Meeting Post Mortem Re Performance-Based Compensation

Post Reply
Site Admin
Posts: 82
Joined: Mon Jul 28, 2008 10:48 pm

Meeting Post Mortem Re Performance-Based Compensation

Post by UtahOwl »

---------------------------- Original Message ----------------------------
Subject: Some wonky info on performance-based compensation
From: June Taylor (aka Utah Owl)
Date: Thu, December 15, 2016 10:59 am - MST
To: John Karls

Dear John,

This is pretty deep in the weeds for most of the group, but perhaps you & George would find this interesting - it outlines a few risks of using Shareholder Value as the major metric in measuring CEO performance.

The original site is: ... ay-19-2010 (you'll have to paste this link)

If you click on some of the headings in that site, it will give you links to slides, like: ... 1280475987


---------------------------- Original Message ----------------------------
Subject: Re: Some wonky info on performance-based compensation
From: John Karls
Date: Thu, December 15, 2016 2:36 pm - MST
To: June Taylor (aka Utah Owl)
Cc: George Kunath

Dear June,

Thank you for your e-mail and the cross-link to the material about using shareholder value as the major metric for compensating CEO's.

As you witnessed, George was “doing a war dance” last evening on our focus book and its author for much the same reasons that I had been.

By way of background, you may recall that George and I have had weekly multi-hour gabfests for 28.5 years since we were partners and George was our worldwide coordinating tax partner on Mobil Oil.

George also mentioned last evening that he had been our tax partner on AEA Investors, a prominent LBO fund during that era.

A copy of one of my old resumes is posted as Ref M in the third section of It discloses, inter alia, that I designed financial products for two leading investment banks (Goldman Sachs and CS First Boston), handled all the tax planning for two leading LBO funds (including Morgan Stanley's) and chaired the ABA Tax Section’s International Tax Committee 1994-1996 comprising the nation’s top 300 international tax attorneys and featuring 22 working sub-committees.

Forhoorar’s Wildly Inaccurate “Facts”

What George and I were both saying was that our author, an English Lit major, is obviously widely read while exhibiting little comprehension of what she has read.

And is wildly inaccurate regarding many of her alleged “facts”!!! Exhibit A which I cited was her allegation on p. 274 which said --

“Consider the mortgage interest deduction, which was first put into effect in 1894, mostly as a way to help farmers keep their family homesteads and make a decent living. Today it has become a boon for the middle and upper classes.”


Levying a national income tax required a Constitutional Amendment and the 16th Amendment was not ratified until 1913!!!


I chose NOT to waste the group’s time last evening with a history lesson on interest deductions.

HOWEVER, from the first Income Tax Acts following adoption of the 16th Amendment and for more than 50 years thereafter, ALL INTEREST OF WHATEVER KIND AND WITHOUT ANY LIMITATIONS WHATSOEVER, was deductible.

The reason???

The American hatred of the British debtors’ prisons!!! From which you never emerged absent a miracle such as an unexpected inheritance from a rich uncle, enabling you to pay off your debts and, thereby, obtain your release from prison!!!

BTW, the American hatred of the British debtors’ prisons was also the historical reason for American bankruptcy laws permitting an insolvent debtor to “start over” with all debts eradicated and the debtor being permitted to keep a small amount of assets (e.g., clothing and her/his “homestead.”)

And just like certain types of interest expense are no longer deductible or are severely limited, the Federal Bankruptcy Law has also been cut back (for example, student loans can NO LONGER be forgiven in bankruptcy!!!)!!!

Forhoorar’s Laments Re Declines in Corporate R&D and Re Stock Buy-Backs

Both George and I were “strong as horse radish” that Forhoorar was out of her depth!!!

She was constantly derogating shareholder “activists” who force corporations to do such things as buy back their shares.

The first problem with this general thesis???

It was NOT that many decades ago that corporate managements were almost-universally criticized for being unchecked “pirates” (my term) because CEO’s typically loaded their Boards of Directors with buddies who would do whatever the CEO wanted. So plundering, of course, was the order of the day.

The second problem with this general thesis???

Forhoorar seems blissfully oblivious to who the shareholder “activists” are!!!

Though she does admit on p. 218 without, of course, seeming to appreciate the significance of her admission, that pension funds “supply 44% of the capital” of institutional investors.

You might recall that in Q&A-4 and Q&A-5 of the Suggested Answers to the Short Quiz, I stated that the overwhelming majority of the capital of institutional investors [both shareholder “activist” funds (aka LBO funds) and venture-capital funds] come from pension funds and university-endowment funds.

So what has really happened in the last 3-4 decades is that the pension funds and the university-endowment funds have grown tired of being “raped” by the “pirates”!!!

So they have hired “gun slingers” (aka “activist” funds, aka LBO funds) to police the corporate managements.

And have hired “gun slingers” (aka venture-capital funds) to police the R&D and other start-ups that the pension funds and university-endowment funds are willing to finance – but willing to finance ONLY separately from the “pirates”!!!

Forhoorar’s Utter Confusion Regarding Stock Options

In order to facilitate the group’s consideration last evening of Forhoorar’s myriad comments about stock options, George gave a quick tutorial.

That stock options measure stock appreciation over a long period, at least 5 years and typically 10 years.

And that although stock options may “vest” (meaning they are no longer subject to forfeiture if the holder resigns or is fired) after a few years, that does NOT mean that they are transferable which usually does NOT occur until many years later, often not until the end of the 5-year or 10-year period for measuring performance.

George then expressed his incredulity over Forhoorar’s fascination with stock options and her frequent claims that stock options focus corporate managements on short-term (quarter to quarter) time horizons for making decisions.

