as strong as in previous years. I would therefore ask that my discretionary bonus reflect this by an appropriate amount."
In an interview with the New York Times he said: "My job at this point is developing people, developing success plans to make sure this company will continue to grow and be successful five to 10 years from now, and I did not get that done."
He told the board that "instead the firm’s stronger than expected performance was driven by a large number of employees in other roles, and therefore I would like to see the bulk of my direct reports … paid greater bonuses than I receive".
Existing approach to compensation "random and self-serving"
Berman views compensation at the company in five distinct parts:
First there are a reasonably standard set of benefits, such as health care, vacation, and now 401k matching. These benefits are identical for all employees at the company regardless of position or years of service. It is my recommendation that this remains the same, as I don’t believe that this is the part of compensation that should discriminate by seniority or performance. We should all be entitled to basic benefits in an equal fashion.
Second, we have a profit-sharing plan. This is designed to have all employees participate in the current and future success of the company. In the past we have allocated 5% of our after-tax profit to this program, and then divided that amount equally among all employees regardless of position or salary. Again I would ask that this remain the same, though given the strong performance of the company this year, the amounts granted will be greater than we had originally forecast. I believe one identical payout, rather than a more traditional %-of-salary payout, actually instills a greater sense of shared purpose across the employees of the firm. And this creates a greater sense of ownership to those who are less well paid and not participating in the equity based compensation plans.
Third, we have base salaries, determined primarily by three factors, responsibility, years of experience and inflation. These tend to go up every year for most employees, as at least one of these factors increases for everyone at a constant rate! I would ask, however, that this year my own salary remain the same. The banker J.P.Morgan once said that he would never lend money to a company where the highest paid employee was paid more than 20 times the lowest paid, as it was in his view, unstable. While we are a long way from that threshold, last year I felt I was given an overly generous raise putting my salary 20-40% higher than my direct reports. If the proposed salary increases are given to the other managers within the firm, my current salary will be at a level more appropriately above the other key employees in 2006.
Fourth, we pay a discretionary bonus to all employees. In contrast to benefits and profit-sharing, we should strive to make great distinctions between employees’ bonuses. Unlike, base salaries, an individual’s performance should drive this form of compensation, not years of service or inflation. Moreover, these bonuses should be set with floors and ceilings based on the company’s performance, not on what an individual was paid last year, or what their boss makes.
As the company had a terrific year this year, far better than last, I would ask that overall subjective bonuses be significantly higher than in 2004. Perhaps surprisingly, however, I do not feel my own performance was as strong as in previous years. I would therefore ask that my discretionary bonus reflect this by an appropriate amount. Instead, the firm’s stronger than expected performance was driven by a large number of employees in other roles, and therefore I would like to see the bulk of my direct reports, and in fact many of their direct reports, paid greater bonuses than I receive. I am confident that in future years this will be reversed!
Finally, we have stock-based compensation in the form of stock option grants. Unlike all other parts of our compensation, I do not believe that all employees should participate in this plan. Instead this form of compensation should be reserved for a small number of employees who we see as current and future leaders of the firm, individuals who we believe can make a difference to the company beyond our already high standards. These grants should be designed to be incentive for those select employees to think and behave as owners, to think about creating value for the long-term, and to increase their own personal commitment to the firm.
In giving me what I ask, I realize the committee will be going against the standard approaches to compensation. There will be no talk of "we look at what other executives at other similar companies are paid", or "payouts are based on defined financial targets". But I believe these approaches are random and self-serving, with little regard for an examination of an executive’s own performance. I will never forget my first year receiving a bonus greater than my salary working at a bulge bracket investment bank. After hearing the amount from my boss, I immediately called my father with the news. The first words out of his mouth were "don’t ever feel that you are worth it". I don’t want him to say that to me again.
Ethan Berman's letter
Americans sick of Greed Incorporated; Gillette's James M. Kilts wins 2005 Gordon Gekko Prize for scooping CEO Piñata worth $188 million
Everybody's Business: Executives Gone Wild: It's Not a Pretty Sight
Author: BEN STEIN New York Times - Dec 18, 2005
THERE is a scene in the old gangster movie "Murder, Inc." in which a prominent member of that entity, a certain Abe "Kid Twist" Reles - ably portrayed by Peter Falk - is asked why he always wants more when he already has so much. "Don't ask questions," he shouts in response. "What've you got hands for, huh? Take!"
Then there was a scene I recall from my childhood during the Army-McCarthy hearings in 1954. After Senator Joseph R. McCarthy of Wisconsin said some nasty thing about a young attorney working for Joseph N. Welch, the canny Boston lawyer representing the Army, Mr. Welch asked Mr. McCarthy: "Have you no decency, sir? At long last, have you no sense of decency?"
These episodes come to mind because of some recent incidents in the world of managers, stockholders, bond holders and employees.
Robert S. Miller Jr., the chairman of Delphi, the auto parts giant that is now in bankruptcy, has said his company cannot compete with parts makers in Asia. To stay in the game, he said, he needs to cut his workers' base pay from about $25 an hour to $9 or $10 an hour, though he recently said he may be able to make it $12.
Well and good, and Mr. Miller, who is known by his middle name, Steve, has been in the news with some extremely astringent and on-target observations about the American labor force and its need to acquire more education to compete with workers in Asia. We would all like to see Delphi stay in business, and obviously something must be done in the way of sacrifice by all concerned. (I was a Delphi stockholder by inheritance, and I have already done my sacrifice by seeing my very small investment in it destroyed.)
But what's this echo of Kid Twist? Part of the package submitted to the bankruptcy court by Mr. Miller calls for the top 600 or so executives and managers to share about $510 million out of the corpse of the company to encourage a smooth transition. What? A bankrupt company enriching its executives even as it destroys its stockholders' equity and demands that its workers revert to spartan living standards? (To be sure, the compensation is concentrated at the high end of the corporate ladder - of course - and much of it is in stock, which is difficult to value. In these recapitalization situations, though, the stock tends to be a fabulous bonanza for those who got it free or for very little. And in the face of bitter labor union opposition, Mr. Miller says he will recast the package for executives.)
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