Executive Compensation

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galukal
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Executive Compensation

Postby galukal » Wed Feb 17, 2010 9:06 pm

"Executive Compensation Brief

Introduction

Executives of large corporations are among the highest paid individuals in the world today. The average executive of a Fortune 500 company is paid $10.4M yearly. Recent concern has arisen from the realization that much of the bailout money earmarked for failed corporations such as GM and AIG has gone directly to the executives. The very executives who were for a large part responsible for the company's tanking were the ones being compensated for the most. The American public needless to say had a problem with this. In response to the public outrage for the compensation to the AIG executives, Congress passed a bill which imposed a heavy tax on the executive bonuses and salaries, which effectively negated the executive's bonuses from the bailout money. Several CEO's of the bailed out corporations have actually taken voluntary action, limiting their annual salaries to $1, with no bonuses until their company is revived. AIG's executive chair Edward Liddy, Steve Jobs, CEO of Apple, as well as GM's CEO has all taken such action.

The Bailout and Executive Salary Caps

Congress recently passed legislation limiting executive pay to $500,000 yearly for companies who received government bailout money. No small sum, unless compared to some of the largest executive salaries pre-bailout. Merrill Lynch's John Thain's annual salary, including bonuses and some stock options, exceeds $83M. CBS's Leslie Moonves received $67M in salary and bonuses last year. The cap will stay in effect until the company repays all of the government bailout money. Some claim that this salary cap will have unintended consequences. "The unintended consequence is you end up killing the institution you tried to save. You drive away the good people." Says Alan Johnson, executive compensation consultant. This may be true, but considering all the executives willing to receive a paycheck of $1, this seems unlikely. It is up to Congress to decide what to do about the cap, and what to do about extraneous executive compensation."


The bill will be written by Ben Romano and Kinjal Dave. We'd like to see it up one week from now.

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Re: Executive Compensation

Postby SRaghavan » Wed Feb 17, 2010 10:30 pm

Larry Ellison, CEO of Oracle, one of the most influential technology companies today, earns the highest salary for executive ceo's: He earns around more than a 105 million per year.

The government cannot "limit" such salaries. If anything is to be done, all the people may hope for is for an employee revolt against the executives, who could enjoy a lavish lifestyle even while earning a salary that's a fraction of what they are currently making.

And let's not forget, most of these prime-time executive officials happen to be self-paid; its their company, and they get to say what share of the profits they will take for themselves.

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Re: Executive Compensation

Postby bromano » Thu Feb 18, 2010 8:55 am

In most cases, Shree, I would agree with you. But when the bailout/stimulus money (however unsuccessful) is used for executive salaries instead of keeping these companies afloat, I think that the government is allowed to step in and say, "You can have this money if you use it correctly"

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Re: Executive Compensation

Postby Jfanders » Thu Feb 18, 2010 5:14 pm

I wondor, has the government even set a date for when the comipanies have to pay the money back. These exec's are toying with the money of the american people and using it to by a new car to add to the other 60 they have! The government should at least have some sort of cap on what kind of money executives can make. Instead of giving themselves a 150 million in cash, why not take a moddest 50 million and give some of the emploies who need it a little more money (which would help the economy by having them spend a little more of their raise, a kill two birds with one stone if you will)?

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Re: Executive Compensation

Postby bromano » Wed Feb 24, 2010 8:54 am

An Act to Reform the Compensation of Executives in their Respective Companies;

Sponsored by Senators Romano and Davè

Be It Hereby Enacted by the House of Representatives and Senate in Congress Assembled:

Whereas the compensation of company executives has become far to high, especially in relation to the received Bailout Plan;


Section 1: For the purposes of this bill, a claw back shall be defined as the ability of a business to reclaim money in relation to a bonus;

Section 2: All business supplying executive compensation must supply the compensation from the business’s annual revenue, and not from the Federal Bailout Plan;

Section 3: Requires that all companies allow for the use of Claw Backs in reference to bonuses with expedited court proceedings;

Section 4: No executive compensation shall exceed;
a. A total cash salary of 5% of the business’s annual revenue;
b. A merit increase of 2.5% of their original salary in their current position;
c. A total percentage of stock options containing more than 5% of their cash salary;
d. A bonus of more than 5% of their cash salary

Section 5: Business making over 5 million dollars a year are required to file a report with the IRS annually along with their taxes, including the following;
a. The annual revenue for the business
b. The aforementioned values in Section 3 of all executives located in the United States
c. Stimulus and Bailout Plan money usage;

Section 6: Until such business has returned 5% of the money received from the federal government, all executive wage increases shall be frozen;

Section 7: Business failing to comply with these restrictions will receive the following;
a. a 1% tax increase for the first year;
b. a 2.5% tax increase for every subsequent year.

Section 8: This bill shall take effect ninety-one days after passage.

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Re: Executive Compensation

Postby MRajpara » Wed Feb 24, 2010 6:58 pm

I think this bill is actually very interesting. While I do agree with the sentiment of the bail and what it is intending, I don't believe that this is the way that we should go about the problem. I agree with some parts of the bill, while disagree with some other.

Section 4 contains a double negative, and i think you might want to fix that. In addition, i feel that an executive who gets 5% of the company's salary is still way too much. If a company makes $100,000,000 (100 million) a year, then only 1 of the executives gets 5 million dollars a year, which is still an astronomical sum in terms of living a lavish lifestyle. And that is only one of the executives. So i believe that that percentage should definitely be lowered to around 2.5% or lower. This way we can ensure that execs aren't getting payed in disagreeable amounts.

Section 5- Although I agree that the government needs some way to know if the companies are using the bailout money responsibly, i don't think that making the company send all this information, atleast in the categories above, will be in our best interests, as i feel that a lot of money will be unaccounted for and lost in these transactions, especially since the companies are sending such specific information, and ONLY that specific information.