Though it is possible, of course, that Forhoorar is confusing stock options with newer performance-pay contracts which often do have much shorter periods for measuring performance.

FINALLY CUTTING TO THE CHASE -- My Condemnation of VIRTUALLY ALL Performance-Pay Plans

The slides contained on the website for which you provided a cross link describe some of the latest examples of performance-pay packages for CEO’s.

Such performance-pay packages were pioneered by the consulting firm, McKinsey & Company, back in the early 1970’s.

McKinsey recognized that stock options were an EXTREMELY CLUMSY way to measure the real metrics by which a CEO should be judged/compensated. And McKinsey specialized in helping companies determine exactly what they wanted their CEO’s to accomplish and then in designing a contractual formula by which compensation would be geared to accomplishing those specific goals.

And yes, the slides up-loaded to the website that you referenced provide examples of such goals including, for example, performance measured against other companies in the same industry.

As well as, of course, tinkering vis-à-vis the time periods within which the achievement of the goals is met.

The basis of my condemnation???

As I have opined in numerous postings on this website, no matter how performance is measured, the overwhelmingly-large component of performance IS BASED ON EXPORTING AMERICAN JOBS TO THIRD-WORLD COUNTRIES!!!

And I recall saying sarcastically at several of our meetings (and perhaps even in a posting on our website) that EVERY AMERICAN KINDERGARTENER ALREADY KNOWS that the most important business strategy IS TO EXPORT AMERICAN JOBS!!!

So why bother spending so much time agonizing over the details of a particular performance-pay package WHEN THE BULK OF THE COMPENSATION is going to be based on the CEO’s success in EXPORTING AMERICAN JOBS???

Forhoorar’s Blindness About The Real Cause of the 1%-99% Disparities

You correctly inferred from my Suggested Answers to the Short Quiz and my Suggested Discussion Outline how frustrated I am with books and articles of the genre of Makers and Takers that they NEVER focus on the REAL CAUSE of the 1%-99% disparities.

Which is The Establishment’s War on American Workers.

[NB: We have always defined The Establishment as the billionaires who “own” virtually all the pols of both political parties as a result of campaign contributions and who “own” many members of the media and who “own” many members of academia.]

And we have always observed that The Establishment’s War on American Workers comprises BOTH the Exportation of American Jobs AND the importation of Illegal Aliens (who are de facto slaves because they cannot complain about anything, such as their slave wages, for fear of being reported to Immigration) to take American Jobs that cannot be exported geographically (e.g., construction, agriculture, etc., etc.).

So why is there any mystery about what is happening to the 99%???

And why does anyone think for a moment that the 1%-99% disparities WILL NOT CONTINUUE TO GET WORSE until the compensation of American workers is driven down to third-world poverty levels -- since it is third-world workers with which The Establishment is forcing American workers to compete.

Forhoorar’s Lack of Real Solutions

Forhoorar, of course, did not have a prayer for proposing any real solutions because she had not been able to diagnose the problem.

Which, of course, was reflected in the inability of our 11 participants last evening (who are some of the brightest minds I have ever encountered) to propose any solutions IAW the “ground rules” of the Suggested Discussion Outline that anyone wishing to speak be restricted to identifying a problem, proposing a solution, and explaining why the proposal solves the problem and constitutes the best solution to the problem.

After the Suggested Discussion Outline’s carving out as “out-of-bound” topics the many solutions on which we already have positions (none of which, BTW, Forhoorar had reached because of her inability to diagnose the real causes of the 1%-99% problem).

The Problem of Congress’ Green Lighting Corporate America’s Substituting 401(k) Plans for Pension Plans

Before our meeting, you posted a comment on that said, inter alia, that you were “happy to see [my] list of off-limits topics & agree with them.”

The “off-limits topics” were, of course, our solutions to the real causes of the 1%-99% problem which I had suggested should be “out-of-bounds” because re-hashing them would consume an incredible amount of time and also because Forhoorar had not proposed any of them due to her failure to diagnose the real causes of the 1%-99% problem.

My reason for mentioning this???

Because “Partially-Out-Of-Bounds Topic No. 5” had suggested that we should treat as “out of bounds” Congress’ Green Lighting Corporate America’s Substituting 401(k) Plans for Pension Plans.

Which, of course, will mean that the overwhelming majority of Americans who will be reaching retirement age in the near future WILL HAVE ABSOLUTELY NO RETIREMENT SAVINGS!!!

The reason stated for treating this as out-of-bounds???

t is noted that the person who led the opposition at our 2/11/2015 meeting to an E-mail Campaign to revoke the so-called Pension Protection Act of 2006 is among our 9 RSVP’s for 12/14/2016. Which is why I am assuming that tackling this issue would consume a tremendous amount of time and would again fail to produce a positive result.”

[NB: We had 2 additional RSVP’s after the Suggested Discussion Outline was posted.]

Question for you --

Since reading your posting approving of the out-of-bounds topics, I have been dying of curiosity regarding whether you recognized yourself as “the person who led the opposition at our 2/11/2015 meeting to an E-mail Campaign to revoke the so-called Pension Protection Act of 2006.”

Because I still believe that this is an issue that we should tackle.

But am reluctant to propose it again if you are still opposed so that we will just be wasting the group’s time.

Please let me know whether you are still opposed.

Or whether you at least would be open to persuasion over dinner at a restaurant of your choosing.

Enough already!!! Voilà!!!

Thank you again for your e-mail.

Your friend,

John K.

Post Reply

Return to “Discussion Outline – Makers and Takers: The Rise of Finance and the Fall of American Business – Dec 14”

Who is online

Users browsing this forum: No registered users and 1 guest