random thoughts

I guess if did not send Gameboymulticarts.com an email, the postman would never arrive.  On June 21 James wrote

As a pion in a company, you are evaluated by what you do and your products are visible.  For example, how many customers you helped in an average day, how many lines of codes you wrote, etc.  But can you actually measure CEOs' output?  They do not actually serve customers, nor write any program codes.  They spend most of their days at meetings and do something called "decision making."  Theoretically their actions determine the life and death of the company.

It does not matter what the CEOs do, but they get paid handsomely; most of the time, they get paid thousands of times of what an average employee gets.  Can this inequality be justified?  It depends.

Firstly, we need to know why a company needs a CEO.  The most important thing a CEO can do for a company is not the day-to-day routines of the company, but to provide a long-run vision for the company to follow, so that the company can become successful and making profits.  How long is long-run?  In my opinion, it has to be over ten years to be called long-run, anything shorter than 10 years, is just short-run.  To judge whether a CEO is sucessful, one needs to see whether his vision really works.  There is always a time lag between the time a program is executed to the time the program becomes effective, if any.  Sometimes, a program will become effective in a year or two, but for "visionary" type programs, they will take a minimum of 3-5 years to see any results of these programs, i.e., whether they actually work or not.  For example, for Boeing to develop a new airplane will take many years to design, lots investment, and will take many more years to see whether there are enough orders.  If there is enough orders, the decision is worth hundreds of millions of dollars or even billions of dollars; therefore, whoever make the decision should be rewarded accordingly.

A friend of mine once told me that CEOs should not stay in one place for more than five years.  The reason -- whatever you did wrong probably will show up in five years; therefore, you would like to leave your mess to your successor.  A friend of mine works for a big insurance company and he told me the following story.  Insurance companies need to develop new products just like manufacturers do.  New insurance policies need information of insurance risks; therefore, every insurance company has lots acturaries.  When the risks are high, the premiums should be high too, so that the isurance company can cover the claim and still make reasonable profits.  When this company that my friend works developeds a new product, then the actuary who was responsible calculated the required premium, the CEO of the company decided that the premium was too high to attract enough customers for the product; therefore, the CEO "ordered" the actuary to "lower" the premium with the comment that "if you do not want to lower it, I can always find someone else to do it."  Why?  This is because the CEO's compensation depended on total revenue.  The new product (policy) may not have many claims in its early years, by the time that the claims are more than revenues from the policy, this CEO probably has long gone to greener pasture and the company losses money and the blame will fall on the shoulders of the new CEO.  It is a crap shot when a CEO takes a company.

In the old days, CEOs usually came from the same company or from a rivalry company.  The CEOs usually had pretty good ideas about what to do with the company.  But nowadays, the CEOs are usually paratroopers, i.e., they do not have to have the expertise about what they are supposed to do, but it does not matter; because they can hire consultants and consultants recommendations are the CEOs' decisions.  Sometimes, in order to push a new policy, the CEOs hire consultants as their mouth piece.

 The ex-CEO of Morgan Stanley, Philip J. Purcell (1997-2005) had presided over one of the most widely reported corporate governance fiascos in recent times, leading his firm to financial distress and many of his managers to leave. His disposition was so haughty and off-putting that his resignation was greeted with relief by many within the company. What sense does it make to stuff a resigning chief executive's mouth with gold? 

Expensive ore is the right comparison. The reported payout is $44 million in cash for resigning, presumably without a further fight. In addition are two other payments that, though not as large, are even more outrageous trinkets for the disgraced executive.  For his troubles, Purcell will receive a $250,000 pension annually for life. Think of this as a tip to supplement the payout. After all, $44 million at 5 percent yields $2.5 million annually. So, the $250,000 represents a 10 percent return on the pension itself.

 In addition, Morgan Stanley agreed to donate another $250,000 a year to charities of Purcell's choosing. This nice little gratuity is perhaps the most bizarre of all. What, precisely, is the point? Surely, Purcell can contribute tax-deductible funds from his grandiose settlement and other assets. Why does he need Morgan Stanley to subsidize this particular indulgence? Isn't adding the term "charitable'' an odd way for Morgan Stanley to salvage some higher ground from an otherwise unsavory power struggle?

Who made these stupid decisions?  Perhaps, the board of directors.  Who are these directors?  They are cohorts of the CEO.  They hired the CEO and gave him unreasonably high compensation, then the CEO would give them handsome compensations in return after s/he takes over the company.  The CEOs sit in each other's board, it is a club for them.  The losers are the investors of the company.

 How much the CEOs should be compensated?  In my opinion, they should not be paid more than three times the average pay of all employees in the company, but they should be compensated if their policies actually improve company's profits -- only if they stay longer than 5-7 years.  The grasshopper type CEOs (i.e., those who job hopping every 3-5 years) should not be compensated anything other than their regular salary.