We all have seen it, out of control pay and bonus packages for the executives of almost every Fortune 500 company.
The top-level executives just keep getting showered with money. It definitely irks workers and even investors, but is it a good or a bad thing?
This is a scary question at a time when public pension funds are starting to do just that. Pay their bigwigs big bucks.
It’s scary because public pension funds are the funds that many of the nation’s state and local workers rely on for their long-term benefits. If something happens to these funds taxpayers will have to bail them out, or else workers that have toiled hard, knowing that they’d have basic benefits in retirement, will be out of luck.
These funds have been struggling in many ways, not the least of which has been attracting cutting edge investment gurus to their employee ranks. So, many fund operators are thinking, let’s take a page from Corporate America and pay these guys obscene amounts of money.
The Wall Street Journal today says one of the nation’s biggest funds, the California Public Employees’ Retirement System, is considering paying its top dog nearly $1 million this year once his bonus is paid out.
“The escalating salaries don’t always sit well with government officials, who object that some pension-fund managers are among the highest-paid public-sector employees in the country.”
Should it sit well? Maybe not.
Money, especially ridiculous amounts of money, doesn’t always translate into big gains for the institutions they run or the workers of those institutions. Remember the late Kenneth Lay from Enron? He had more money than god, and as many condos, but he was at the helm of one of the biggest Corporate disasters. And we all know there are tons of other such stories.
Let’s look at one recent example that is coming to a head today.
Merrill Lynch and its head honcho, Stanley O’Neal.
OK, ready for this? In 2006, he got $48 million.
And, what does the company have to show for all the money it dished out?
An $8 billion write off against the largest U.S. brokerage firm’s profits. People, that’s very bad and could end up leading to…what else? Layoffs. He was overseeing some of the riskiest investments in the firm’s history and it came back to bite everyone on their fat and skinny asses.
O’Neal is expected to resign today. Big deal. He’s already done the damage and all those slumps working for Merrill, making way less than O’Neal, will end up suffering.
The New York Times today called O’Neal fall from grace “stunning in its speed and ferocity.”
I say, what the heck is stunning about it. These guys are thrown so much money that they come to believe they are omnipotent. Wouldn’t you?
They are drowning in their riches, realizing they’ll probably never have to worry about money again, other than spending it.
A study — mentioned in a Wall Street Journal article a while back — written by David Yermack, a finance professor at New York University, looked at CEOs and the like and the homes they bought.
“It found that on average, the stocks of companies run by leaders who buy or build megamansions sharply underperform the market. The researchers don’t claim to know why. They theorize that some of these executives might be focused more on enjoying their wealth and less on working hard.”
There is nothing wrong with slightly overweight paychecks for the people that run the show, but it seems we have a pay obesity epidemic, and it’s doing little for the health of the nation’s corporations. Time will tell what it will mean for our nation’s pension funds.
I asked Stephen D’Arcy, professor of finance at the College of Business, University of Illinois, what his take was on the movement to pay pension fund manager more. Here’s his response:
Public pension plans have historically paid their investment managers salaries well below what the private sector pays, and as a result most of the top talent in investing has gone to Wall Street or private industry. This is not necessarily bad, as public pension plans tend to invest in fairly straightforward investments, stocks, bonds, index funds, etc., which do not require a highly paid professional to manage. Since the key stakeholders in public pension plans are taxpayers, a basic investment strategy makes sense. The taxpayers, and their representatives, are not qualified to oversee more complex investments. If public pension plans wanted to invest a portion of their funds in more complex securities, they can place some of their funds in the hands of these highly paid private investment professionals. As the boards of most public pension funds are not filled by investment professionals, they would be moving beyond their comfort zone (and knowledge zone) to have esoteric investments in their plans. No one should invest in something they don’t understand. This definitely applies to public pension plans.
Some investment professionals are worth very high compensation, as they can provide a return to their employers well in excess of the compensation. Other investment professionals would not justify such a high level of compensation. There is no way the boards of public pension plans can differentiate and hire someone who, going forward, will provide returns to justify that high a level of compensation. Therefore, they will likely hire high priced investment managers who are not worth the compensation. On Wall Street and in private industry, investment managers perform or are replaced. That by itself can justify a high compensation figure, as they have little job security. Public pension plans are not likely to replace their investment staff when their investment preformance suffers. Thus, if public pension fund investment managers gain the high pay of industry, they will likely have both the high pay and job security, which means the public plan would be overpaying for talent.
Thus, I would oppose paying public pension investment professionals top dollar to try to attract talent from the competition.