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Steven Clifford Says You Don't Need a Compensation Consultant · Masters in Business

• 0:02
  Speaker 1: This is Masters in Business with Barry Ridholts on Boomberg Radio.
• 0:09
  Speaker 1: This week on the podcast, I have Stephen Clifford. He
• 0:13
  Speaker 1: is the author of the CEO pay Machine. If you
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  Speaker 1: have ever wondered why executives in public companies in America
• 0:24
  Speaker 1: are paid more than just about anybody else and not
• 0:27
  Speaker 1: a little more. Not twenty five times like it used
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  Speaker 1: to be in the before, or fifty times, which is
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  Speaker 1: more or less what it is in other countries, but
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  Speaker 1: five hundred times with the average worker gets Uh. This
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  Speaker 1: is going to be quite a fascinating conversation. Uh. This
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  Speaker 1: is not the usual screed from the far left of
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  Speaker 1: the political spectrum. Clifford is a former CEO. He's been
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  Speaker 1: a board member on numerous companies. This is somebody within
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  Speaker 1: the corporate corporate firmament who has just recognized how completely
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  Speaker 1: absurd executive compensation has become. Uh. He criticizes his fellow
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  Speaker 1: board members, He criticizes the so called independent outside advisors.
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  Speaker 1: He has lots of things to say about the consultants,
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  Speaker 1: calls them some pretty uh nasty names, says they're completely
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  Speaker 1: compromised and don't work for shareholders. And he discusses the
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  Speaker 1: impact of of just the gross excess pay not only
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  Speaker 1: on shareholders, which he says is unfair, but the impact
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  Speaker 1: on companies themselves. The more highly paid an executive is
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  Speaker 1: very often the worst the company has done, as well
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  Speaker 1: as the economy and society at large. Excessive executive compensation
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  Speaker 1: has ramifications. Listen, what's ten or twenty million dollars to
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  Speaker 1: a multibillion dollar company doesn't sound like a lot? Well,
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  Speaker 1: it turns out there are reverberations from that throughout the company,
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  Speaker 1: the economy, and society at large, and their substantial and significant.
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  Speaker 1: And not only that, but Clifford suggests that it has
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  Speaker 1: a very significant negative impact on future economic growth. So,
• 2:28
  Speaker 1: with no further ado, here is my conversation with CEO
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  Speaker 1: and board member and now expert on executive compensation, Stephen Clifford.
• 2:43
  Speaker 1: My special guest today is Stephen Clifford. He is the
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  Speaker 1: former CEO of King Broadcasting Company and National Mobile Television.
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  Speaker 1: He has served on the boards of directors of dozens
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  Speaker 1: of public and private corporations, and he was special depth
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  Speaker 1: the Controller of the City of New York during the
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  Speaker 1: city's fiscal crisis in the nineties seventies. He is the
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  Speaker 1: author of the ceo pay Machine, how it trashes America,
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  Speaker 1: and how to stop it. Stephen Clifford, Welcome to Bloomberg.
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  Speaker 1: Honored to be here. So you're a surprising person to
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  Speaker 1: write a book about executive compensation, to write a critical
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  Speaker 1: book about executive compensation. You were the CEO of multiple companies.
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  Speaker 1: You've sat on numerous boards, You've advised on executive compensation
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  Speaker 1: to the companies you worked with. How did this come about?
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  Speaker 1: It came about because I was working on boards. Uh,
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  Speaker 1: these are smaller companies, these aren't Fortune five hundred boards.
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  Speaker 1: But we were using the same system that the consultants
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  Speaker 1: UH put in it all companies. And as I was
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  Speaker 1: sitting there and serving on the comp Committee, I said
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  Speaker 1: to myself, Yeah, this system doesn't make any sense. This
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  Speaker 1: is a crazy system. And so too um. I said
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  Speaker 1: that to some members of the comp Committee and they said, oh, no, no,
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  Speaker 1: you don't understand. This is just how comp has done
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  Speaker 1: in this country. This is consultants have it all worked out,
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  Speaker 1: this is how it's done. Trust us. So I started,
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  Speaker 1: So I started doing some research on my own to
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  Speaker 1: bring my fellow comp Committee members around. And the more
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  Speaker 1: I got into it, the more I realized it wasn't
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  Speaker 1: just a stupid system that gave the CEO the wrong
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  Speaker 1: signals and uh lad the CEO to do wrong things,
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  Speaker 1: wrong incentives, perverse incentives. But it was also terrible for
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  Speaker 1: the for the country, it was bad for the economy.
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  Speaker 1: And so I started doing even more research. And everything
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  Speaker 1: I did told me this system is insane and it's
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  Speaker 1: hurting a lot of people. Let's let's put some flesh
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  Speaker 1: on of bones and and and this data comes from
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  Speaker 1: from your book. Since CEO pay in America has grown
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  Speaker 1: ninety times faster than the pay of the typical worker.
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  Speaker 1: Go back to eight the average large company chief executive
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  Speaker 1: was paid about twenty six times more than the salary
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  Speaker 1: of the average worker. Today it's somewhere between three hundred
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  Speaker 1: times and seven hundred times. How on earth did that
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  Speaker 1: come about? It came about because the pay consultants started
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  Speaker 1: in roughly the or so, and as they started to
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  Speaker 1: get clients, they realized that they had data on what
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  Speaker 1: other CEOs were paid. Now, until this time, CEO pay
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  Speaker 1: had been established really on the basis of internal equity.
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  Speaker 1: How the CEOs pay uh compared with everybody else in
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  Speaker 1: the cup Penny and that's why that ratio twenty five
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  Speaker 1: state stable from through the late late seventies. But they
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  Speaker 1: came in, they had this data and it was a
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  Speaker 1: great sales tool. So they said, now you got it
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  Speaker 1: all wrong. CEO pay should depend on what other CEOs make,
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  Speaker 1: and so U what we'll do is we'll establish a
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  Speaker 1: peer group and we'll tell you what other CEOs and
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  Speaker 1: these comparable companies making. Now let me interrupt you here
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  Speaker 1: and ask why should what other CEOs make be relevant
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  Speaker 1: to what we're gonna pay our CEO in our It
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  Speaker 1: should have no relevance whatsoever. So how is that sales
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  Speaker 1: job affected? Well, the sales job is effective because when
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  Speaker 1: you go through all the steps here, what it does
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  Speaker 1: is it greatly increases the CEOs pay. So of course
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  Speaker 1: they want to hire these consultants. CEOs want to hire
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  Speaker 1: the consultants. The boards kind of want to hire the
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  Speaker 1: consultants because the boards don't really they're happy when the
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  Speaker 1: CEO gets paid more. Uh why is that why the
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  Speaker 1: they're all golfing buddies or why do they really Well,
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  Speaker 1: let's start with every most boards. The majority of people
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  Speaker 1: on the board, our CEO s or x CEOs themselves Uh,
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  Speaker 1: so there's a little bit of tribalism. Is a little
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  Speaker 1: bit of tribalism. Uh. Secondly, they like to be able
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  Speaker 1: to hide behind the consultants and say, hey, we we
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  Speaker 1: we hired experts. You know, we had we had the
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  Speaker 1: best people in and they went through all the data
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  Speaker 1: and this is an objective measure. Now, the interesting thing
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  Speaker 1: about this is the way they get paid has nothing
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  Speaker 1: to do with the market. These are people that they
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  Speaker 1: love the free market of the market. For the labor
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  Speaker 1: market for chief executive exactly, there is no in fact,
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  Speaker 1: there isn't much of a labor market for chief executives.
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  Speaker 1: U When you look at chief executives. To be an
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  Speaker 1: effective chief executive, you have to know a tremendous amount
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  Speaker 1: about a single company. You have to know it's finances,
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  Speaker 1: it's marketing, it's competition, it's personnel, etcetera, etcetera, etcetera. Most
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  Speaker 1: of that knowledge is not worth much outside that company, right,
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  Speaker 1: so you see you companies rarely rarely go outside higher
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  Speaker 1: Another CEO of fortuneos were internal promotions. Really that's amazing.
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  Speaker 1: And so in other words, the skill set that an
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  Speaker 1: executive has probably isn't all that transferable to a different
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  Speaker 1: company unless it's in the exact same and that they
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  Speaker 1: are not Lebron James. Lebron James can take his skills
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  Speaker 1: to any NBA tail and improve it. Uh CEOs camp
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  Speaker 1: and you know there're only two of the fortune CEOs
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  Speaker 1: were previously CEOs of a public company. That's interesting. CEO
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  Speaker 1: is jumping between one large company and another happens about
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  Speaker 1: once a year, and when they do, they usually failed.
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  Speaker 1: The failure rate is quite high. You know, your reference
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  Speaker 1: to external equity reminds me very much of what took
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  Speaker 1: place during the real estate boom. Everybody the appraisers used parables.
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  Speaker 1: So what starts to happen in a rising market? It
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  Speaker 1: becomes the self fulfilling spiral and everything goes up because
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  Speaker 1: other houses are going up. Is the same thing taking place.
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  Speaker 1: That's exactly right, except it's a built inspiral. It's not
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  Speaker 1: just that it starts. What happens is you start with
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  Speaker 1: your peer group. Okay, I told you they assemble the companies. Well, surprise, surprise,
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  Speaker 1: companies choose peer groups that have highly paid CEOs. It's
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  Speaker 1: not an objective data say, it's not an objective data set.
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  Speaker 1: The book is filled with some fascinating data points. This
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  Speaker 1: one really stood out to me. Between two thousand and
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  Speaker 1: eleven and two thousand and fourteen, there were four CEOs
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  Speaker 1: who earned more than a hundred million dollars a year.
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  Speaker 1: These companies could have paid d CEOs less and gotten
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  Speaker 1: the exact same performance from them. How do we end
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  Speaker 1: up in a situation where people are making hundreds of
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  Speaker 1: millions of dollars on the backs of shareholds. Well, you
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  Speaker 1: have what I have termed the pay machine. And each
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  Speaker 1: year the companies crank up this machine. And as I
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  Speaker 1: as I mentioned, it starts with a peer group of
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  Speaker 1: of of highly selected other CEOs making a lot of money.
