[helene_t]

I don't quite understand the argument that stock options to CEO make CEOs maximize short term success.

If the incentitive was based on crude (sales-expences) then I could understand. But the value of options reflect the market's assessment of the stock value. Surely that must be based on the long-term value of the company?

I see a different issue, though. If the CEO can increase the volatility of the stock he will increase the value of the options but (other things being equal) decrease the value of the stock to a risk-adverse investor. I think this is a bad thing. The CEO should be payed in stocks, not in options.

[mycroft]

The market is clearly not based on long-term value - watch what happens when a company misses a quarterly target by 1%. I mean, in the long term the way to win is Buffett's; but that's longer than 3-5 years vest time.

Also, speaking of skin in the game, dwar's argument applies - the options are "given", and are worth nothing. If everything's stable, and if the market thinks everything's stable or small growth; they'll be worth something at vest time. If things works spectacularly, they'll be worth a lot come vest time; if things fail a little or spectacularly, they're worth nothing.

Also, after 3 years or so, when the signing bonus options start to vest, there is a distinct incentive to short-term gains; *those* options cash. Maybe next year we'll have recovered to the point where I can pull off another short-term gain and cash some more. Or I can let *a lot* of options vest, do one short-term thing and cash out, trading the last few years of options for a big payout on the first few years.

Stock options also incentivise long term thinking when they are fixed; for non-C-level positions, they almost always are. But at the "mandatory bonus" level, oddly enough, the board sometimes "revalues" options at vest, and lookit! they're worth $X! What a coincidence!

There's lots of skin in the game; but like the Romans at empire and the plantation owners in the Confedaracy, a lot of the top of society have arranged it so that it doesn't have to be *their skin*.

[Winstonm]

There is more bad news for the right wing austerity ideology: Errors found in famous austerity research

[mike777]

For starters thanks for all the thoughtful critics to my comments to fight inequality.

1) Again I posit to try and gain from uncertainity, risk and volatility rather than try for stabilty or as I prefer robustness. To try and gain from trial and error and failure. To look to the tiny tail rather than the vast middle/average. I think this is the winning way to grow a state/ and reduce inequality.


2) I ahare your disgust with those who transfer risk to others and gain or hope to gain or desire to gain without the risk of losing.



3) I liked the posters who said I seemed to romanticize those who attempt to gain from risk taking and who often fail. Indeed that is my point and hope that others will reconsider.

To focus on taking out risk, less randomness, less failure leads to a state that will explode and not be flexible.

to encourage a system that will gain from these elements I posit and one that can overprotect those few that are weakest among us. Again I grant that means the focus is not on the middle..the vast middle of us.

[mike777]

Winstonm, on 2013-April-17, 15:16, said:

There is more bad news for the right wing austerity ideology: Errors found in famous austerity research

again Winston I am one of those who grew up with austerity..to be fair I would call it normal not austerity.

To be frank I find almost no one on the right who wants to live and grow up as I did.
To be fair my girlfriend grew up with less:
no indoor water
no indoor toilets
no electrical
no phone

heat was coal stolen from the mountain.

But for some reason many say that no cell phone is austerity but I have never owned one.

My step grandmother lived in a cave


You guys seem to have no idea what austerity means.

end of rant but these kinds of posts on austerity really piss me off.

--


edit sorry I seem to overreact to when posters use the word austerity or poor.


but not us blame right or left.

[Mbodell]

helene_t, on 2013-April-17, 03:49, said:

I don't quite understand the argument that stock options to CEO make CEOs maximize short term success.

If the incentitive was based on crude (sales-expences) then I could understand. But the value of options reflect the market's assessment of the stock value. Surely that must be based on the long-term value of the company?

I see a different issue, though. If the CEO can increase the volatility of the stock he will increase the value of the options but (other things being equal) decrease the value of the stock to a risk-adverse investor. I think this is a bad thing. The CEO should be payed in stocks, not in options.

