Compensation in Shares - Solution to pay discussion?

News that Goldman Sachs top executives will only be paid in shares this year is supposed to take the wind out of the sails for opponents of excessive bonuses. But does it really solve the problem of excessive executive compensation? Would it be better to pay someone $100 million in shares? After all, the recipient of this compensation would not be able to consume more than a tiny fraction of the amount in any case - whichever way the amount is awarded - the rest would be saved and invested in one way or another. We argue that TOTAL compensation for senior executives (including all perks, bonuses, incentive payments) must be more closely monitored by the fiduciaries that handle savings for the real end-investors (pension fund members, holders of mutual funds).

Overpaid and Over here!

Unilever's James Lawrence, yesterday resigned as chief financial officer. The American, who joined the company only in September 2007 received an annual salary including bonus of Euro 1.37 million. But amazingly he will also be allowed to draw down the remainder of a $1 million “golden hello”, along with 80,000 shares that he was offered in stages. He will also keep Unilever shares worth an estimated Euro 14 million which demonstrates the way that executive compensation is stacked in favor of a select few members of top management. Would an ordinary factory worker who leaves after two years be mollycoddled in the same way? How long will the company owners stay asleep at the wheel?

Index Idiocy

News that Petropavlovsk (formerly known as Peter Hambro Mining) will be soon be included in the FTSE 100 Index raises a number of questions: Is it proper that a company that is predominately active in countries outside the UK (and the EU) is included in an index that is after all designed to reflect the fortunes of companies active and/or based in the UK? In our opinion there would be a number of indices that would be more appropriate (Russia, Emerging Markets, Mining).
More importantly, the impact on investment behaviour is a serious distortion. A company with a £ 387 million (12/08) turnover but a towering market capitalisation of £ 2,265 million
may be numerically suited to be included in the index but the rationale behind such an index construction is more than questionable. Some analysts already claim that the gold price is in bubble territory and the same may be said of a share that closely follows the gold price. Is this the right time to include it in a prominent index?

Cadbury - another unfair battle

In what can only be suspected to be courtesy of a PR effort by Kraft in today's paper we read that Irene Rosenfeld, the CEO of Kraft, has a history of high achievement. As if it would be relevant to the takeover bid for Cadbury that is being pursued by Kraft we are then treated to gems like this one: '...summers were spent at Tyler Hill Camp, a children's camp in the picturesque Pocono Mountains...'. Is is a disgrace that PR jobs like this one are supposed to be a critical factor in the serious question of how public companies are being managed. We have repeatedly argued that the way takeovers are currently regulated is seriously deficient and short-changes the existing owners of the business, not mentioning the other stakeholders such as employees, pensioners, customers and public authorities in the locations the business operates in. In addition, the army of 'advisers' is a costly burden on the shareholders of the acquiring company as well as the target company.

Chairman - just another dead weight cost?

News that Legal & General, one of Britain's leading life insurance and pension providers, has finally managed to identify its preferred candidate to become chairman leads us to ask why the role of Company Chairman is seen to be a cornerstone of good corporate governance in the UK. While the US system of the all-powerful CEO may well have its defects, the UK system in turn has not lead to much better performance by the listed company sector. Both systems need a major overhaul but one thing is certain: separate chairman do cost money and may create friction as the CEO is constantly second-guessed.

Shareholder rip-off documented

A report by Patterson Associates, a firm of remuneration consultants, documents the sorry saga of (Senior) Executive Compensation schemes that are designed to feather the nest of chief executives and their acolytes in senior management. As we said in an earlier post, the fish starts to smell from the head and we stand by our suggestion that all efforts to reduce excessive executive compensation have to start with resolute action to reign in the compensation of chief executives. Then, and only then, would there be an incentive to bring the compensation of companies into a more equitable equilibrium and reduce the disparity between top pay, average pay and difference between top and bottom pay in the organisation.

Patent on Investment Methodololgy

News that Research Affiliates has been granted a US patent for an indexing methodology that selects and weights securities using fundamental measures of company size, such as dividends and sales should set alarm bells ringing in investor circles the world over. While the ruling only affects the United States there is the danger that US law gains ex-territorial reach or gets copied by other legislatures.Granting a patent on an investment methodology is akin to granting a patent to the first person that has opened a self-service supermarket. It is nonsense and makes a mockery of the true purpose of patent protection for technological and medical innovations. Fees charged by Research Affiliates are a extra drag on investment returns achieved by investor's funds. We hope that fund providers have enough intelligence to do their own index construction. This work requires only minimal skill and can be performed on any standard PC.