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  Speaker 1: Then the company quote benchmarks their CEO. So where does
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  Speaker 1: your CEO rank? Well, we're a good company, So everybody
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  Speaker 1: benchmarks their CEO at the seventy five percent diial of
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  Speaker 1: this group just random Well, no, we're better than those companies,
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  Speaker 1: so our CEO should be make what's the basis of
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  Speaker 1: assuming you're in the top quartile of what I assume
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  Speaker 1: is a fairly competitive market, simply corporate pride. There is
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  Speaker 1: no simply corporate pride. We're good, okay, there's there's never
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  Speaker 1: any performance They don't have to perform at seventy percentile
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  Speaker 1: at all. It's just corporate pride. One would think there
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  Speaker 1: would be some correlation between, Hey, if we're declaring ourselves
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  Speaker 1: in top quartile, then we should be top quartile and
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  Speaker 1: profit growth top quartile and revenue gains top portoial and
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  Speaker 1: market share gains. Yet those seems things never seem to
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  Speaker 1: come up. They don't come up at all. They don't
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  Speaker 1: come up at all. It's just corporate pride. So so
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  Speaker 1: this to me looks like a wealth transference scheme from shareholders,
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  Speaker 1: two managers and insiders. It I wouldn't I wouldn't use
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  Speaker 1: the word scheme because that's as if it were deliberately
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  Speaker 1: and conspiratorially designed. What happened is the consultants came in
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  Speaker 1: and step by step this machine was built and different
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  Speaker 1: different things we're ad and it's a very complicated system. Now,
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  Speaker 1: on the face of it, most of these apps in
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  Speaker 1: here by themselves seem to make sense when you put
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  Speaker 1: them all together. They guarantee with mathematical certainty that the
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  Speaker 1: CEOs pay will escalate and I regardless of performance, regardless
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  Speaker 1: of performance. So I to me, this is more something
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  Speaker 1: that evolved, but it evolved with two rules. One, the
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  Speaker 1: individual part of the machine had to have a certain
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  Speaker 1: surface logic, and to it had to increase the CEOs pay.
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  Speaker 1: And so each of those were selected for an evolution.
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  Speaker 1: So now you have a machine that guarantees that CEO
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  Speaker 1: pay will rise eight nine times faster than the average
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  Speaker 1: workers pay. That's amazing. I really like this quote from
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  Speaker 1: your book about stock price and profits quote, the price
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  Speaker 1: of your stock will tell you whether to maximize today's
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  Speaker 1: or tomorrow's profits. Explain that, well, that comes from Jensen,
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  Speaker 1: who you know, is that the father of the shareholder
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  Speaker 1: value school and the terrible idea which has been pretty
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  Speaker 1: thoroughly debunked over recent years. It has been debunked, but
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  Speaker 1: this is still the basis of CEO pay to really
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  Speaker 1: so so for those of you who may not be
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  Speaker 1: familiar with share how holder value, it's an idea that
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  Speaker 1: really got its biggest push from Milton Friedman and the
• 13:24
  Speaker 1: Chicago School of Economics, which essentially says that instead of
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  Speaker 1: worrying about various constituencies clients, suppliers, employees, etcetera, um a
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  Speaker 1: corporation sole job is to maximize profit. Maximized shareholder value.
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  Speaker 1: Fair fair statement. Absolutely absolutely, and I think and that
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  Speaker 1: that school said, Okay, stock price is the only thing
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  Speaker 1: that counts, So every decision you make should be made
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  Speaker 1: by what will maximize the stock price. So you know
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  Speaker 1: you may have to trade today its profits for tomorrow's profits. Well,
• 14:02
  Speaker 1: how much should you do that? Well, look to the
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  Speaker 1: stock of your look to the price of your stock.
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  Speaker 1: That will tell you how to do it. So so
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  Speaker 1: the idea is not necessarily thinking long term, but it's
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  Speaker 1: whatever you can do to raise profits, raise stock prices today. Well,
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  Speaker 1: the the theory behind that is that the market looks
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  Speaker 1: long term. So your your your stock price today. And
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  Speaker 1: in the Chicago school, everything is completely rational. Every actor
• 14:31
  Speaker 1: is completely rational. So your stock price today is the
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  Speaker 1: discounted value of dividends plus the stock price ten years out,
• 14:41
  Speaker 1: et cetera. And it's all perfect. And so the market
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  Speaker 1: looks long term. So that's why you can That's why
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  Speaker 1: you don't have to really look long term, because the
• 14:51
  Speaker 1: market will do that. For that sounds so backwards. The
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  Speaker 1: way I had always learned what public companies should do
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  Speaker 1: is focus on long term health of the company and
• 15:03
  Speaker 1: the stock price to take care of itself. That's right.
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  Speaker 1: This stood it on its head. This said that today's
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  Speaker 1: stock price tells you how good you are long term,
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  Speaker 1: and you could see why executives who are compensated with
• 15:16
  Speaker 1: stock options. I love that concept. Well, the worst the
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  Speaker 1: worst thing about this is what how it focuses and
• 15:28
  Speaker 1: misallocates company investment. Give us an example in between in
• 15:34
  Speaker 1: the last ten years, S and P five have spent
• 15:40
  Speaker 1: three point seven trillion dollars buying back their own stock.
• 15:44
  Speaker 1: Now they buy back their own stock, fire it, retire,
• 15:48
  Speaker 1: but they buy it back to keep the price high. Uh,
• 15:52
  Speaker 1: they're not buying it back because it's undervalued. They're buying
• 15:55
  Speaker 1: it it's already high. They're buying it back to keep
• 15:58
  Speaker 1: the price high. Uh. What do they spend on R
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  Speaker 1: and D over that same period? Well, I can tell
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  Speaker 1: you they cut R and D by over that same period.
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  Speaker 1: They cut plant and equipment by over that same period.
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  Speaker 1: And I'm going to use something stealing from your book
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  Speaker 1: because I thought it was so stunning when I talk
• 16:17
  Speaker 1: about three point seven trillion, trillion is a hard number
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  Speaker 1: to get your head around. Reading your book, you had
• 16:24
  Speaker 1: an example that a trillion seconds is thirty two thousand
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  Speaker 1: years and that to me, that that tells you how
• 16:36
  Speaker 1: much a trillion is and you've got three point seven
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  Speaker 1: trillion dollars that could be It could have been invested
• 16:43
  Speaker 1: in product development, R and D, new technology, UH, job training,
• 16:50
  Speaker 1: all these things for for long term health. And instead
• 16:54
  Speaker 1: of doing that, they bought back their own stock. I mean,
• 16:57
  Speaker 1: this is eating This is America's eating the seed or
• 17:00
  Speaker 1: an American industry is eating its own seed corn. Let's
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  Speaker 1: talk a little bit about how this impacts uh inequality
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  Speaker 1: in the country, not just for employees, but across across
• 17:13
  Speaker 1: the whole board of society. And I want to start
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  Speaker 1: with some again more data from the book you reference
• 17:19
  Speaker 1: that this is a fairly uniquely American phenomena. In Japan today,
• 17:26
  Speaker 1: the average ratio between CEO pay and worker pay is
• 17:30
  Speaker 1: sixteen to one. It's a little higher. In Denmark, it's
• 17:34
  Speaker 1: forty eight to one. It's about eighty five to one
• 17:37
  Speaker 1: in the UK. How is it more than five hundred
• 17:39
  Speaker 1: to one in the US. It's so incongruous with the
• 17:42
  Speaker 1: less rest of the corporate world. Well, there are two explanations.
• 17:46
  Speaker 1: One is that US CEOs are thirty times more valuable
• 17:52
  Speaker 1: and productive than Japanese CEOs. That would be one. That's
• 17:56
  Speaker 1: a little bit of a stretch. Another explanation is something's
• 18:00
  Speaker 1: gone terribly wrong here. That seems more likely. Let's look
• 18:03
  Speaker 1: at how this impacts, uh, the overall economy. You actually
• 18:08
  Speaker 1: say that this isn't just a function of within the
• 18:11
  Speaker 1: corporation there's pain equality. You suggest this effects work of morale.
• 18:18
  Speaker 1: You suggest this effects research and development, This affects how
• 18:22
  Speaker 1: we actually build a society. Expound on that. Well, it
• 18:27
  Speaker 1: clearly hurts the companies. I mean we've talked, we have
• 18:30
  Speaker 1: talked about how they've cut R and D and cut
• 18:32
  Speaker 1: investment to keep their socker price high. UH A bigger guy,
• 18:37
  Speaker 1: and they of course waste tens of million dollars on
• 18:40
  Speaker 1: the CEO pay. But that's how the bush back is, Oh,
• 18:42
  Speaker 1: that's company does billions of dollars. Who cares? I mean,
• 18:45
  Speaker 1: so they so they waste that. That's a small part
• 18:47
  Speaker 1: of the cost. A bigger part of the cost is
• 18:49
  Speaker 1: the effect on company morale. I mean, when CEO is
• 18:53
  Speaker 1: making five times what you make and he comes out
• 18:56
  Speaker 1: and he says, there's no I in team, and we're
• 18:59
  Speaker 1: all in this to other, it's pretty tough for you
• 19:01
  Speaker 1: to swallow. And I mean this has been proven by
• 19:05
  Speaker 1: study after study that the more the gap, the worse simmerale.
• 19:09
  Speaker 1: How significant is the correlation between companies that spend billions
• 19:14
  Speaker 1: on share buy backs and the reduction of things like
• 19:17
  Speaker 1: R and D and plant investment, etcetera. Well, it's it's
• 19:21
  Speaker 1: a one to one correlation. The more you spend, the
• 19:23
  Speaker 1: more you spend on share buy backs, the less you
• 19:26
  Speaker 1: have to put into R and D or put into
• 19:30
  Speaker 1: RhE finite pie and and you've got you got so
• 19:32
  Speaker 1: much money. And the more they're using fift of their
• 19:35
  Speaker 1: net income is used to buy back chairs. The share
• 19:38
  Speaker 1: buy backs are twice what they pay on dividends. The
• 19:41
  Speaker 1: data point I thought you were going to go to
• 19:43
  Speaker 1: from the book was that when you look at a
• 19:46
  Speaker 1: company like Dell, I don't mean the E M C
• 19:49
  Speaker 1: version of Dell today, but Dell, the direct built to
• 19:53
  Speaker 1: order PC maker, over the course of that company's history,
• 19:58
  Speaker 1: they spent more on stock buybacks than they ever made
• 20:02
  Speaker 1: in profits the entire company's history, which, if you think
• 20:06
  Speaker 1: about it should be impossible. It should be impossible, and
• 20:11
  Speaker 1: somebody should have woken up and sure, did that stalk
• 20:14
  Speaker 1: very well? It eventually had some real difficulties to it,
• 20:18
  Speaker 1: and it wasn't necessarily apple. But let's let's bring this
• 20:21
  Speaker 1: back um to income inequality. There's a data point I
• 20:26
  Speaker 1: have to reference again. Since c. Ninety eight CEO pay
• 20:31
  Speaker 1: Rose tan X, the median salary in America rose from
• 20:35
  Speaker 1: forty eight thousand to fifty three thousand over the same
• 20:40
  Speaker 1: time period. This is obviously inflation adjusted. That's a less
• 20:44
  Speaker 1: than half a percent a year. What is this due
• 20:47
  Speaker 1: to uh an economy? Well, it is very bad. This level,
• 20:51
  Speaker 1: the level of inequality we income inequality we have in
• 20:55
  Speaker 1: this country is very bad for economic growth. Why is that? Well,
• 20:58
  Speaker 1: to start with, have any percent of our g d
• 21:01
  Speaker 1: P is consumer spending? When the consumers don't get much money,
• 21:05
  Speaker 1: it's hard to spend it. It's the thing I have
• 21:07
  Speaker 1: to pay my workers exactly. And now the money when
• 21:11
  Speaker 1: the money goes to the one tenth of one percent,
• 21:13
  Speaker 1: as it has, let me stop here and say that
• 21:17
  Speaker 1: about since nineteen of all the gains and growth of
• 21:22
  Speaker 1: the economy have gone to the one tenth of one percent.