There are numerous problems with executive compensation. You raise the issue of volatility and other aspects of moral hazard (essentially the CEO has much less down side risk than normal investors, so should "double or nothing" with his options). There is also information asymmetric. The CEO can maximize the appearance of short term success in ways that will take a while to figure out, and since the CEO compensation is related to that short term horizon this leads to problems. There is also the issue that the vast majority of major executives are not really paid for performance. They are paid extremely well regardless of performance. It is a rare company that docks the pay of its executives for bad performance, and even then it usually is still very large compensation. Then there's also the problem that higher CEO pay may well be correlated with worse company performance both in terms of CEO with the most incentive pay lead to the worst performance, and companies where CEO are paid more than other CXO also lead to worse overall company performance (see here).

[mike777]

Mbodell, on 2013-April-18, 00:52, said:

There are numerous problems with executive compensation. You raise the issue of volatility and other aspects of moral hazard (essentially the CEO has much less down side risk than normal investors, so should "double or nothing" with his options). There is also information asymmetric. The CEO can maximize the appearance of short term success in ways that will take a while to figure out, and since the CEO compensation is related to that short term horizon this leads to problems. There is also the issue that the vast majority of major executives are not really paid for performance. They are paid extremely well regardless of performance. It is a rare company that docks the pay of its executives for bad performance, and even then it usually is still very large compensation. Then there's also the problem that higher CEO pay may well be correlated with worse company performance both in terms of CEO with the most incentive pay lead to the worst performance, and companies where CEO are paid more than other CXO also lead to worse overall company performance (see here).

sorry all of this is nonsense...I discussed this all zillion posts ago


You ignore all.

You respond to all none.


to be fair I find this often.

basically if own want to lose money and are silly ok...don't stop them.

-----


if this matters the post does not say he owns the company.

[Winstonm]

mike777, on 2013-April-17, 22:14, said:

again Winston I am one of those who grew up with austerity..to be fair I would call it normal not austerity.

To be frank I find almost no one on the right who wants to live and grow up as I did.
To be fair my girlfriend grew up with less:
no indoor water
no indoor toilets
no electrical
no phone

heat was coal stolen from the mountain.

But for some reason many say that no cell phone is austerity but I have never owned one.

My step grandmother lived in a cave


You guys seem to have no idea what austerity means.

end of rant but these kinds of posts on austerity really piss me off.

--


edit sorry I seem to overreact to when posters use the word austerity or poor.


but not us blame right or left.

Mike,

Austerity is not a synonym for poor, and the austerity I mentioned was in regard to the political position that forcing government to be frugal during times of economic distress is based on faulty facts, that the oft-repeated claim that government debt above 90% of GDP causes negative growth is flat-out wrong and based on faulty data.

Governments are not families and to compare family debt situations to debt actions government should take creates a faulty narrative interpretation of reality.

And as far as your "rant" is concerned, don't worry, many people get angry when their fantasies are challenged.

[kenberg]

Inequality, and to me moreimportantly lack of opportunity, is a big issue. If we accept that only people with skin in the game and who have girl friends that grew up without indoor plumbing are qualified to have an opinion, we will have to put Mike in charge since the qualifying candidates will be few and far between.

But in amongst some things Mike says, I see some items worth looking at. Mike speaks of cell phone entitlement. I have certainly known, and my guess is that most posters have known, people whose lives would be going much better if they would get a better grip on what is essential and what is not. Times, of course, change. It is true that in the 1940s my grandmother's house had an outdoor toilet. We are speaking northern Minnesota. I think we can most all agree that indoor plumbing is now an essential. At least in northern Minnesota. But there can be life without cable tv.

The essentials of my early life were that I never had the slightest doubt that I would be fed, that I would have a home, that I would be safe. That's a starter plan for what I would like for everyone. Not that we should just give it to them, but it should be within reach with decent effort. The Porsche they can buy for themselves later when their ship comes in. It's worth some thought about how to get this right.

[barmar]

mycroft, on 2013-April-17, 10:22, said:

The market is clearly not based on long-term value - watch what happens when a company misses a quarterly target by 1%. I mean, in the long term the way to win is Buffett's; but that's longer than 3-5 years vest time.

