Monday, October 15, 2007

Overpaying for Baa-d Management


Ovine owners and shareholders may bleat quietly, but they follow and herd. Whether they're sports fans or stockholders, they accept their fleecing.

The baseball version is particularly amusing in Boston. Now that the Sox won the World Series after a long hiatus and are back regularly playing with the big kids, the local fans are more passive than ever. (As a friend said after being in several consecutive bad relationships, "Beat me. Kick me. Make me write bad checks." Anything for love [or reflected athletic glory].)

The numbers should be sobering, enough to make even sheep rebel. We have by far the highest ticket prices in the world for baseball right here in Beantown. Boston's prices are more than double the national average. They have had the nation's highest prices for the previous nine years.

The big boys in what appear to be opaque pantyhose are certainly overpaid and the team owners treat the Sox as cash flow not a gentleman's diversion. A key irony here is that local management, media and fans have decried buying championships. That, of course, has been directed at the perennial winners, the Yankees. Unfortunately for us though, we are number two in the salary list and have no valid claim to higher ground. The Yankees at nearly $190 million and our Sox at over $143 million are the pigs at the trough contrasted to the Marlins ($31 million) and Devil Rays ($24 million).

The corporate parallel is CEOs. They are similarly overpaid to sluggers and hurlers. Some important differences are that they don't have short careers, injuries can't knock them out of play permanently, and there are only one or two top guys per corporate team.

Most CEOs, it seems, are not as gullible or delusional about their self-worth as pro athletes. They also take the compensation though.

As one example, in a report coming out today, two thirds of the company biggies admit they are overpaid. The Financial Times reports that investors and politicians through our current President G. W. Bush (himself a previously grossly overpaid sports executive) can't ignore the findings on this one.

In July and August, the National Association of Corporate Directors surveyed 70 CEOs and presidents. "Only 2.2 per cent of the nearly 70 chief executives and presidents involved in the survey said compensation was too low, while a third deemed it 'just right.'" That huge majority — two of three — "said the compensation of top executives was high, relative to their performance."

Amusingly, passive shareholders join boards and the executives in trying to justify irrational and excessive packages based on easy-to-obtain goals. They seem to love sports metaphors and compare the top guys to great athletes.

If fans are willing to pay the better part of a week's salary to take the family to see the Sox, that speaks to a free market. In fact that is much more like a free market than many of our cartel and oligopoly-like businesses, such as gasoline and cable services.

All of this reminds me of a friend's Harvard MBA thesis of several decades ago. His conclusion was that "the typical company would be better managed by an oak tree." Mid-term and longer performance (and sometimes even short-term) hardly ever exceeds stock indices and often is below that of the best bank returns for high-end savings. Putting the millions or billions into those handlers would outperform the CEOs' results.

Despite our plunging dollar and the extreme national debt racked up in the past seven years, we remain a relatively wealthy nation. If our ovine citizenry want to piss away large amounts on diversions, they can and do and will.

Corporate shareholders on the other hand expect to get decent returns for their investment. When the boards diminish their net with absurd CEO packages, the shareholders are seldom in a position to force change.

However, the FT suggests that this has gone on too long, too far. Along with lots of other data, this new report may well catalyze improvements, changes easy to understand and implement. Key, for one, is:
Nearly 60 per cent of the directors polled by the NACD said the reason for excessive pay packages was the absence of objective ways to measure an executive’s performance. Nearly half criticised the use of options and equity awards that reward executives when the company’s share price goes up, rather than when its operations improve.
It is ironic but positive that President Bush is joining this all to stop boards from rewarding the top guys for failing their companies.

Cross-posting: This seems like a natural for Harrumph! I'll put it over there too.

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