• 21:28
  Speaker 1: Now that's a hundred and twenty four thousand households. So
• 21:31
  Speaker 1: the reason the average American hasn't gotten a raise. All
• 21:35
  Speaker 1: the money has gone to a very small percentage of people.
• 21:38
  Speaker 1: They don't spend that. I mean, how many yachts can
• 21:41
  Speaker 1: you buy? You know, after you have your fourth, you're
• 21:43
  Speaker 1: not going to buy your pretty much done right, the
• 21:45
  Speaker 1: power boat, a sailboat. Number one, you don't get the
• 21:50
  Speaker 1: consumer spending Number two. Inequality imposes uh, a lot of
• 21:56
  Speaker 1: hidden costs us healthcare as you're in come goes down
• 22:00
  Speaker 1: to your ability to pay for your healthcare goes down. Uh.
• 22:05
  Speaker 1: It imposed. It makes the country less healthy overall. Is
• 22:08
  Speaker 1: that what you're implying it does? Incarceration rises, crime rises.
• 22:13
  Speaker 1: We've seen crime falling over the same period when CEO,
• 22:17
  Speaker 1: although we's even as crime is fallen, we've seen incarceration
• 22:20
  Speaker 1: continue to rise. I could go to a study, but
• 22:23
  Speaker 1: the company it's I think it's too complex to explain
• 22:27
  Speaker 1: the study that says, well, crime would have fallen a
• 22:29
  Speaker 1: lot more if there has been less in equal that
• 22:32
  Speaker 1: makes sense. Let's talk a little bit about the impact
• 22:35
  Speaker 1: of corporate board members and what they have done to
• 22:40
  Speaker 1: pretty much rubber stamp this again. Another data point from
• 22:44
  Speaker 1: the book that that I find is so fantastic. Board
• 22:48
  Speaker 1: members at the company qual Calm quote from two thousand
• 22:52
  Speaker 1: and nine through two thousand and fourteen authorized the repurchase
• 22:56
  Speaker 1: of two hundred and thirty eight million shares at the
• 23:00
  Speaker 1: cost of thirteen point six billion dollars, and at the
• 23:05
  Speaker 1: same time, total shares outstanding increased two How on earth
• 23:11
  Speaker 1: can that happen? Well, they were printing new shares to
• 23:14
  Speaker 1: give to their executives, but two hundred and thirty six
• 23:17
  Speaker 1: million shares was not enough to reduce the share count.
• 23:21
  Speaker 1: The facts speak for themselves. That's astonishing. So another words,
• 23:26
  Speaker 1: based on these prices, they gave away fourteen billion dollars
• 23:30
  Speaker 1: and options to their That that is what the mathematics
• 23:34
  Speaker 1: would say. So what is a board member who has
• 23:38
  Speaker 1: a fiduciary obligation to a company? How do they process
• 23:42
  Speaker 1: that information? What leads them to say yes, I think
• 23:45
  Speaker 1: that's a good idea. What leads them to say that?
• 23:48
  Speaker 1: As they say, first do they get stock of Well,
• 23:53
  Speaker 1: they get stock depends on the company, but they tend
• 23:56
  Speaker 1: to get stock. They get a fee overall and get
• 24:00
  Speaker 1: a gig like that. That sounds like it's a great
• 24:02
  Speaker 1: gig overall at good companies. That science of QualComp you'll
• 24:07
  Speaker 1: be getting three or four thousand dollars a year in
• 24:10
  Speaker 1: stock and cash for attending six meetings. Very nice side gig.
• 24:17
  Speaker 1: And the way you justify it as you say, well,
• 24:21
  Speaker 1: I'm not on the compensation committee, but these are my
• 24:24
  Speaker 1: fellow members, and they've studied it and they have the
• 24:27
  Speaker 1: good consultants, and so whatever the compensation committee proposes almost
• 24:33
  Speaker 1: gets rubber stamped because you don't want to question your
• 24:37
  Speaker 1: board members. And by the way, if you bring up
• 24:40
  Speaker 1: a lot of questions about CEO pay and the other
• 24:44
  Speaker 1: board members, uh, you're not gonna be asked on too
• 24:47
  Speaker 1: many other boards. And as we've said, they're they're a
• 24:49
  Speaker 1: nice gig. Uh. And then you can justify it by saying, well, look,
• 24:56
  Speaker 1: it's what the real problem is. What all these other
• 24:59
  Speaker 1: companies are doing. They're paying their CEO so much that
• 25:02
  Speaker 1: we have to follow. We've got no option. We're forced
• 25:06
  Speaker 1: to follow them. It's not our fault because if we don't,
• 25:09
  Speaker 1: they're just gonna hold their breath till they turn blue
• 25:12
  Speaker 1: and not come to work. Well, the the what they
• 25:15
  Speaker 1: say is, oh, if we don't pay them, they'll go
• 25:17
  Speaker 1: someplace else, which is nonsense. They won't go someplace else.
• 25:20
  Speaker 1: They got no place to go that that that's astonishing.
• 25:24
  Speaker 1: So I'm curious what sort of pushback have you gotten
• 25:28
  Speaker 1: on the book from your fellow board members or or executives.
• 25:32
  Speaker 1: I have gotten zero from uh from them, because why
• 25:36
  Speaker 1: would they want to make noise about this? Uh? They
• 25:41
  Speaker 1: have no effective They just do it. They just ignore it,
• 25:48
  Speaker 1: go away. Here's a quote that I love. This is
• 25:51
  Speaker 1: this is terrific. A good corporate board is like a
• 25:54
  Speaker 1: club where you work on interesting problems with intelligent, congenial companions. Travel,
• 26:00
  Speaker 1: good restaurants, amenities are all provided free of charge. Best
• 26:04
  Speaker 1: of all, instead of paying club dues, the club pays you.
• 26:09
  Speaker 1: So that sounds like a sweet gig. It is a
• 26:11
  Speaker 1: sweet gig. When I was when I was coming close
• 26:16
  Speaker 1: to retirement, I've decided that there was a very good
• 26:19
  Speaker 1: gig and lined up a lot of board spots. And
• 26:21
  Speaker 1: it's been I've I've enjoyed it. It's been wonderful. I've
• 26:23
  Speaker 1: been well paid. Uh I, And yet you're biting the
• 26:27
  Speaker 1: hand that feeds you. I believe that corporate boards have
• 26:30
  Speaker 1: been incredibly irresponsible when it comes to CEO pay. I
• 26:35
  Speaker 1: tried to be as I learned something about this. I
• 26:38
  Speaker 1: tried to be more responsible. Some boards didn't like that.
• 26:42
  Speaker 1: A couple of boards I was able to convince to
• 26:44
  Speaker 1: move to a different system of pay. Other boards just
• 26:47
  Speaker 1: ignored it. So here's an interesting quote. In theory, shareholders
• 26:53
  Speaker 1: elect board members to represent them, but in actual practice,
• 26:57
  Speaker 1: corporate boards are self prepared, actuated well. Corporate boards nominate
• 27:03
  Speaker 1: who is going to be on the board uh absent
• 27:07
  Speaker 1: a proxy fight or sometimes some egregious UH corporate behavior,
• 27:13
  Speaker 1: the dominations go out and nobody opposes him. Nobody says, oh,
• 27:18
  Speaker 1: I'm going to run for that board seat. And so
• 27:21
  Speaker 1: every nominee, I would say the re election of boards
• 27:25
  Speaker 1: is roughly the same as the re election of the
• 27:30
  Speaker 1: North Korean polit bureau. That if you're nominated, you're gonna
• 27:36
  Speaker 1: be Let's put some flesh on those bones. In two
• 27:38
  Speaker 1: thousand and twelve, seventeen thousand and one corporate directors were
• 27:44
  Speaker 1: nominated for board positions. Of that over seventeen thousand nominees,
• 27:50
  Speaker 1: only sixty one. We're not approved, less than one half
• 27:54
  Speaker 1: of one percent. As I say, we arrived, we arrival
• 27:57
  Speaker 1: North Korea. That that that is just astonishing. So let's
• 28:02
  Speaker 1: talk about independent directors on compensation committees. Wasn't that supposed
• 28:07
  Speaker 1: to be, Hey, we're gonna use outside board members, we're
• 28:11
  Speaker 1: gonna use independent experts, and therefore they don't feel um
• 28:15
  Speaker 1: obligated to to grease the CEO. There's some objectivity. Why
• 28:20
  Speaker 1: hasn't that worked out? Well, it hasn't worked out because really,
• 28:25
  Speaker 1: what has changed. It's not that the it's not that
• 28:27
  Speaker 1: they're people are not independent. Doesn't mean that the fundamental
• 28:33
  Speaker 1: dynamic of the CEO being your friend. The CEO may
• 28:36
  Speaker 1: have asked you on the board, but you're still independent.
• 28:40
  Speaker 1: The fact that you have these in built in pay
• 28:48
  Speaker 1: machine systems that guarantee that the CEO that's the status quo,
• 28:54
  Speaker 1: that's the status quo. And so you're an independent director.
• 28:56
  Speaker 1: You come on and this is what you do. This
• 28:59
  Speaker 1: is how it pays hand gold in. The CEO gets
• 29:01
  Speaker 1: a fift increase every year. Why would you, as an
• 29:04
  Speaker 1: independent director start to make all sorts of ruckus about this?
• 29:08
  Speaker 1: Nobody else is Let's talk about the Old Boys Club,
• 29:12
  Speaker 1: the Old Boys Network. The average age of board members
• 29:15
  Speaker 1: is sixty three, and women accounted for less than twenty
• 29:18
  Speaker 1: percent of total directors. Minorities and the reappointment rate was
• 29:26
  Speaker 1: why is it so problematic to get a more diverse board?
• 29:31
  Speaker 1: And and the question that also comes up from this,
• 29:34
  Speaker 1: why do we have so few women as not only
• 29:37
  Speaker 1: board members but CEOs? Well, actually you have a more
• 29:41
  Speaker 1: as board members than you have as CEOs. If you're
• 29:43
  Speaker 1: looking at Fortune five hundred, less than five percent of
• 29:47
  Speaker 1: CEOs are women. And uh, I think if you're looking
• 29:53
  Speaker 1: for the number one characteristic of a CEO, you look
• 29:57
  Speaker 1: like one tall, good hair, are all good hair, and
• 30:03
  Speaker 1: good voice, good presence. Uh they're all They're all cast
• 30:08
  Speaker 1: in Hollywood exactly. And so competency doesn't really seem to
• 30:13
  Speaker 1: make that much. You know, if if you look at it,
• 30:16
  Speaker 1: you'll find it looking like what is probably more important
• 30:20
  Speaker 1: than competence. That's incredible, it is incredible. But but they
• 30:24
  Speaker 1: are taller, they are in average, there are a few
• 30:27
  Speaker 1: inches taller, three inches taller. They're in better shape, they
• 30:31
  Speaker 1: work out their trim. Uh I gotta get busy, and
• 30:36
  Speaker 1: uh am I too old for human growth hormone? Of this?