That's always bothered me. Every consumer investment guide or magazine emphasizes long-term thinking. "Don't try to time the market" is one of the most common pieces of advice, and successful money managers like Buffett and Lynch talk about understanding the fundamentals of a company you invest in, and then buying and holding.

But the folks on the front-lines of Wall Street think they know better -- it feels like "do as I say, not as I do." They undoubtedly add volatility to the market simply by acting this way.

[PassedOut]

To my mind, here is the kind of person who starts a business and goes on to be successful: At Age 14, No Stranger to a Steal

Quote

On the Internet, no one cares that you’re 13. That’s what Henry Kilpatrick discovered when he started his vintage-furniture retail site, Magic City Finds, in September 2011, at the dawn of his teen years. Mr. Kilpatrick, who is now 14 and lives in Birmingham, Ala., had no idea who Herman Miller was when he plucked a fiberglass armchair from his grandmother’s storage space, but one online search later, he knew he had a find. He plowed the $75 he made on that initial sale, along with some birthday money, back into furniture bought at estate sales and off Craigslist, including 20 more Eames chairs, which cycled through his parents’ garage. He mostly works on the weekends, as it is “tough to do schoolwork and business, and schoolwork comes first,” he said.

Profitable and fun, but no chance of being tossed out on the street...

[jdeegan]

helene_t, on 2013-April-17, 03:49, said:

I don't quite understand the argument that stock options to CEO make CEOs maximize short term success.

The Agency Problem.

For the past 50+ years absentee corporate owners have allowed their corporate overseers to hire their in-house accountants and outside auditors. If the Audit Committee reports directly to the Board (best practice), the CEO may have to bribe or bamboozle enough of the Board to get a majority.

As a result, you would be amazed, possibly dismayed, at what can be done these days with the timing of recognizing revenues, expenses and capital outlays without risking hard time in the Big House. Eventually, it all has to come out, but by that time it will be someone else's problem.

In this circumstance, obvious and necessary change to survive inevitable future adversity appears to make no sense. Recent cases in point: Chrysler and GM bankruptcy versus Ford's survival with founder's family members still in the business and looking after things.

[kenberg]

jdeegan, on 2013-April-18, 13:55, said:

The Agency Problem.

For the past 50+ years absentee corporate owners have allowed their corporate overseers to hire their in-house accountants and outside auditors. If the Audit Committee reports directly to the Board (best practice), the CEO may have to bribe or bamboozle enough of the Board to get a majority.

As a result, you would be amazed, possibly dismayed, at what can be done these days with the timing of recognizing revenues, expenses and capital outlays without risking hard time in the Big House. Eventually, it all has to come out, but by that time it will be someone else's problem.

In this circumstance, obvious and necessary change to survive inevitable future adversity appears to make no sense. Recent cases in point: Chrysler and GM bankruptcy versus Ford's survival with founder's family members still in the business and looking after things.

Could you expand a bit on hopw this last paragraph exemplifies the one above it. I'm not completely understanding. Not doubting, just not understanding.

[jdeegan]

kenberg, on 2013-April-18, 16:08, said:

Could you expand a bit on hopw this last paragraph exemplifies the one above it. I'm not completely understanding. Not doubting, just not understanding.

YES. The last paragraph was meant to illustrate the agency problem seen from an outsider's perspective.

I did suffer through one in person, though. Our CEO had painted himself into a long-term accounting situation. His personal solution was to play bet-your-company with someone else's company ie. the company I worked for and he was hired to manage. The CEO/Board Chairman authorized the full development of a 26mmbbl deepwater offshore field at a time when the major oil companies with all the latest technology considered 200mmbbl the lower economic limit. A horrendous gamble, but one that bought him an extra four or five years before its almost inevitable failure. The idiot ultimately managed to bankrupt a natural gas utility company.

[onoway]

One of the things, Mike, that you need to consider is what sorts of risks people might turn to who are in unstable and difficult situations. If they can't see any way within the system to overcome their problems they might decide they had nothing much to lose is they did get caught if they bought a gun and robbed a gas station or mugged someone or worse. That's the sort of risk I would prefer we don't push people to take.

