Decoding CEO Pay – Robert Pozen & S.P. Kothari

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Harvard Business Review 

Each year most public companies issue reports on the pay packages of their top executives, describing how their compensation committees arrived at the numbers. These reports are part of the proxy statements sent to all shareholders, who vote on the packages. The votes are advisory or binding, depending on the country where a company is chartered.

More than 95% of the time, shareholders overwhelmingly approve the pay recommendations. Yet our research suggests that investors should be more skeptical. Compensation committees frequently adjust company performance numbers in complex and

MIT Sloan Professor SP Kothari

even obscure ways, for a variety of reasons. Sometimes, for example, they want to focus on the performance of a company’s core or continuing operations. Whatever the motive, the upshot is all too often inflated numbers, calculated on a nonstandard basis, that rationalize overly generous compensation.

Given that reality, compensation committees need to explain the basis of their decisions more clearly in their reports. For their part, investors need to develop standards and best practices for compensation design and reporting, around which they can build a meaningful dialogue with companies. Such a dialogue is critical today in view of the public’s concerns over the rising ratio of CEO pay to the average worker’s wages and of shareholders’ growing insistence that high pay be justified by superior managerial performance.

In this article we’ll review the common shortcomings of compensation committee reports, especially the use of nonstandard accounting measures and the selection of inappropriate peer companies. We’ll also propose ways in which companies and shareholders can improve their approach to determining top management’s compensation. Let’s begin by looking at an example of the problem.

Generous to a Fault

In their reports, most compensation committees identify the criteria used to award both annual cash bonuses and longer-term stock grants—usually the two largest components of executive pay. But even at the most upstanding companies, those criteria are seldom well explained.

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How globalization sunk many Americans deeper in debt – Erik Loualiche

MIT Sloan Assistant Professor Erik Loualiche

MIT Sloan Asst. Prof. Erik Loualiche

From MarketWatch

Even as U.S. policy makers continue to debate the relative advantages and drawbacks of globalization, it’s abundantly clear that international trade is not the benevolent force it was once thought.

For all its promise of boosting incomes and strengthening growth, trade has had a disproportionately damaging impact on regions of the U.S. that have long depended on manufacturing. Recent data shows that these communities have suffered a great deal of economic distress, including high rates of underemployment and joblessness.

These communities have also become much more indebted compared with the rest of the nation, according to my latest research. During the years 2000 to 2007 — also known as the run-up to the Great Recession — overall American household debt doubled. That debt peaked in 2008, at almost $13 trillion. This leverage, however, was not shared equitably. Household debt in regions of the country where manufacturing jobs had shifted overseas grew an additional 20-30% over that period. In other words, nearly a third of American household debt during that time frame can be attributed to import competition with China and other low-wage countries.

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Trump’s tax promise looks like just another of his tweets–Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From MarketWatch

Although Donald Trump claims that his forthcoming tax plan will be “phenomenal,” he is in truth not likely to propose something really new.

Before the election, Trump put forth a broad tax plan and then a narrower plan.  But even the narrower plan created a budget deficit of roughly $3 trillion to $4 trillion over 10 years, according to the dynamic scoring of the independent researcher Tax Foundation.  That steep increase in the national debt would present major challenges, given rising interest rates and much larger budget pressures from entitlement programs.

Soon after the election, President Trump lambasted the border adjustment tax ( BAT ) plan of the House Republicans. Then he began to be more favorable to the BAT because he believed — wrongly — that it would impose a large tariff on Mexican imports to pay for the wall.  In fact, the BAT would effectively impose a tax on all imports, which would probably be absorbed by importing companies and their customers.

So there are three main questions about what type of tax plan Trump could propose. 

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4.0 Lab: The future of food, finance, health, ed, & management–Otto Scharmer

MIT Sloan Sr. Lecturer Otto Scharmer

MIT Sloan Senior Lecturer Otto Scharmer

From Huffington Post

Last week, Amazon acquired Whole Foods in a move that has many wondering what this means for the direction of the economy. In my view, Amazon’s acquisition of Whole Foods does to organics what Uber did to the sharing economy: it takes something that was born out of a different economic logic (a grocery store dedicated to healthy food) and then molds and morphs it to fit into an economic operating system that is firmly based in the old paradigm—i.e. in a paradigm that aims for world domination rather than serving a goal of shared prosperity and well-being for all. 

In this post, inspired by a number of gatherings with change makers across sectors in China, Europe, and the Americas during the past few weeks, I outline a framework for understanding how the current limits of capitalism we are bumping up against in sectors such as food, finance, health, education and business are all related to the same outdated economic logic or “operating system” (OS). We need a new economic operating system, one that reinvents how we work together as neighbors, as businesses, as cities and as larger systems. Below I describe briefly the evolution of these five sectors from OS 1.0 to where we are today, which in most cases is OS 2.0 or 3.0.

The pressing challenges of our time, i.e. the challenge of losing our environment (ecological divide), our societal whole (social divide), and our humanity (spiritual divide) calls for reinventing our systems of food, health, education, finance and management towards 4.0. This essay lays out the rationale for OS 4.0 and a possible way to get us there through an Asian-American-European initiative called 4.0 Lab.

Five Sectors, One Problem

As the labels of the new economy have gone mainstream (green, organic, sharing economies) the underlying economic reality stays the same. That is to say, the immense buying power of giants like Amazon squeeze the supply chain, workers, farmers, and the planet through the same patterns of exploitation and structural violence that gave rise to the movement for a new economy in the first place.

On one level you could describe the problem by saying that companies like Amazon and Uber misperceive the new economy as just another app that runs on their old corporate operating system (i.e. world domination through economies of scale). In reality, though, the new economy is not just another app—it’s a radical upgrade of their entire operating system. The difference between the old and the new paradigms can be summarized in three words: ego vs. eco. Ego-system awareness means “me first”, while eco-system awareness means an awareness that focuses on the well-being of all.

There is a profound systemic barrier that exists in all major sectors today. It’s not only the mainstream players like Amazon and Uber that are stuck in their current economic operating systems; many of the innovators who once broke through that model are now also stuck. The global food system is still profoundly destructive. The health system is still sick. The educational system is unable to learn. The global financial system is heading full throttle into the next crash—as if 2008 never happened. Foundations and philanthropists still place their assets in the old economy, thereby harming people and planet, in order to use some of the profits to fund projects that alleviate symptoms but don’t deal with root causes. The innovators in all these spaces are stuck in the niches that first gave them space to develop something new. But now these niches are increasingly crowded, and mainstream players adopt the new labels and sound bites while often perpetuating the old models.

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Blockchain: New MIT Research Looks Beyond the Hype – Christian Catalini

MIT Sloan Professor Christian Catalini

MIT Sloan Professor Christian Catalini

From Crowdfund Insider

With a market capitalization of approximately $12 billion and with the price of Bitcoin reaching towards its 2016 high, Bitcoin is both the most established and the most secure cryptocurrency. Its ascendancy has triggered both a great deal of enthusiasm and a fair share of concern.

On the utopian side, optimistic proponents assert that cryptocurrencies will free consumers from the tyranny of their domestic currencies, will force out entrenched financial players and payment systems, will reduce transaction costs for businesses and fees for consumers.

On the dystopian side, pessimistic opponents argue that cryptocurrencies may undermine traditional monetary policy, support illicit activity, or simply cannot meet the speed, scale and privacy requirements of real-world financial applications and marketplaces.

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