• 30:40
  Speaker 1: I you know, I don't know. I haven't kept up
• 30:42
  Speaker 1: my So let's talk about who the shareholders are these
• 30:47
  Speaker 1: days and their impact. Mutual funds essentially owned the vast
• 30:52
  Speaker 1: majority of equity stock. Why aren't mutual funds saying hey,
• 30:58
  Speaker 1: you guys, are are you know given away the store?
• 31:01
  Speaker 1: And we have a fiduciary obligation to our investors to
• 31:04
  Speaker 1: make sure you don't. Well, of course, it's it's not
• 31:06
  Speaker 1: just mutual funds, if you know, as you know today, Uh,
• 31:11
  Speaker 1: index funds are you know, they're half the market now,
• 31:16
  Speaker 1: it's still a smaller percentage than active funds, but it's
• 31:19
  Speaker 1: growing rapidly. And Bill McNabb is, the CEO of Van Garden,
• 31:24
  Speaker 1: said they were setting up um committees to essentially reach
• 31:30
  Speaker 1: out and be proactive with corporate management on some of
• 31:33
  Speaker 1: the more egregious practice. Well, I think I think Vanguard
• 31:37
  Speaker 1: has always been one of the leading companies and one
• 31:40
  Speaker 1: of the most responsible companies in that field. But you
• 31:44
  Speaker 1: have huge investors, you know, the hedge funds almost always
• 31:48
  Speaker 1: just vote straight management. Big big investors t I a craft,
• 31:56
  Speaker 1: people like that. They almost always back management. Uh, it's
• 31:59
  Speaker 1: very rare for these, for hedge funds or big institutional
• 32:04
  Speaker 1: investors to vote against management. The rule had always been
• 32:08
  Speaker 1: if you don't like what's going on, sell your stock.
• 32:11
  Speaker 1: Don't try and make sense. Well, what about the opposite.
• 32:13
  Speaker 1: Let's talk about activist investors who basically go to a
• 32:17
  Speaker 1: company and say, you guys are doing it wrong. You
• 32:20
  Speaker 1: manage team is terrible. You've got to make some changes.
• 32:23
  Speaker 1: What is the impact of activist investors on compensation. I
• 32:27
  Speaker 1: haven't seen it. I haven't seen compensation be the major
• 32:31
  Speaker 1: issue of activist investors because, as we say, let's say
• 32:36
  Speaker 1: you're wasting you know, you paid your CEO a hundred
• 32:38
  Speaker 1: million dollars and you should have paid him ten million dollars. Well, frankly,
• 32:43
  Speaker 1: ninety million dollars is not enough to raise up an
• 32:46
  Speaker 1: activist investor campaign. I mean, you've not going to move
• 32:50
  Speaker 1: the needle on a earnings pre share basis, right, So
• 32:53
  Speaker 1: you've got to you've got to say that it's it's
• 32:55
  Speaker 1: generally that the stock is terribly undervalued, and you can think, well,
• 33:00
  Speaker 1: if I split off this division or split off this
• 33:03
  Speaker 1: I can get a huge pop on the stock. That's
• 33:06
  Speaker 1: when you go in and try and do it. We
• 33:08
  Speaker 1: have been speaking with Stephen Clifford, author of the CEO
• 33:12
  Speaker 1: pay Machine. If you enjoy this conversation, be sure and
• 33:15
  Speaker 1: stick around for a podcast extras where we keep the
• 33:18
  Speaker 1: tape rolling and continue discussing all things executive compensation. Be
• 33:23
  Speaker 1: sure and check out my daily column on Bloomberg View
• 33:26
  Speaker 1: dot com. You can follow me on Twitter at rid Halts.
• 33:30
  Speaker 1: We love your comments, suggestions and feedback right to us
• 33:33
  Speaker 1: at m IB podcast at Bloomberg dot net. I'm Barry
• 33:37
  Speaker 1: rid Holts. You're listening to Masters in Business on Bloomberg Radio.
• 33:58
  Speaker 1: Welcome to the podcast, Stephen. Thank you so much for
• 34:01
  Speaker 1: doing this. I find this topic to be fascinating. I've
• 34:04
  Speaker 1: I've read about and written about this over the years
• 34:07
  Speaker 1: because it just seems to be so abusive and so
• 34:11
  Speaker 1: unfair to shareholders, and yet there's so much built in inertia.
• 34:17
  Speaker 1: The new compensation machine is very difficult to thwart it.
• 34:23
  Speaker 1: It's become part of the firmament, and I assume it's
• 34:27
  Speaker 1: going to continue for a while. In the book, you
• 34:29
  Speaker 1: talk about a trinity Michael Jensen, Bill Clinton, and Milton
• 34:34
  Speaker 1: Rock who who together or separately, helped create the climate
• 34:41
  Speaker 1: that we have. So first, who is Michael Jensen? What
• 34:44
  Speaker 1: did he do? Michael Jensen is a professor of He
• 34:48
  Speaker 1: was long time at the Harvard Business School. UH. He
• 34:52
  Speaker 1: was kind of the founder of the theory of founder
• 34:57
  Speaker 1: and UH evangelist of the theory of shareholder value that
• 35:02
  Speaker 1: the only thing that matters is the stock. He was
• 35:04
  Speaker 1: a student of Milton Friedman when he went he went
• 35:07
  Speaker 1: to Chicago during the Freedman esque. Uh, you know, the
• 35:13
  Speaker 1: market is always right. And then Milton Rock, Milton Rock
• 35:16
  Speaker 1: was the first pay, first big pay consultant. And unlike
• 35:20
  Speaker 1: the rest of the pay consultants, who I say are
• 35:22
  Speaker 1: are essentially corrupt hours Uh he not. Milton Rock wasn't
• 35:32
  Speaker 1: that way. I mean, Milton Rock was was I think
• 35:34
  Speaker 1: very serious. What Milton Rock never considered was how the
• 35:39
  Speaker 1: system would work once everybody used to pay consultant, and
• 35:43
  Speaker 1: so how the how this spiral would inevitably start once
• 35:49
  Speaker 1: they were all using the same sense. He saw it
• 35:51
  Speaker 1: long before it began. I mean he retired early. Yeah,
• 35:55
  Speaker 1: he retired early eighties, and and I've got he he
• 35:58
  Speaker 1: happened to be a pay consultant. He didn't consider, Gee,
• 36:00
  Speaker 1: what if the whole world use these pay consultants, well,
• 36:03
  Speaker 1: that we everybody would get a raise every year. We're
• 36:07
  Speaker 1: all in the exactly. And then Bill Clinton. Bill Clinton campaigned,
• 36:14
  Speaker 1: uh in he saw this as a political issue, and
• 36:18
  Speaker 1: he said, I'm going to tax everything over a million dollars.
• 36:21
  Speaker 1: He got elected in terms of actual dollar I'm sorry
• 36:25
  Speaker 1: not tax Excuse me, i am not going to allow
• 36:28
  Speaker 1: tax deductions for all over a million dollars. Well, he yeah, cash,
• 36:34
  Speaker 1: stock anything. So he got in, he got in office,
• 36:39
  Speaker 1: and then he was lobbied by the business groups that said, well,
• 36:43
  Speaker 1: this is this is critical for American industry to pay
• 36:46
  Speaker 1: for performance. And so they revised it and said, uh,
• 36:50
  Speaker 1: if it relates to performance, then it's tax deductible. So
• 36:54
  Speaker 1: and therefore stock options, the stock options by the by
• 36:57
  Speaker 1: themselves were an unlimited amounts. We're uh any you know,
• 37:02
  Speaker 1: so anything that related to what you can make anything
• 37:05
  Speaker 1: and say it relates to performance. Ironically, this this is
• 37:10
  Speaker 1: the thing that truly opened the floodgates to CEO pay
• 37:13
  Speaker 1: going crazy. This was part of the bill Clint, the
• 37:16
  Speaker 1: budget reconciliation bill that had the big new taxes coming in.
• 37:22
  Speaker 1: It passed without a single Republican vote. Really, that's amazing.
• 37:26
  Speaker 1: And then which is which is really surprising when you
• 37:29
  Speaker 1: see what it ended up doing for the money class
• 37:31
  Speaker 1: and the executives. There was a wonderful NPR Planet Money
• 37:37
  Speaker 1: podcast on this exact topic, and it really fleshes it out.
• 37:42
  Speaker 1: So let's talk a little bit about the inertia and
• 37:45
  Speaker 1: how entrenched the CEO compensation machine has become. Are there
• 37:51
  Speaker 1: any hopes that that we can get out from under
• 37:54
  Speaker 1: the scheme or is this going to be with us
• 37:56
  Speaker 1: for the foreseeable future? Boards? Uh and rectors will not
• 38:00
  Speaker 1: reform this system. Uh by themselves. You have this new
• 38:05
  Speaker 1: say on pay, which I don't believe will make much difference. Now,
• 38:10
  Speaker 1: say on pay under Dodd frank Up, every at least
• 38:15
  Speaker 1: every three years, a corporation must have it offer its
• 38:18
  Speaker 1: shareholders the ability to have a non binding vote on
• 38:25
  Speaker 1: whether they approve or disapprove of the pay system. What's
• 38:29
  Speaker 1: happened is that two or three or four the most
• 38:33
  Speaker 1: egregious pay systems and the most egregiously overpaid ceo s,
• 38:39
  Speaker 1: there's a campaign on say on pay, and often it's
• 38:43
  Speaker 1: effective and it will affect that uh, those three or
• 38:46
  Speaker 1: four CEOs. The problem is they're all egregious, and so
• 38:51
  Speaker 1: just focusing on anyone just doesn't get it done right, right,
• 38:55
  Speaker 1: I mean, you've got you've got every one of these,
• 38:58
  Speaker 1: Uh CEO is ridiculously overpaid and the whole system is
• 39:03
  Speaker 1: causing so much harm to the to the country that
• 39:07
  Speaker 1: UH hoping that say on pay is going to make
• 39:10
  Speaker 1: any difference is uh, you know, it's like swatting swatting
• 39:15
  Speaker 1: a few flies. So so we can't talk about executive
• 39:18
  Speaker 1: compensation without bringing up Yahoo and Marissa Meyer. She she
• 39:23
  Speaker 1: joined the company. It seems like less than ten years ago. UH,
• 39:28
  Speaker 1: revenue has gone down, profits have gone down, market share
• 39:32
  Speaker 1: has gone down. The thing of value at Yahoo is
• 39:36
  Speaker 1: their steak in Ali Baba, which Merissa Meyer had nothing
• 39:39
  Speaker 1: to do with. And she's been compensated to the tune
• 39:43
  Speaker 1: of just about a quarter billion dollars. How on earth
• 39:47
  Speaker 1: does something like that make any sense? Uh? This is
• 39:51
  Speaker 1: most of CEO pay turns out to be paid for luck,
• 39:55
  Speaker 1: not pay for performance. All. All of the studies have
• 39:59
  Speaker 1: shown that, UH, CEO compensation and performance, no matter how
• 40:04
  Speaker 1: you define it, is at best weekly weekly, correlated and
• 40:10
  Speaker 1: a worse negatively carlate, which means the more you pay
• 40:14
  Speaker 1: the CEO, the worse you perform. Now, Marissa Mayer was
• 40:18
  Speaker 1: an example of this. She was there five years. By
• 40:22
  Speaker 1: every measure her, the performance of the company was poor.