Going back to the thread topic, I suspect that there is a growing number of people, not just in the States, who are being nudged ever closer to that point.

[mike777]

onoway, on 2013-April-18, 19:28, said:

One of the things, Mike, that you need to consider is what sorts of risks people might turn to who are in unstable and difficult situations. If they can't see any way within the system to overcome their problems they might decide they had nothing much to lose is they did get caught if they bought a gun and robbed a gas station or mugged someone or worse. That's the sort of risk I would prefer we don't push people to take.

Going back to the thread topic, I suspect that there is a growing number of people, not just in the States, who are being nudged ever closer to that point.

when I talk about risk takers I mean in the sense of entrepreneurs. Again I said this over and over again but posters seem to have not read that.

I grant getting out of bed is taking a risk.

--


Keep in mind my one big suggestion was a day to celebrate and honor them....granted no one agrees with that when I read your posts. I showed how in japan and many other places...failure,failure in business, capital markets, was equal to great shame rather than a noble ...a very noble effort.

a way to fight inequality.

--


but my more important point I wanted to share was that seeking stable or my word robustness....leads to ....explosion in a society...not more equality.

I grew up on the south side of Chicago...my mom was a union Chicago teacher....I present today's Chicago education system as one example.

This is an example of robustness.

--

example of what I want you to think about is an artist..or taxi drivers.. again for that tiny few but not you, perhaps.

[Winstonm]

Mike,

I think what you are doing is taking a complex subject and trying to reduce it to simplicity that does not comport with reality. The world cannot be reduced to simply risk-takers and non-risk takers. However, that simplistic twist on reality does make it easier to argue your point. If the world were as you say, you may have a valid point; unfortunately, the world is more complex.

[mike777]

Winstonm, on 2013-April-20, 10:02, said:

Mike,

I think what you are doing is taking a complex subject and trying to reduce it to simplicity that does not comport with reality. The world cannot be reduced to simply risk-takers and non-risk takers. However, that simplistic twist on reality does make it easier to argue your point. If the world were as you say, you may have a valid point; unfortunately, the world is more complex.

to be be fair I divided into 3 worlds....but I think we still disagree on my main points...


Perhaps the big one being that going for a stable world will explode compared to learning to live in an unstable world or at least explode in a much worse way.

That trying to take out risk, rather than learn how to win from risk or however you wish to define it...fails more often.


This an argument for trail and error and to gain from it rather than to think of it as shame. It is also an argument to fiddle rather than giant govt grants/loans...etc.

[mike777]

Side note:

In my local paper was a very very interesting discussion with Cruthfield on the issue of too big to fail.
He was a big banker.


He suggested taking 5% of profits and set them aside.

His argument was better to take 5% than 33% of profits in making banks smaller.
If make USA banks smaller than nonUsa, read giant China, take profits.

He also noted that no one had any idea how to solve the issue of too big to fail.


He misses the main point not 5% or 33% but 100%....you lose 100% of your ownership....he missed this point.

a perfect example of non risk takers...missing the point.

[Cthulhu D]

helene_t, on 2013-April-17, 03:49, said:

I don't quite understand the argument that stock options to CEO make CEOs maximize short term success.

If the incentitive was based on crude (sales-expences) then I could understand. But the value of options reflect the market's assessment of the stock value. Surely that must be based on the long-term value of the company?

I see a different issue, though. If the CEO can increase the volatility of the stock he will increase the value of the options but (other things being equal) decrease the value of the stock to a risk-adverse investor. I think this is a bad thing. The CEO should be payed in stocks, not in options.

It's because of the way stock options work - if you get options today, that's the right to by Stock A at price $X on date Y. If the cost of the stock on date Y is less than X, your stock option is worthless - and it doesn't matter how much under X it is.

So say coming up to stock option day your current share price is $X-2, so your stock options are worthless. You can make a 25% bet that will increase the stock price by $10, 50% do nothing and 25% send the company bankrupt. The rational CEO will make that bet every time, because then he has a 25% of cashing it at $8 an option, and if it doesn't work he's not out of pocket.