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?

Wal-Mart's New Gas Price Campaign

I was watching some network television last night and saw a Wal-Mart commercial in which actors talk about the price of gasoline but then say how they won't let it dictate their lives - and, presumably, going to Wal-Mart is one of those life choices.

The commercial seems quite peculiar to me, and I wonder if this isn't a sign that something is seriously wrong with Wal-Mart's marketing and business strategy. First, gas prices have come down, oh, a good 30 to 40 cents a gallon here from the spike earlier this year. I suspect they're down around the country as well - and I also think that consumers have made their peace with prices. Certianly they're not giving up shopping for what they need. (In fact, last night I heard a number on NPR that pegged it at 40 cents overall since spring.)

So you'd think that the commercials are runnning at least a month late, and are really negatively-based. They argue not to give up life style choices - no matter what the price, which, I guess, is easy enough to do if your annual business equals many national GNPs. But there is no reason to go to Wal-Mart. If gas was such a problem, why not roll out Wal-Mart gas stations with subsidized prices to get people to the stores? And other stores, like Target, seem to be weathering the economic issues, which hit most equally.

But Wal-Mart has been blaming gas prices for recent poor performance. Maybe the problem is not gas prices, but strategic decisions. Perhaps they've gained too much bad will through their own actions in dealing with labor issues. Perhaps people are angry about outsourcing and see Wal-Mart as selling out to China. Maybe the idea of having superstores apart from malls, where people can more efficiently shop, is the real problem. (I wonder what the company's same store sales are in mall locations versus standalone.)

Whatever the issue is, I don't believe it's largely driven by petroleum. Yet the commercial, along with Wal-Mart's remarks to Wall Street, show this as an officially adopted excuse. Maybe it's time for upper management to look and see whether there might not be more serious issues - for example, the well-publicized internal company report on mistakes in moving outside the existing brand. There is something more going on inside the company. Trying to find the logical explanation for investors won't solve anything and will only get management more determined to keep the blinders on.

Executives Do Favors for Wall Street Analysts, Get Better Ratings

The Finanical Times had a story on Friday about a new study that proved mutual back scratching to be alive and well on Wall Street. Researchers from the University of Texas in Austin and the University of Michigan spoke with 1,800 analysts and hundreds of corporate executives. They then tied back admissions of favors given to nearly two-thirds of all analysts they interviewed.

The study found that by offering analysts favours, ranging from recommending them for a job to agreeing to speak to their clients, executives sharply reduced the chances of a downgrade in the aftermath of poor results or a controversial deal.

More specifically, an analyst who took two favors was 50 percent less likely to downgrade the company's rating after poor results. According to the CFA Institute, yes, this is unethical behavior.

The sad thing? I sent a copy of the story to some colleagues, one of whom used to work in investor relations and the other a former investment banking type. Their take was, "Ho-hum." They had found that corruption was systematic in their experience.

And what happens to the individual investor trying to make intelligent decisions? They have a good chance of effectively underwriting, with their own money, these backroom relationships because they may keep putting money in a poor investment based on biased advice.