• 40:26
  Speaker 1: Now maybe that's all her fault. I don't think it's
• 40:30
  Speaker 1: all her fault because I think that the CEO is
• 40:34
  Speaker 1: is not responsible for everything that happens. You know, the
• 40:37
  Speaker 1: CEO has limited abilities to move a big ship. So
• 40:44
  Speaker 1: Marissa didn't do a great job. Does she get singled
• 40:47
  Speaker 1: out because she's a woman, and then making her the
• 40:50
  Speaker 1: post a girl of over compensated? Well, I could give
• 40:54
  Speaker 1: you executives who have been equally overcompensated. Who were men.
• 41:00
  Speaker 1: Let's let's name a few. Well, i'll just take your name.
• 41:03
  Speaker 1: You certainly name names in the book, Well, you know
• 41:06
  Speaker 1: the book. What I did was I took the four
• 41:09
  Speaker 1: highest page CEOs, the people named the highest paige CEO
• 41:14
  Speaker 1: from two thousand and eleven to two thousand and fourteen.
• 41:17
  Speaker 1: I didn't select them because I thought that they were
• 41:21
  Speaker 1: examples of overpaide CEOs. I just took the highest I
• 41:26
  Speaker 1: just took the highest page. So let's say you wanted
• 41:28
  Speaker 1: to look at baseball players, and I took the baseball
• 41:31
  Speaker 1: player had the highest batting affage for the last four years.
• 41:34
  Speaker 1: Uh Now, when I got into that, it turned out
• 41:37
  Speaker 1: that the first of all, if I took the base
• 41:41
  Speaker 1: four baseball players with the highest batting AVU, you would
• 41:44
  Speaker 1: have heard of them and there's only so many people
• 41:47
  Speaker 1: can hit a hundred mile basketball or or a hanging
• 41:50
  Speaker 1: curve ball. It sounds like lots of people can do
• 41:54
  Speaker 1: with these various executives. It would appear to me that
• 42:01
  Speaker 1: executive baseball players, let's say, seldom go from superstars two
• 42:09
  Speaker 1: bums in a single season. This happens all the time
• 42:12
  Speaker 1: with CEOs. I mean, we've seen we've seen CEOs crash
• 42:15
  Speaker 1: and burn. You know, they're brilliant, they're they're the new
• 42:19
  Speaker 1: poster child for for CEO, for top CEOs. Next year,
• 42:23
  Speaker 1: they're out of a job. Most of Look, I was
• 42:27
  Speaker 1: a CEO for fourteen years. When I was in the
• 42:29
  Speaker 1: right place at the right time, I was a genius.
• 42:32
  Speaker 1: When I was in the wrong place at the wrong time,
• 42:34
  Speaker 1: I was a more Most of success is being in
• 42:38
  Speaker 1: the right place at the right time, or something called fit,
• 42:43
  Speaker 1: meaning that your skills, the particular skills you have, fit
• 42:48
  Speaker 1: for what that company needs at that time. So let
• 42:52
  Speaker 1: me take an icon of American business, Henry Ford. Henry
• 42:56
  Speaker 1: Ford was a superb fit for the automobile industry when
• 43:00
  Speaker 1: mass production and manufacturing efficiency were what was critical. When
• 43:07
  Speaker 1: it became a question of customers styling Henry Foker is
• 43:12
  Speaker 1: terrible fit any color as long as it's black, exactly.
• 43:15
  Speaker 1: So you know when you're when you're fit, when you
• 43:20
  Speaker 1: have the right fit for the right time in the company.
• 43:23
  Speaker 1: You look pretty good when your skills are So I'm
• 43:27
  Speaker 1: I'm a serendipity and luck really pay a big, big role.
• 43:31
  Speaker 1: The race is not to the swift. So let's let's
• 43:35
  Speaker 1: talk a little bit about consultants. I referenced them in
• 43:39
  Speaker 1: my book. You spend a lot of time talking about consultants.
• 43:43
  Speaker 1: And I have to begin with a quote, as I
• 43:46
  Speaker 1: so often like to do, from Charlie Monger. I would
• 43:49
  Speaker 1: rather throw a viper down my shirt fronts than hire
• 43:52
  Speaker 1: a compensation consultant. So Charlie is not a big fan
• 43:57
  Speaker 1: of them. Why do you think that is? Well, because
• 44:02
  Speaker 1: compensation consultants are part of the ore. Are a parasitic profession. Uh,
• 44:10
  Speaker 1: you'll have to put a little detail to that. Uh.
• 44:13
  Speaker 1: Compensation consultants come in and say we're going to give
• 44:17
  Speaker 1: you all sorts of studies in an objective way to
• 44:20
  Speaker 1: pay your CEO. And uh, they're very anctious and and
• 44:28
  Speaker 1: you'll pretend to be very serious and basically, what the
• 44:32
  Speaker 1: what the CEO knows they're going to do is juice
• 44:35
  Speaker 1: is pay. That's that's all. That's all these compensations. You
• 44:41
  Speaker 1: don't even have to wink and nod. You just look
• 44:43
  Speaker 1: at the record. And this is a big business. I
• 44:46
  Speaker 1: was stunned to learn from your book management consulting industry.
• 44:50
  Speaker 1: I would have guessed it was a couple of billion dollars.
• 44:52
  Speaker 1: It's a two billion dollar industry. Oh yeah, now I'm not.
• 44:57
  Speaker 1: I'm I don't paint all management cons aultants with the
• 45:01
  Speaker 1: same brush. I find compensation consultants. Uh how big of that?
• 45:07
  Speaker 1: Too much billion? To all pie are the compensations. I
• 45:11
  Speaker 1: could not find a number on that. There's nothing, there's
• 45:14
  Speaker 1: nothing public. Uh I would you know all of all
• 45:18
  Speaker 1: of these companies have, all big companies have compensation consultants,
• 45:22
  Speaker 1: and you know they're paid a million to ten million
• 45:26
  Speaker 1: dollars at these places. Um, and really the only thing,
• 45:31
  Speaker 1: the only thing they do is give you a big
• 45:35
  Speaker 1: report and a lot of slides and a big power
• 45:39
  Speaker 1: point and goose the CEO s pay. It's that simple.
• 45:42
  Speaker 1: So here's an idea for any billionaire who wants to
• 45:46
  Speaker 1: pursue it. You know, we've seen the way the thing
• 45:49
  Speaker 1: tanks managed to push ideas out into the world, even
• 45:54
  Speaker 1: though they may not be great ideas such as a
• 45:57
  Speaker 1: shareholder value. Someone needs to for him in executive compensation
• 46:02
  Speaker 1: think tank. They need to dog all of these consultant
• 46:06
  Speaker 1: companies and essentially debunk every time they put out a
• 46:09
  Speaker 1: slide deck to study something, and eventually, by doing that,
• 46:14
  Speaker 1: someone will find a way to um put into the ether,
• 46:19
  Speaker 1: put into the media and the conversation. Hey, these guys
• 46:22
  Speaker 1: are wildly overpaid and for everything they say, you have
• 46:27
  Speaker 1: to come up with the opposite, and I nominate you
• 46:29
  Speaker 1: to do that. Well, and the book is a good start.
• 46:32
  Speaker 1: I I don't I don't think that would work. Why not?
• 46:37
  Speaker 1: Look does media pressure impacted comprit Directors would have to
• 46:41
  Speaker 1: be brain dead not to know that their CEOs are
• 46:45
  Speaker 1: wildly overpaid. I mean, how can you realistically go to
• 46:50
  Speaker 1: you know, attend a meeting and say, oh, yeah, okay,
• 46:53
  Speaker 1: so we're paying Joe this. So Joe has made forty
• 46:55
  Speaker 1: million dollars this year. Well that's all right, because you
• 46:58
  Speaker 1: know his peers are all paid. Let me give you
• 47:01
  Speaker 1: an example. Suppose in nineteen eighty we had insurance consultants
• 47:07
  Speaker 1: and they came to the boards and they said, hey,
• 47:09
  Speaker 1: we got a great new way to do insurance. See,
• 47:12
  Speaker 1: we're gonna have a peer group. We're gonna see what
• 47:14
  Speaker 1: all your peers are paying for insurance. Okay, and then
• 47:17
  Speaker 1: we're gonna have you pay at seventy at the seventy
• 47:20
  Speaker 1: because you're well, no, no, this is a great idea
• 47:23
  Speaker 1: that that you're a good company, you'll pay there. And
• 47:26
  Speaker 1: by the way, because you need premium insurance your top court,
• 47:28
  Speaker 1: top quart tile. And by the way, then um, we'll
• 47:32
  Speaker 1: set for the for the insurance company. We're gonna set
• 47:34
  Speaker 1: performance goals and if they hit those goals, will will
• 47:37
  Speaker 1: double our our premiums cost. So so you accept that,
• 47:43
  Speaker 1: you say, the company accepts that. It's now two thousand seventeen,
• 47:46
  Speaker 1: you're on the board and you say, hey, I've been
• 47:48
  Speaker 1: looking at our insurance. You know the cost, the real
• 47:52
  Speaker 1: inflation inged cost has gone up a thousand percent, ten
• 47:57
  Speaker 1: times uh and with how many our coverage is worse? Why?
• 48:03
  Speaker 1: Why did? Why are we listening to these consultants? That's
• 48:06
  Speaker 1: the position there in with CEOs, But they won't ask
• 48:09
  Speaker 1: that question. So what has to be done to pressure
• 48:12
  Speaker 1: board members, either through the media or what have you
• 48:17
  Speaker 1: to my view, and this is this will be uh
• 48:23
  Speaker 1: is that you need a blunt instrument, need a very
• 48:27
  Speaker 1: blunt instrument to to wake these guys up. A law
• 48:33
  Speaker 1: or I mean the Dodd Frank rule that requires the
• 48:36
  Speaker 1: say on pay and the publication of this that hasn't
• 48:40
  Speaker 1: seemed to thwart it. What what my because nothing else
• 48:44
  Speaker 1: has worked. I'm saying you need a very blunt instrument.
• 48:47
  Speaker 1: And what I'm saying is you need a luxury tax.
• 48:50
  Speaker 1: I'm taking a page from Major League Baseball, a luxury
• 48:54
  Speaker 1: you know, the Major League Baseball says, look, if your
• 48:56
  Speaker 1: payroll gets over x, you gotta pay at tax. So
• 49:00
  Speaker 1: I'm gonna say, if you pay your ceo everything over
• 49:04
  Speaker 1: six million dollars to any executive, you gotta pay a
• 49:08
  Speaker 1: tax to the federal government dollar for dollar. And by
• 49:11
  Speaker 1: the way, I'm going to include everything. What you know,
• 49:13
  Speaker 1: these number jets, the club got the biggest, the biggest thing.