Section 6- I believe that the company should pay back a LOT more than 5% of what they received in Bailout before we unfreeze executive salary increases. Maybe change this number to around 15% or higher, as the government gives companies a hell of a lot of money, and to be sure that they have indeed pulled themselves out of the water by using this money responsibly, we cannot let the executives be free to start bumping up their salaries.

I like section 7, as it gives the companies a reason to pay back the money, but 1% of a 3 billion dollar company is like nothing, and I think we should higher the starting number so that companies don't think that they can take 2-3 years of taxing before they decide that they have to pay it off.

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Re: Executive Compensation

Postby vallada » Sat Feb 27, 2010 11:00 am

I think this bill fixes many of the problems of executive compensation. For the most part this bill has the potential to help out the problem but there are a couple of things that I'd like t0 point out..

I think the way you defined a clawback was a little confusing, that may be just to me. "a claw back shall be defined as the ability of a business to reclaim money in relation to a bonus." I think it would sound a little clearer saying " a claw back shall be defined as previously given money that is taken back due to arising circumstances." Again its just a suggestion.

Executives can't just start increasing their salary after 5% of the bailout money is payed back, it's way too little. I agree with Marg in that 15%-20% of the bailout money should be payed back before the increase of executive salaries occur.

I disagree with you, Marg, about section four. I think that a total cash salary of 5% of the business’s annual revenue is a good idea. If companies have multiple executives they ren't all goin to take 5% of the anuual revenue. The bill said it shall not exceed.... Now I'm assuming that the executives aren't greedy and selfish so thats why I say this. I like all the numbers Ben and senator Dave stated in the bill because In my opinion they are fair amounts. Also, I think that sending information on managing bailout money and etc with taxes to the IRS is a good idea. Of course companies cant just write it down and throw it in with their taxes, there has to be some sort of efficient way companies do the transaction, but its a good way get the information to the goverment so they can keep track of what companies do with the bailout money.

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Re: Executive Compensation

Postby bromano » Tue Mar 02, 2010 3:19 pm

With the huge amounts of money allotted to some of these business, the amounts that they will have to pay back, even at 5% will be a huge number. We believe that they might need a long time to do this.

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Re: Executive Compensation

Postby SRaghavan » Wed Mar 03, 2010 12:07 pm

Overall, the bill addresses many important problems. But, as Marg had mentioned, there should a variant on what percentage of a company's revenue goes to the CEO:

Let's take Microsoft and a smaller budding company for comparison. Gates' salary will obviously be many more times that of the CEO of the smaller company. To fix this imbalance, I think there should be "ranges": For example, if a company's total revenue is between 100 million to 200 million, the CEO would get paid a larger percent in the smaller company whereaS a larger company's CEO would earn a lesser percentage of the overall profit. Of course, even these measures will be restricted: We can't have a small company paying too large a part of its revenue just to one CEO.

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Re: Executive Compensation

Postby DGrastara » Tue Mar 09, 2010 7:33 pm

Along with Ben, I agree that this bill clearly mentions the use of the government in certain cases. Section 5 states that businesses making a certain amount of the money should be followed by the IRS to ensure the spendings, profit and security of the money. This bill also includes consequences such as 1% tax increase within the first year for those businesses failing to follow. These consequences are the way for businesses to take this matter seriously and apply this as soon as possible.

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Re: Executive Compensation

Postby athakker » Wed Mar 10, 2010 8:56 am

Although I do agree with many parts of this bill, I believe that this bill, though attacks major companies who make millions and billions of dollars, forgets small businesses. Many of these small businesses do not have many employees. In many cases, in such companies, the executives do a lot more work than the employees: first teaching the employee, then checking all the work, and in many cases, small businesses are a one-man show. Limiting such executives pay, who cannot afford so sit on the top floor of an office building and expect employees do all the work, can be detrimental when in times like these, the economy needs small businesses.

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Re: Executive Compensation

Postby SRaghavan » Wed Mar 10, 2010 11:09 am

Aman, although small businesses may be good in some aspects, let's not forget that we have a global crisis of having too few jobs globally. Larger businesses would be able to employ more people, thereby solving this problem.

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Re: Executive Compensation

Postby Cmccloskey » Wed Mar 10, 2010 6:40 pm

SRaghavan wrote:Aman, although small businesses may be good in some aspects, let's not forget that we have a global crisis of having too few jobs globally. Larger businesses would be able to employ more people, thereby solving this problem.


This isn't true at all. Large businesses, (over 500 employees) hire less than half of the work force. Furthermore, small businesses (as a class) are more stable and less likely to fire workers or institute percentage based layoffs, and are responsible for over 80% of new job creation in recent years. However, this bill only applies to businesses that received bailout money, which correct me if I'm wrong, only covers businesses that have more than 500 employees; I.E. "To Big To Fail".

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Re: Executive Compensation

Postby galukal » Thu Mar 11, 2010 12:54 pm

Well, Chris, I'll correct you. At first it applied to all businesses, but I amended it to apply only to businesses that got TARP money. It still lacked the definition of an executive, though.

BTW, may I ask where you got your stats?

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Re: Executive Compensation

Postby Cmccloskey » Thu Mar 11, 2010 8:33 pm

galukal wrote:Well, Chris, I'll correct you. At first it applied to all businesses, but I amended it to apply only to businesses that got TARp money. It still lacked the definition of an executive, though.

BTW, may I ask where you got your stats?


The 50% I got from my business management class. The rest should be included in these two links:

http://www.msnbc.msn.com/id/4142727
http://ftp.iza.org/dp3888.pdf

George's edit to avoid a worthless one-word post: Thanks.


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