Clever Retail Revamping

The Financial Times has a story about Danish silverware company Georg Jensen, which recently revamped its retail look. How do executives justify such an expense at a down economic time? By being innovative. Jensen got in touch with 25 top Danish companies and offered a swap: use of consumer electronics, furnishings, housewares, and so on in return for a showcase of that company's goods. Jensen isn't selling the products of the other, just its own. It's similar to how many magazines get use of materials from various companies in return for credit. It's a smart bit of business innovation.

Making Sense of CEO Bonuses

When do you pay a bonus? If you're smart, you sign that check when you've had a clearly-defined goal within the power of the potential recipient to deliver, the behavior you reward strengthens the business, and you watch to see that what you wanted actually occurred. And there's some odd news on this front. At Merrill Lynch, CEO John Thain thinks he deserves a $10 million bonus for 2008. This would be riotously funny if it weren't so tragic and indicative of the problems often found in upper management. Merrill has lost $11.67 billion this year. So far. Thain's view? He deserves a bonus because he helped keep it from getting a lot worse.

It's not that there is no case to be made for Thain. He only took over last December, so literally has been cleaning up the messes of others, and pulled off the acquisition by Bank of America. And yet, the board noted that more successful Wall Street firms - or at least one, Goldman Sachs - aren't giving out bonuses, and that acquiring BofA and the public at large might not sit too calmly with a big payout when so much was lost.

When Mr. Thain landed at Merrill in late 2007, he received a $15 million cash signing bonus and a pay package that was valued from about $50 million to $120 million over a number of years.

Merrill shares were trading above $50 when he was hired, and his pay package was structured heavily toward his ability to increase the price by another $40 or more. Merrill's shares have fallen steadily this year, closing Friday at $13.04 in 4 p.m. New York Stock Exchange composite trading.

As much disaster as he may have averted, he clearly signed on to do something that a more realistic person might have said wasn't possible. If you're going to get big bucks, then you need to deliver big. And if he couldn't see where things were going as recently as a year ago, then maybe he wasn't so insightful after all. Or is the board punishing Thain because it's embarrassed at not having checked the stupidity of his predecessors?

I have a tad more sympathy for Toyota management, which is seeing its bonuses reduced as car sales slide off the road. The company had been doing marvelously well and is clearly caught in forces larger than human decision. But when things go bad, employees are always asked to tighten their belts. Making the same request of management seems only fair.

GM Tries Hiding Plane

The big three auto makers received scathing publicity when they used private jets to travel to Washington, D.C. so they could ask Congress for a public bailout of their companies, driven to the brink of fiscal death by inept management.

Representatives at the Nov. 19 House hearing, including Gary L. Ackerman, Democrat of New York, faulted Mr. Wagoner; Alan R. Mulally, the Ford Motor chief; and Robert L. Nardelli, the chief of Chrysler, for taking private jets to Washington to plead their case.

“Couldn’t you all have downgraded to first class?” Mr. Ackerman asked.

Critics of a federal aid package for G.M., Ford and Chrysler spotlighted the private jets as an example of why the companies did not deserve a bailout.

To keep such wasteful and arrogant activity from hitting the public spotlight happening again, General Motors for one decided to ... block the public's ability to track a plane it uses. Good lord, these people really will never learn, will they? Any bets on what they would do with bailout money? Do I hear waste it?

Bankerss Living in World of Dreams

David Reilly in the Wall Street Journal wrote an interesting analysis of the banking system i which he argues that the institutions need as much of an overhaul as the auto industry.

The crisis, they have argued, is down to an impossible-to-predict perfect storm, predatory hedge funds, panicked investors, unrealistic accounting rules and economic changes that emerged so quickly there was no way to be prepared for them.

If only. The reality is the crisis is due to bad lending and investment decisions.

I agree, but would extend this a bit. Bad decisions caused the problem. The trigger was a series of events that stressed the business model enough that it crumbled.

The problem with the banks' explanation is that it effectively says, "If only things hadn't gone wrong, we'd have been fine." But nothing goes right forever. Bankers rode a long string of wins, and then kept pushing their luck. They didn't test extreme scenarios. That was heinously inept. As I've mentioned before, when you have events that are independent of each other, the probabilities of at least one happening add. Maybe some of these events aren't completely independent, but they're not completely dependent either. As the number of things that can go wrong increases, so are the chances that one of them will.

Executives who cannot grasp this simple fact and who keep telling themselves that everything will be fine are nothing more nor less than addicted gamblers. There is a reason that some financial institutions with a reputation for being overly conservative have lasted hundreds of years. They don't look for the short cut to profit.