• 49:19
  Speaker 1: You know, when a CEO cashes in his stock options
• 49:22
  Speaker 1: that's not reported as pay. Yeah. That so let's talk
• 49:26
  Speaker 1: about fasby a little bit. There was an ongoing debate,
• 49:29
  Speaker 1: primarily driven by Silicon Valley, which was do stock options
• 49:36
  Speaker 1: counts as compensation, and one would think they should count
• 49:40
  Speaker 1: as compensation, but they don't, well what they They finally
• 49:45
  Speaker 1: forced them to say, yes, it's compensation. So this is
• 49:49
  Speaker 1: the way. Then the accountants and the companies got around that.
• 49:52
  Speaker 1: They said, well, when when we barry, we're gonna give
• 49:56
  Speaker 1: you a million options at twenty. Stock is currently twenty now,
• 50:01
  Speaker 1: so those million options will run it through a black
• 50:05
  Speaker 1: Shoals model or something like that, and we'll say, okay,
• 50:07
  Speaker 1: each option is worth is worth a dollar today. So
• 50:13
  Speaker 1: we say you've got compensation of a million dollars. You
• 50:15
  Speaker 1: got a million options. Now seven years later, the stock
• 50:20
  Speaker 1: is at fifty. Not because you've done a good job,
• 50:22
  Speaker 1: just because the market really well. Right, So you now
• 50:26
  Speaker 1: cast in your million options for a gain of thirty
• 50:29
  Speaker 1: dollars in option, you pocket thirty million dollars. That's not
• 50:32
  Speaker 1: considered compensation. That is when when you read these ratio
• 50:37
  Speaker 1: is three company have to go out when you exercise
• 50:40
  Speaker 1: the option and replace that stock. It either has to
• 50:43
  Speaker 1: replace that stock or print more stocks, or it's it's
• 50:48
  Speaker 1: either dilutive or expensive. The shareholder loses. Uh. But according
• 50:53
  Speaker 1: to the company, this uh, this money came from the
• 50:57
  Speaker 1: tooth fairy. He just came in in the middle of
• 51:00
  Speaker 1: the night put thirty million dollars under your pillow, and uh,
• 51:04
  Speaker 1: very nice of them. And you know you left out
• 51:07
  Speaker 1: the other half of that story, or the other possibility
• 51:12
  Speaker 1: of that story, which is the stock doesn't go to fifty.
• 51:17
  Speaker 1: The stock goes to ten, at which point the board
• 51:21
  Speaker 1: reprices the stock options down to ten. There are no
• 51:25
  Speaker 1: I don't even know if there's taxed, because you paid
• 51:27
  Speaker 1: tax at twenty and clearly that calculation was wrong because
• 51:31
  Speaker 1: it's not worth twenty, it's worth ten. And so you
• 51:33
  Speaker 1: might even have a little fun with your tax amendment,
• 51:37
  Speaker 1: do you amending your previous return. And then if subsequently
• 51:40
  Speaker 1: that stock runs up, the companies in the same situation,
• 51:44
  Speaker 1: it goes back to twenty and all of a sudden,
• 51:45
  Speaker 1: you're mate, you're making money because because it's been repriced,
• 51:49
  Speaker 1: because we had to give you the incentive. Now, this
• 51:52
  Speaker 1: is this is one of the worst parts of it,
• 51:55
  Speaker 1: the idea that these huge uh option packages at various
• 52:03
  Speaker 1: other pay packages are necessary to motivate you. Now, CEOs
• 52:09
  Speaker 1: are highly motivated to start with. You don't get you
• 52:11
  Speaker 1: don't get to be a CEO if you know if
• 52:13
  Speaker 1: you show up at eleven o'clock every morning. UM, A
• 52:18
  Speaker 1: pay system is should only channel the motivation properly. Now,
• 52:25
  Speaker 1: financial incentives at the CEO level, UH tend to have
• 52:34
  Speaker 1: because they're so powerful, tend to narrow your focus completely.
• 52:38
  Speaker 1: You're a ceo. You can make thirty million dollars this
• 52:42
  Speaker 1: year if you increase earnings per share by x per cent.
• 52:45
  Speaker 1: Let's say your whole bonus is based on You're gonna
• 52:49
  Speaker 1: make that. You're gonna make that. You're going to make that.
• 52:53
  Speaker 1: I mean, look, as you know, I could always make
• 52:57
  Speaker 1: earning experience. I jump up and dance the mac arena
• 53:00
  Speaker 1: with a you know, a few accounting changes. But but
• 53:03
  Speaker 1: you're gonna make that. I don't care what you have
• 53:05
  Speaker 1: to do. You're gonna make that. You are going to
• 53:07
  Speaker 1: neglect everything else. You're gonna focus totally, totally on the
• 53:12
  Speaker 1: Suppose I suppose I said, Barry, your performance measure next
• 53:17
  Speaker 1: year is, UM, how many headlines your your radio story
• 53:23
  Speaker 1: makes in the New York Post. Okay, you're gonna get
• 53:26
  Speaker 1: thirty million dollars. If you make You're gonna be interview anybody.
• 53:31
  Speaker 1: You'll make a headline. You don't care what right I mean,
• 53:36
  Speaker 1: thirty million dollars is a powerful, powerful motivator there, right,
• 53:40
  Speaker 1: you can ruin your show, but it's thirty million dollars
• 53:44
  Speaker 1: and executives do the same thing. It's so powerful that that.
• 53:49
  Speaker 1: And by the way, this has been shown in study
• 53:51
  Speaker 1: after study and an experiment after experiment that for all,
• 53:56
  Speaker 1: for all, um all, except repetitive, repetitive tasks or really
• 54:04
  Speaker 1: distasteful tasks like you know, knocking on doors and selling magazines.
• 54:08
  Speaker 1: Financial incentives tend to harm performance your your You perform best,
• 54:15
  Speaker 1: and I'm sure you perform best when you are motivated
• 54:19
  Speaker 1: by your conception of what a job well done is
• 54:24
  Speaker 1: just pride and workmanship. I know that's old school, but
• 54:28
  Speaker 1: I think it's important. It's it's, it's, it's it's not
• 54:31
  Speaker 1: old school, in fact, is what how humans perform um
• 54:37
  Speaker 1: And so you're saying stock options are motivating CEOs towards
• 54:43
  Speaker 1: one thing, which is stock price. Yes, yeah, it's it's,
• 54:47
  Speaker 1: it's and that's why. That's why. And you combine that
• 54:51
  Speaker 1: with the theoretical justification of shareholder value, and this is
• 54:58
  Speaker 1: one of the I think the is one of the
• 55:00
  Speaker 1: worst things that's happened to American industry. So there are
• 55:03
  Speaker 1: two issues that raises and and a shorter one and
• 55:06
  Speaker 1: along the one. Let's start with the shorter one first.
• 55:11
  Speaker 1: I've read numerous times people said, well, when you give
• 55:14
  Speaker 1: stock options to executives, their interests or aligne with shareholders.
• 55:19
  Speaker 1: But that doesn't make sense. They haven't taken any risk,
• 55:22
  Speaker 1: they haven't put up any money, they're not thinking long term.
• 55:25
  Speaker 1: To them, all they need to do is have um
• 55:29
  Speaker 1: the stock price go up, whether they're responsible or not.
• 55:33
  Speaker 1: How on earth does that align them with the interests?
• 55:37
  Speaker 1: It is amazing. I look at these company proxies and
• 55:40
  Speaker 1: you know, they have forty pages on executive compensation and
• 55:44
  Speaker 1: the word alignment is used at least twenty or thirty
• 55:47
  Speaker 1: times in each proxy. And you're absolutely right, there's no
• 55:51
  Speaker 1: alignment at all. I mean heads heads I win, tails
• 55:56
  Speaker 1: I break even with an option unless there's a repricement
• 55:59
  Speaker 1: in which even tails went right, which even tails I win.
• 56:01
  Speaker 1: So let's talk about the bigger issue, which is what
• 56:03
  Speaker 1: I think the compensation that is attributed to stock options
• 56:10
  Speaker 1: get so wrong. When you are giving a huge pile
• 56:14
  Speaker 1: of stock options to an executive, you're essentially compensating them
• 56:20
  Speaker 1: not for how well their company does relative to their peers,
• 56:23
  Speaker 1: not for how well they do, but you're compensating them
• 56:26
  Speaker 1: based on how well the stock market does. Absolutely, as
• 56:29
  Speaker 1: as as you know, sevent of a company stock movement
• 56:34
  Speaker 1: has to do with the general stock market or the
• 56:37
  Speaker 1: industry and the sector. Right, the two of those are
• 56:39
  Speaker 1: at least not more. The company itself is responsible for
• 56:43
  Speaker 1: about a third if that much, if that much, and
• 56:46
  Speaker 1: so hey, if you're in the right industry, in the
• 56:48
  Speaker 1: right market, you're going to get big stock option gains,
• 56:53
  Speaker 1: even if you perform much below your peer group. This
• 56:57
  Speaker 1: is another thing that that stuns me. We say we're
• 57:01
  Speaker 1: gonna they always say, okay, we're gonna pay according to
• 57:03
  Speaker 1: a peer group. And then they say, but you're you're
• 57:06
  Speaker 1: going to be paid at the seventy five percentile because
• 57:08
  Speaker 1: we're a good company. They never ever test that you
• 57:12
  Speaker 1: have to perform at the seventy five percent dial or
• 57:16
  Speaker 1: you have to beat your peers at anything. That's shocking.
• 57:19
  Speaker 1: There is never, there is never that test in everyone
• 57:23
  Speaker 1: I've ever looked at once. Once you set your base
• 57:28
  Speaker 1: at seventy peer group, you are not held for any performance.
• 57:32
  Speaker 1: You're that you may have a uh your compensation may
• 57:39
  Speaker 1: be linked to your stock price, it may be linked
• 57:40
  Speaker 1: to earnings per share, but nothing about beating these peers,
• 57:43
  Speaker 1: right the old line as I'm astonished but not surprised.
• 57:48
  Speaker 1: So so here you raised the question that that uh
• 57:52
  Speaker 1: I was thinking of, which is how did this company
• 57:56
  Speaker 1: do relative to revenue? For is their peers relative to
• 58:01
  Speaker 1: market share, relative to patents filed, relative to product introduction,
• 58:07
  Speaker 1: relative to market penetration, relative to geographic expansion relative You
• 58:12
  Speaker 1: could come up very easily with a dozen or hundred
• 58:17
  Speaker 1: different metrics that you could use a loan or in
• 58:20
  Speaker 1: combination with each other that would fairly say, hey, how
• 58:24
  Speaker 1: has this company done relative to other companies in the space,
• 58:29
  Speaker 1: relative to other companies of the same size, relative to
• 58:32
  Speaker 1: any reasonable pier and those gains are the basis for
• 58:38
  Speaker 1: our bonuses and compensation. You could although that would that
• 58:42
  Speaker 1: would be that would be highly complicated. I I prefer
• 58:46
  Speaker 1: much simpler system, which would be my simple. My My
• 58:50
  Speaker 1: system is you get a salary pretty good salt, you know.
