No Ollie, No

Instead, the compensation of chief executives is set by a company’s board and the decision-making is, to say the least, not transparent. It can also result in perverse incentives. A large component of compensation will typically be in stock options, which creates an incentive to take excessive risks.

Quite a number of years out of date there. Stock awards, not stock options, these days.

7 thoughts on “No Ollie, No”

  1. Even so, most of these awards, even of options, were set against targets. An option had to have a strike price so would only be worthwhile if the company’s shares traded at a higher price price at the relevant date

  2. @ Diogenes
    Tim’s point is that an award gives the CEO/COO/CFO/whoever a share that has downside and upside the same as that of the lumpenshareowner while the option has a geared upside and a limited downside. So a CEO with options has an incentive to take risks if the expected upside on the combination of his shares and options far outweighs the risk of downside on his shares, excluding options, and his salary and pension. Oliver Kamm ignores – of course – the CEO’s salary and pension that are jeopardised by risk-taking: presumably those of journalists are not until you get to a Johann Hari- type exposure (Wikipedia says that Vicki Pryce got another job when she came out of prison).

    Not all CEOs take risks just because they have share options e.g. yesterday H&T announced that its CEO had exercised share options and sold some some to pay the tax thereon; H&T has been the lower-risk pawnbroker for the last dozen years [JN spent his first few years reducing gearing and risk while simultaneously growing the business] while its major competitor has gone bust by bad management (with a minor part of that being taking risks). An incentive to take risks is *not* the same as a compulsion to take risks.

    [Why do I look at H&T? Originally because a client had a sense of humour but since then because it combines sound business ethics with success. I’m not the only one A couple of weeks ago it announced an unilateral interest and payments holiday for all pawnbroking clients while its shops were closed and scrapping its next dividend – and its share price went up!]

  3. Options are still common, especially in startups.

    The assumption that options encourage taking risks is possibly quite true, but that taking those risks are bad for the the shareholder are not necessarily true. If the shareholders’ investments are diversified, if one company’s risks fail to pan out it may not be too damaging, but if successful could be quite good for the shareholder. The venture capital industry is famed for its assumption that a few winners will pay for a lot of losers and still make a big profit over all.

  4. “If companies don’t act on executive pay, parliament will have to compel them”

    Nah.

    ‘The coronavirus crisis is highlighting the issue of pay.’

    No. You are. Dumbass.

    ‘In recognition of workers’ sacrifices, some business leaders are voluntarily taking big pay cuts. Ana Botín of Santander is giving half her pay for this year to a medical equipment fund.’

    You have government medicine – NHS. WTF is a medical equipment fund? She helping the indigent government buy equipment?

    ‘Will the debate over executive pay be changed by the crisis? I expect and hope so’

    Never let a crisis go to waste. You have always been disturbed about executive pay, you are exploiting this crisis to trot it back out. EVEN THOUGH THERE IS NO CONNECTION.

    ‘Otherwise, policies to narrow income inequality could do more harm than good.’

    Always the case.

  5. The Big Night In thingy yesterday seems to have raised £25million for the NHS. Yay!!! Less than 50 pence per person. What difference is that going to make? The UK annual NHS budget is £134 beeeeellion.

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