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CEOs “cashed out” prior to economic crisis

Posted on November 30th, 2008 at 14:07 by John Sinteur in category: Robber Barons


Balzac’s maxim that “behind every great fortune lies a great crime” may yet prove a fitting epitaph for American capitalism. A recent survey by the Wall Street Journal reveals that CEOs at major US financial and real estate firms converted tens of millions of dollars of overvalued stock into cash prior to the eruption of the current financial crisis, even as many of their corporations approached the precipice.

The Journal analyzed the fortunes of CEOs from 2003 to 2007 based on executive compensation and stock sale data. Fifteen of these CEOs took home more than $100 million in cash during this period. At the high end was Charles Schwab, who made over $816 million from his self-named accounting firm, almost all of it from stock sales.

Of the 120 publicly traded firms the Journal analyzed, CEOs cashed out a total of more than $21 billion. However, data was gathered only from publicly traded companies, and thus does not include similar fortunes that have been made by “hedge fund chiefs, Wall Street traders, and executives who sold their companies outright.” Nor did it include data related to exit packages, the multimillion-dollar “golden parachutes” awarded to retiring or fired executives.

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  1. Note that the original WSJ article [offsite copy] also includes some caveats:

    Some officials executed regularly scheduled sales of stock. Others exhibited good timing in stock sales, cashing out shares months or years before the market’s steep decline.

    Most of those at the top of the list retained far more shares than they sold, meaning that their paper losses exceed the amount they took out of their companies. Some are founders or longtime executives who had built up equity over decades. Others on the list left their companies long before the crisis hit.

    Oddly (?), the socialist coverage doesn’t mention any of that. Cherry-picking makes it easier to be indignant, I guess.

  2. Cherry-picking makes it easier to be indignant

    It’s also stupid – it’s perfect for follow-up like “and if you think that’s a lot of money, look at this… oh my god they are really really really overpaid!” argument.

  3. It’s definitely time for some broad discussion on what “overpaid” might mean. If a CEO helps a company grow and creates $50 billion in share holder value (let’s say in a durable way), is $100 million too high?

    (Yes, these people did not create durable share holder value–but we didn’t know that at the time that they converted some of their stock to cash. Few people saw the collapse coming.)

  4. If a CEO helps a company grow and creates $50 billion in share holder value

    There’s a solution for that. Base rule: Maximum CEO compensation is 15-20 times what the lowest paid employee gets. Add checks and balances (to make sure they don’t split the company to go around the base rule, for example), but leave the actual payoff to the company. If that CEO expects to create $50b in shareholder value, he can take his pay in the form of options, and cash in after the shareholder value is realized.

  5. Wait, let’s simplify it even more. If the CEO wants options because he believes the company is going to raise that much shareholder value, he can buy options, just like the rest of us.

    And if we’re going for new rules: anything that has to be rescued during a financial crisis because it plays an essential role in the financial mechanism, should be regulated (when there isn’t a crisis) so that it doesn’t take excessive risks.

  6. I’m glad you brought up the need to deal with splitting the company to effectively raise the lowest salary. I’m curious how you would prevent that without completely preventing businesses from restructuring to become more competitive. Without any regulation, the 15-20X max compensation rule would provide perverse incentive to outsource the lower-paid functions in a company: outsourcing may be cheaper *and* would raise the minimum salary in the company, allowing the CEO a raise, which would be a lose-lose result. How can you create reasonable checks and balances against this? If a specialized company can provide better trained receptionists at a lower cost, are you going to make that illegal?

    With the CEO buying options: any rational individual will invest money in the companies that they think are going to do best. So if the company hiring a CEO is in a lower growth or lower profit industry, or simply not currently positioned as well as some competitors, a rational CEO might invest in other companies than their own, no matter how good a manager they think they are. Perhaps the board of directors would still like some financial incentive tied to company results–that’s where stock/option plans come in.

    Looking at the two together–if the company is going to do well and the CEO can afford to buy lots of stock or options, he or she may decide to forego much of a regular salary at all, opting to keep salaries low to maximize profits. Oops.

  7. Let me try:

    right now, if I claim with the dutch tax office to be a company of one person, they will look at my customers. If I have only one, they say “ha ha, you’re not a company, you’re employed”. You could do something similar with outsourcing – for the purpose of max ceo salary, any company that is a supplier will be looked at: any of them with too few customers will have their lowest and highest salary viewed as if they were only one entity together with the company they’re supplying to. Mind you – that’s only for max ceo salary purpose. Outsourcing to a better-receptionist-training supplier is still possible, but you’ll have to make sure they have many customers if (and only if) you’re doing that to avoid being counted in the CEO limit.

    CEO options: companies can still give them, of course, but they’ll count towards the 20x maximum. Any options I ever got were taxed as income, so the infrastructure to do that is already in place. And there’s no reason the board has to give options of their own company only. If a board feels that they have to give the CEO of Boring, Inc options for Google stock to keep the ceo interested, that’s up to them. Any ceo who is so limited in his view that he will walk away from an industry where his personal wealth isn’t growing enough is a ceo you don’t want as board anyway.

  8. I’m not so persuaded by your solution to the outsourcing issue; many functions can already be outsourced to specialized companies (e.g. cleaning, reception, gardening) and others can be covered by temp agencies. I suppose you could look at the length of service by temps and the reporting hierarchy, but it seems like a morass to me. It would restrict large companies to only do business with suppliers who are already established and have other clients; any start-up supplier where you’re the first customer (e.g. a new catering company for box lunches) is suddenly going to impact executive compensation. Suddenly beginning small businesses are frozen out of a huge market of publicly traded companies.

    Counting options towards the salary max: how does that work: Do you count the value of the option or that of the stock when its sold? The former seems useless (options are rarely worth much when issued), and the latter… well, if the options become worth more than the 20X, does that force employee salaries to be raised, or is there a cap on the amount the CEO can cash in? (Greatly reducing the incentive.) Or would you say that employees must be issued 1/20th as many options?

  9. I like the “issue employees options too” solution – not 1/20th, of course, but pro ratio to the ceo salary (if he makes twice your salary, he gets twice the options). The whole idea behind this is to close the gap between lowest pay and highest pay, and there’s really no difference between one kind of compensation (such as base salary) and another kind (such as options).

    And small businesses getting clients is no problem – I’ve managed to be a one-person startup and get clients without my clients being worried about getting me as personnel, there’s rules and forms that can assist, and they can be reused here. Check out the dutch rules here. Doing something similar for outsourced services in this case is trivial.

FDA sets melamine standard for baby formula

Posted on November 30th, 2008 at 14:01 by John Sinteur in category: News


Two months ago, federal food regulators said they were unable to set a safety threshold for the industrial chemical melamine in baby formula. Now, however, they found a way to settle on a standard that allows for higher levels than those found in U.S.-made batches of the product.

Food and Drug Administration officials on Friday set a threshold of 1 part per million of melamine in formula, provided a related chemical is not present. They insisted the formulas are safe.


The agency had left the impression of a zero tolerance on Oct. 3 when it stated: “FDA is currently unable to establish any level of melamine and melamine-related compounds in infant formula that does not raise public health concerns.”

The FDA and other experts said they believe the melamine contamination in U.S.-made formula had occurred during the manufacturing process, rather than intentionally. The U.S. government quietly began testing domestically produced infant formula in September, soon after problems with melamine-spiked formula surfaced in China.

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