• 58:55
  Speaker 1: Do you get a salary two three two million bucks
• 58:57
  Speaker 1: and you get restricted stock? How can I live on
• 59:01
  Speaker 1: two million dollars? Well, you know, maybe you know what
• 59:03
  Speaker 1: the dudes are at the golf club. It's and I
• 59:05
  Speaker 1: don't even play golf, but still it's very expensive. To
• 59:11
  Speaker 1: let me tell you, I've I've lived very well. I've
• 59:16
  Speaker 1: lived very well, and I belonged to a very nice
• 59:19
  Speaker 1: golf club. Uh and I've never made two million dollars
• 59:22
  Speaker 1: a year. That's a that's a book title scraping. So uh,
• 59:30
  Speaker 1: I say restricted stock, and then there's one restricted stuff,
• 59:35
  Speaker 1: not an option, but restricted stock. How long do they
• 59:38
  Speaker 1: have to hold that stuff? To hold that stock until
• 59:43
  Speaker 1: about five years after they've retired, after they've not even
• 59:47
  Speaker 1: after they've left the company, after after they've left after
• 59:50
  Speaker 1: I'm sorry, after they've left the company. So in other words,
• 59:53
  Speaker 1: you're making them think long term plus five and there's
• 59:58
  Speaker 1: only one performance requirement. M hmm, long term plus five.
• 1:00:03
  Speaker 1: That stock has to perform better than the SMP five
• 1:00:07
  Speaker 1: really lose half of it. So in other words, half
• 1:00:10
  Speaker 1: the SMP five hundred is gonna underperform. One would think,
• 1:00:15
  Speaker 1: I mean the distribution. So I'm just saying, look, you
• 1:00:18
  Speaker 1: get you get a lot of stock in the company,
• 1:00:20
  Speaker 1: so you're you're a shareholder that and your your interests
• 1:00:24
  Speaker 1: truly are aligned. Your interest truly are aligned and you're
• 1:00:27
  Speaker 1: a long term shareholder because you can't even get out
• 1:00:30
  Speaker 1: the day you quit the company. Uh. And there there's
• 1:00:33
  Speaker 1: a complicated way of how you can reduce this over
• 1:00:36
  Speaker 1: time and um. And your test is that during that
• 1:00:42
  Speaker 1: period you have to form better than the other guys
• 1:00:45
  Speaker 1: are half your restricted share is goot forfeited And you
• 1:00:48
  Speaker 1: mentioned blunt instruments. The way to make this work, one
• 1:00:51
  Speaker 1: would imagine, would be to create a tax incentive if
• 1:00:55
  Speaker 1: you use this plan, and a higher tax if you don't.
• 1:00:59
  Speaker 1: That's right, right, that would I didn't I didn't have
• 1:01:02
  Speaker 1: that in my book. But I think that's an excellent idea. Well,
• 1:01:04
  Speaker 1: the the only way to get anybody to adopt something
• 1:01:07
  Speaker 1: is to give them incentive or disincentives. And the current plan.
• 1:01:12
  Speaker 1: Should you combine your you were three quarters away there
• 1:01:15
  Speaker 1: your luxury tax with you don't pay the luxury tax.
• 1:01:18
  Speaker 1: If you do it this way, you had both completely
• 1:01:21
  Speaker 1: We we should have I should have had this interview
• 1:01:24
  Speaker 1: before I read this. Well, can these are your ideas?
• 1:01:27
  Speaker 1: I'm just add the luxury tax with this. I think
• 1:01:31
  Speaker 1: it's an excellent idea. It's it's a way to make sense.
• 1:01:34
  Speaker 1: The second edition will have it in there. You go,
• 1:01:36
  Speaker 1: you can you can you can edit that UM before
• 1:01:39
  Speaker 1: we go to our our standard questions, our favorite questions
• 1:01:42
  Speaker 1: I had UM. I had one last question I had
• 1:01:46
  Speaker 1: to ask you, which I thought was hilarious. A board
• 1:01:50
  Speaker 1: member once asked you, how do you measure the first
• 1:01:53
  Speaker 1: year's progress on a three year turnaround? So, in other words,
• 1:01:58
  Speaker 1: people have bonuses and incent of every year on what
• 1:02:01
  Speaker 1: was supposed to be a three year turnaround. How can
• 1:02:05
  Speaker 1: you legitimately measure where you are? One of the problems
• 1:02:09
  Speaker 1: is with the bonus system. You get an annual bonus
• 1:02:13
  Speaker 1: as if everything important falls nice calendar within a calendar year.
• 1:02:19
  Speaker 1: And the analogy that I used to show you how
• 1:02:21
  Speaker 1: absurd an annual bonus system is. The analogy as he
• 1:02:25
  Speaker 1: used in the book, is think of setting a bonus
• 1:02:28
  Speaker 1: system for generals in wartime because we need to motivate them.
• 1:02:33
  Speaker 1: We need not self motive. They're not self motivate, and
• 1:02:37
  Speaker 1: we need to you know, they'll perform better if we
• 1:02:41
  Speaker 1: give them a bonus. Well, that's the same that you have.
• 1:02:43
  Speaker 1: I mean, it's so absurd, but although invade easy targets,
• 1:02:46
  Speaker 1: they won't fight exactly exactly. It's pretty crazy. I mean,
• 1:02:52
  Speaker 1: if if the Soviet Union, I'm Soviet univer that shows
• 1:02:55
  Speaker 1: out my age. If if Russia wanted to truly debilitate
• 1:03:01
  Speaker 1: the army, the military, and the United States, it would
• 1:03:05
  Speaker 1: introduce an annual bonus system. That's amazing. So so let's
• 1:03:10
  Speaker 1: talk a little bit about some of our standard questions.
• 1:03:14
  Speaker 1: And these are the things I asked all of my guests. Um,
• 1:03:17
  Speaker 1: tell us a little bit about your background that people
• 1:03:19
  Speaker 1: don't know about you. Uh, well people don't. I doubt
• 1:03:25
  Speaker 1: your listeners know anything about me, so they will after this, okay. Um.
• 1:03:31
  Speaker 1: The first the job I had the most fun at
• 1:03:34
  Speaker 1: was when I was Deputy Controller of the City of
• 1:03:37
  Speaker 1: New York during the financial crisis. That was pretty interesting,
• 1:03:40
  Speaker 1: was fascinating. I mean the cast of characters I was
• 1:03:43
  Speaker 1: working with, uh and the issues I was working when
• 1:03:46
  Speaker 1: I was a kid. I was thirty four years old,
• 1:03:48
  Speaker 1: so that that was that was a lot of fun.
• 1:03:51
  Speaker 1: My father in law used to own the New York
• 1:03:54
  Speaker 1: City General Obligation bonds and when I think they had
• 1:03:58
  Speaker 1: a coal function in two thousand something like that, and
• 1:04:02
  Speaker 1: I remember he came came to me and said, all right,
• 1:04:05
  Speaker 1: I have these bonds that are called in New York
• 1:04:07
  Speaker 1: City geos. He was buying them for years in the seventies.
• 1:04:11
  Speaker 1: They've been playing twelve four? What can you get me
• 1:04:15
  Speaker 1: to replace him? And I said, I could get you
• 1:04:18
  Speaker 1: some treasuries at four and a half five percent if
• 1:04:20
  Speaker 1: you want muni bonds, they're just a tiny bit riskier,
• 1:04:23
  Speaker 1: but it's tax free and they'll pay about four percent.
• 1:04:27
  Speaker 1: And he's like, what the hell am I going to
• 1:04:28
  Speaker 1: do with that? Were you there during the that was
• 1:04:32
  Speaker 1: quite quite a period of time. My father in law,
• 1:04:35
  Speaker 1: who is no longer with us, correctly surmised New York
• 1:04:38
  Speaker 1: City UH is still gonna be around. So that was
• 1:04:40
  Speaker 1: a yes to say the least. Tell tell us about
• 1:04:43
  Speaker 1: some of your early mentors who affected um the way
• 1:04:46
  Speaker 1: you approach being a CEO or a board member. You know.
• 1:04:52
  Speaker 1: I would say that two early mentors I had were
• 1:04:54
  Speaker 1: when I was in government UH in New York. One
• 1:04:58
  Speaker 1: was a fellow named Bob will Ers, who is now
• 1:05:02
  Speaker 1: longtime CEO of M ANDT Bank and the most As
• 1:05:08
  Speaker 1: a matter of fact, his bank, which I think is
• 1:05:10
  Speaker 1: about the twentieth biggest bank in the country, has the
• 1:05:12
  Speaker 1: very fast growing recently has been the most successful bank
• 1:05:16
  Speaker 1: stock among all banks that's grown at about twenty a
• 1:05:22
  Speaker 1: year from forever. And then, uh, I just had lunch
• 1:05:26
  Speaker 1: with him. And I just had lunch with another one
• 1:05:28
  Speaker 1: of my former mentors, Jay Golden, who was the controller
• 1:05:31
  Speaker 1: of the Brilliant Brilliant Guy New York City or New
• 1:05:35
  Speaker 1: York State, New York City. I definitely recognized the name
• 1:05:39
  Speaker 1: who affected your thoughts on executive pay. Again, you're not
• 1:05:44
  Speaker 1: a typical CEO slash board member. What steered you? Who
• 1:05:48
  Speaker 1: steered you in the direction you move? You know, I'd
• 1:05:51
  Speaker 1: have nobody steered me. I just kept, as you know,
• 1:05:55
  Speaker 1: I was doing this at a company level to try
• 1:05:58
  Speaker 1: and to say, look doesn't make any sense. I mean,
• 1:06:01
  Speaker 1: the incentives are all wrong in their perverse and they're
• 1:06:03
  Speaker 1: going the wrong way. And then as I got into
• 1:06:05
  Speaker 1: it and into it, I said, this is an outrage.
• 1:06:09
  Speaker 1: And you know, I like to write, and so I
• 1:06:11
  Speaker 1: started to write about it. But no, no, but no,
• 1:06:13
  Speaker 1: I steered myself. That's that's interesting. Um. This is uh
• 1:06:19
  Speaker 1: a listener question that that we've adopted every week, and
• 1:06:22
  Speaker 1: it's it's actually one of the most popular questions we get.
• 1:06:26
  Speaker 1: Tell us about some of your favorite books, fiction, nonfiction,
• 1:06:29
  Speaker 1: compensation related or not. Okay, In the last three years,
• 1:06:37
  Speaker 1: I would say my two favorite books were Daniel Kahneman's
• 1:06:42
  Speaker 1: Thinking Fast and Thinking Slowly and I'll tell you a
• 1:06:46
  Speaker 1: story about that. Uh and um, Why Nations Fail? That's
• 1:06:51
  Speaker 1: a that was a big book that came out a
• 1:06:53
  Speaker 1: year or two ago. Two M. I T. Professor hard
• 1:06:57
  Speaker 1: one Harvard won M I T. I guess what was
• 1:06:59
  Speaker 1: the author name of that? It's I know that. I'm
• 1:07:05
  Speaker 1: gonna pull that up right now. Hold on a second.
• 1:07:07
  Speaker 1: Let me tell you a fascinating story about Daniel Cokay,
• 1:07:12
  Speaker 1: I read. I read his book, Thinking Fast and Thinking
• 1:07:14
  Speaker 1: So I love the book. But I thought he had
• 1:07:17
  Speaker 1: one Darren Asmo Glue, who was a recent UM guest
• 1:07:24
  Speaker 1: on the show will be broadcast later uh this month. Well,
• 1:07:29
  Speaker 1: he's a brilliant, absolutely brilliant thing. Well by the time
• 1:07:32
  Speaker 1: this broadcast, it will have been last week or so. Okay,
• 1:07:35
  Speaker 1: So Daniel Koneman, Nobel Prize winner, wrote this brilliant book.
• 1:07:40
  Speaker 1: I thought he had one thing wrong. I thought he
• 1:07:42
  Speaker 1: had made I thought he I had a better explanation
• 1:07:46
  Speaker 1: for one of his examples than he did. So I
• 1:07:49
  Speaker 1: don't need to go into it. I sit down and
• 1:07:51
  Speaker 1: I this is at ten o'clock Seattle time. Ten am.
• 1:07:54
  Speaker 1: It's one o'clock Princeton time. Where he is. I write
• 1:07:56
  Speaker 1: him up an email. I said, dear Mr, I mean
• 1:08:00
  Speaker 1: I enjoyed your doctor. I enjoyed your book. Uh, but
• 1:08:05
  Speaker 1: I think you got one thing wrong. Ten minutes later,
• 1:08:11
  Speaker 1: one ten Princeton time, I get back an email saying,
• 1:08:16
  Speaker 1: thanks for the kind comments about your book. Uh, your explanation,
• 1:08:21
  Speaker 1: uh would would seem to be pretty good. However, we
• 1:08:25
  Speaker 1: checked before we did this, and here's why our explanation
• 1:08:29
  Speaker 1: is right and yours is wrong. And I said, here's
• 1:08:33
  Speaker 1: a No Bill Prize winner one ten answering an email
• 1:08:37
  Speaker 1: from somebody he's never heard. I just found out astonishing.
• 1:08:40
  Speaker 1: He's a fascinating guy. When I'll tell we don't have
• 1:08:44
  Speaker 1: time for it, but I'll tell you a funny story
• 1:08:47
  Speaker 1: about him, which I actually relate in that podcast. But
• 1:08:50
  Speaker 1: he's really a fascinating guy. Um. So that's one book.
• 1:08:55
  Speaker 1: Uh why why Nations Fail? It was to me, come
• 1:09:00
  Speaker 1: pleat eye opener. Uh, fascinating. I never thought I love
• 1:09:05
  Speaker 1: a book that all of a sudden makes you think
• 1:09:07
  Speaker 1: the way I've been thinking all my life is wrong
• 1:09:10
  Speaker 1: on this particular serspective changer. Yes, yes, I mean just
• 1:09:15
  Speaker 1: what they call it paradigm. So what else? What else
• 1:09:18
  Speaker 1: is give me one more book? Well, unless you have more, uh,
• 1:09:23
  Speaker 1: I would have to you know, the most influential books
• 1:09:25
  Speaker 1: that I've ever read. I would say that Richard Dawkins
• 1:09:28
  Speaker 1: a selfish gene, probably influenced my thought more than any
• 1:09:34
  Speaker 1: other book I've run across. That's that's fascinating. Um, So
• 1:09:41
  Speaker 1: what do you see as the next shifts in the
• 1:09:44
  Speaker 1: world of executive compensation? Is this going to continue on
• 1:09:48
  Speaker 1: this trajectory with no ability to change it? Or are
• 1:09:52
  Speaker 1: we going to start to see some changes? Uh? I
• 1:09:55
  Speaker 1: don't think we'll see any changes until it becomes a
• 1:09:58
  Speaker 1: political issue. I now, isn't isn't it a bit of
• 1:10:01
  Speaker 1: a politicalitial already with with the incoming equality and or
• 1:10:05
  Speaker 1: is that still a minor factor. I don't see it
• 1:10:08
  Speaker 1: as a politic I don't think boards are scared. Boards
• 1:10:10
  Speaker 1: are going to have to get scared and say to themselves,
• 1:10:14
  Speaker 1: you know, if we don't reform ourselves, somebody else is
• 1:10:17
  Speaker 1: going to. That's when it will start. They're not in
• 1:10:20
  Speaker 1: that position now, nobody. You don't see anybody threatening legislation.
• 1:10:24
  Speaker 1: It's got I think it's got to get to the
• 1:10:26
  Speaker 1: point that where they say, you know, if we better
• 1:10:29
  Speaker 1: do something. That Bernie Sanders won the election, they might
• 1:10:32
  Speaker 1: have been a little more nervous, exactly exactly. And if
• 1:10:35
  Speaker 1: you get you know, if in the next Democratic primary
• 1:10:38
  Speaker 1: you get another Sanders type candidate who who's not quite
• 1:10:45
  Speaker 1: to the you know, a little to the right of Bernie,
• 1:10:47
  Speaker 1: but starts saying, if elected, I'm going to do something
• 1:10:50
  Speaker 1: about this, then populous. Yeah, then I think boards might.
• 1:10:54
  Speaker 1: But not until then that that's quite that's quite fascinating.
• 1:10:58
  Speaker 1: So tell us about a time you fail, old and
• 1:11:00
  Speaker 1: what you learned from the experience. We could be here
• 1:11:04
  Speaker 1: a long time if I was just going to tell
• 1:11:07
  Speaker 1: you about all the times I failed. And I looked
• 1:11:10
  Speaker 1: at that question and I thought, I'm not sure I
• 1:11:15
  Speaker 1: learned anything. Uh. Here, I failed because I was too bold,
• 1:11:19
  Speaker 1: and then I failed because I was too timid at
• 1:11:21
  Speaker 1: different times. So less I've failed when I when I
• 1:11:25
  Speaker 1: didn't consult enough people, and I failed when I consulted
• 1:11:29
  Speaker 1: a lot of people. So I've had as a CEO,
• 1:11:33
  Speaker 1: you're going to fail a lot. So it's the luck
• 1:11:36
  Speaker 1: and the fit issue more than anything, I think. I
• 1:11:38
  Speaker 1: think the one thing I've learned be in the right
• 1:11:41
  Speaker 1: place at the right time always helpful. UM, tell us
• 1:11:45
  Speaker 1: what you do to keep mentally and or physically fit?
• 1:11:47
  Speaker 1: What do you do to relax outside the I get
• 1:11:51
  Speaker 1: tremendous amounts of exercise. Uh, And I find as I
• 1:11:55
  Speaker 1: at your age, I'm seventy four and look well, thank you.
• 1:11:59
  Speaker 1: I'm I'm thirty six, and I looked terrible as you
• 1:12:03
  Speaker 1: as you age. Uh, physical exercise is the absolute key.
• 1:12:08
  Speaker 1: It sends messages somehow to your body that hey, you
• 1:12:12
  Speaker 1: gotta stay alive, you gotta stay alert. So I do
• 1:12:15
  Speaker 1: a lot of exercising, uh, jim or anything in particular.
• 1:12:20
  Speaker 1: Well I do I know? Well, I work out. I
• 1:12:24
  Speaker 1: do about forty minutes on the elliptical every morning as
• 1:12:28
  Speaker 1: I read the newspaper. Then I do about a forty
• 1:12:33
  Speaker 1: minutes strength uh, stretching, strengthening, And then I played nine
• 1:12:37
  Speaker 1: holes of golf most days. Really yeah, but I played. No,
• 1:12:42
  Speaker 1: I'm not that I've actually I'm at at age seventy
• 1:12:45
  Speaker 1: four and playing the best golf of my life. But
• 1:12:47
  Speaker 1: what I do is the courses I live in in
• 1:12:49
  Speaker 1: the city of Seattle, but I belonged to a course.
• 1:12:51
  Speaker 1: It's about five minutes from my house. I play either
• 1:12:55
  Speaker 1: by myself or in a twosome and we do it
• 1:12:57
  Speaker 1: in an hour using a car. To you walking, I'm walking,
• 1:13:01
  Speaker 1: And who's carrying your bag? I'm pulling it. Really that's
• 1:13:06
  Speaker 1: pretty good. Um, alright, our last two questions, these are
• 1:13:10
  Speaker 1: our favorite questions. I know we have to get you
• 1:13:12
  Speaker 1: out of here in a few minutes. So what sort
• 1:13:15
  Speaker 1: of advice would you give to a millennial or someone
• 1:13:18
  Speaker 1: who's just starting their career as it relates to compensation. Uh, well,
• 1:13:24
  Speaker 1: I'd have to repeat, avoid the wrong place at the
• 1:13:27
  Speaker 1: wrong time, be in the right place at the right time,
• 1:13:30
  Speaker 1: always good advice. And and our final question, what is
• 1:13:34
  Speaker 1: it that you know about executive compensation and stock options
• 1:13:38
  Speaker 1: and boards today that you wish you knew twenty or
• 1:13:42
  Speaker 1: thirty years ago. You know, if I had known all
• 1:13:45
  Speaker 1: of this twenty or thirty years ago and seeing it
• 1:13:48
  Speaker 1: at the start, I might have been able to do
• 1:13:50
  Speaker 1: something to uh, to arrest it at that time before
• 1:13:54
  Speaker 1: it got amazingly out of control. I mean, it's so
• 1:13:59
  Speaker 1: blatantly insane. I I say, it's this is it's kind
• 1:14:03
  Speaker 1: of like doctors who used to bleed people. Why did they?
• 1:14:07
  Speaker 1: Why did why did they didn't know better? Well, no,
• 1:14:10
  Speaker 1: because everybody bled people. I mean, this is what doctors did.
• 1:14:14
  Speaker 1: So this is the way a lot of people think about. Well,
• 1:14:17
  Speaker 1: this is what this is how we do compensation, this
• 1:14:19
  Speaker 1: is this is how a board is supposed to work.
• 1:14:22
  Speaker 1: Thank you so much for being so generous with your time. Well,
• 1:14:24
  Speaker 1: thank you for having me. This has been I've really
• 1:14:27
  Speaker 1: enjoyed the talk. Here. We have been speaking with Stephen Clifford.
• 1:14:30
  Speaker 1: He is the author of the CEO pay Machine. If
• 1:14:34
  Speaker 1: you enjoyed this conversation, be shure and check out all
• 1:14:37
  Speaker 1: of our other such talks. You can see the nearly
• 1:14:40
  Speaker 1: hundred and fifty or so over the past three years
• 1:14:43
  Speaker 1: at Apple, iTunes, Overcast, Bloomberg dot com and SoundCloud. I
• 1:14:50
  Speaker 1: would be remiss if I did not thank my head
• 1:14:53
  Speaker 1: of research, Michael bat Nick, and my recording engineer, Medina Parwana.
• 1:14:58
  Speaker 1: Taylor Riggs is our producer slash Booker. We love your comments,
• 1:15:03
  Speaker 1: feedback and suggestions right to us at m IB podcast
• 1:15:08
  Speaker 1: at Bloomberg dot net. I'm Barry Hults. You're listening to
• 1:15:13
  Speaker 1: Masters in Business on Bloomberg Radio,