The Fix for Misleading ‘CEO Pay Ratios’ – Robert Pozen and Kashif Qadeer

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan MBA ’18, Kashif Qadeer

From The Wall Street Journal

In the coming weeks, many public companies in the U.S. will disclose for the first time their “pay ratios”—the CEO’s compensation divided by the median employee’s. The requirement to provide this ratio was included in the Dodd-Frank Act of 2010. But comparing the figures among different companies—and particularly different industries—will hardly be a straightforward task.

The consulting firm Equilar estimates that the pay ratio will be two or three times as high for retailers as for drug, financial or tech companies. But the reason isn’t soaring CEO pay in the retail industry. For one thing, midlevel retail workers simply make less, on average, than their peers in pharma, finance and tech, which skews the ratio.

Another issue is that 31% of retail employees work part-time, compared with 17% for the rest of American employees. When computing the CEO pay ratio, the Securities and Exchange Commission prohibits companies from adjusting part-time earnings to “annualize” them—to show what these employees would have earned if working full-time. The SEC also bars companies from counting several part-time employees as a single full-time equivalent. Because of this, having many employees who work only a few days each week drags down the median.

To understand how much this might overstate the pay ratio, we examined data for a midsize retail company that operates about 1,200 stores, primarily in the U.S. The company had more than 25,000 employees in 2017. Almost half worked less than 30 hours a week. The median pay of these part-timers (without annualizing) was less than $6,000 a year. By contrast, the median pay of full-time employees who worked for the whole year was approximately $30,000. Read More »

Closing the lending gap will help government and business thrive – Doug Criscitello

Doug Criscitello, Executive Director of MIT’s Center for Finance and Policy

Doug Criscitello, Executive Director of MIT’s Center for Finance and Policy

From The Hill

With taxpayers at risk for $20 trillion in loans and insured obligations, worth more than the five largest American bank companies combined, the United States government is essentially the largest financial institution in the world. Lending is a risky business as we learned during the last financial crisis. Government activities in this regard are no less dangerous, and perhaps more so, given public policy complexities that extend well beyond profit. Given a bleak fiscal outlook, policymakers may want to consider ways to reduce taxpayer exposure by fortifying financial institutions and financial technology companies with an enormous infusion of loan performance data that only it can provide.

Through a set of more than 100 programs largely initiated or expanded in response to the Great Depression, the Great Society programs of the 1960s, and the 2008 financial crisis, the government has provided over 100 million direct loans and guarantees for home ownership, higher education, business assistance, and a variety of other purposes. As the government has increasingly turned to credit programs to accomplish a diverse set of objectives, with its loan portfolio more than doubling since 2008, it is challenged to keep pace with an increasingly sophisticated financial marketplace, which could actually help reduce the federal lending role.

Government forays into this realm are typically driven by a desire to extend the lending frontier, thereby achieving societal gains, by either closing information gap about borrower creditworthiness or by providing an explicit subsidy to borrowers who likely would not be granted a loan even if a private lender had full information. The government can increase credit availability under either of those conditions because, unlike private lenders, it is able to offer loans without regard for profit. Read More »

Why institutional investors are entering the digital asset space – Edward Woodford

MIT Sloan Master of Finance Alumnus Edward Woodford

Digital assets have garnered increasing interest from institutional investors, despite questions remaining around the regulation, security, and reliability of trading venues. Today, the largest trading venues – typically referred to as “crypto exchanges” – serve individual investors and traders, are limited to spot trading, and are often unregulated or based in foreign jurisdictions. What’s more, they often lack the technological infrastructure and depth of liquidity to execute larger orders that institutions require.

As a result, many of these institutional investors – typically those managing large amounts of money – bypass exchanges and turn to the opaque world of over-the-counter (OTC) trading, buying and selling large amounts of cryptocurrency directly with a specific counterparty. Deals are done in the dark, primarily through messaging platforms like Telegram and Skype. We estimate that the OTC market is currently around three times greater than the on-exchange volume.

However, the OTC trading has some considerable downsides compared to on-exchange trading. Participants can see a publicly disclosed order book on exchange, which does not exist OTC. With an order book, there is more transparent pricing, which allows for the best executable price within the market. In addition, contrary to an exchange where the identity of your counterparties is hidden, with OTC, an investor’s intention – to buy or sell – is revealed and thus can cause slippage in price or leakage in terms of your trading intentions.

The fact is that the lack of an acceptable institution-ready exchange is the one of the single largest barriers to crypto asset class growth, as every meaningful financial market is built on a foundation of institutional involvement.

What does the digital asset space look like today?

Today, digital asset trading is dominated by institutions, principally OTC. The type of institutions involved is changing. The early players were proprietary trading firms and family offices, who have the most latitude in their investment mandates. Digital asset hedge funds were also established with specific mandates to trade digital assets. Now, more established funds are entering the space, along with asset managers who’ve had to gain additional comfort.

Read More »

Commentary: the BlackRock letter sets ambitious goals. Here’s how CEOs can meet them – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Fortune

Should public companies focus on earning profits for their shareholders, or should they serve broader societal needs? Larry Fink, the head of BlackRock, the largest fund manager in the world, recently issued a letter to company CEOs stating: “Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

Yet the same letter tells public companies that they should adopt a strategic plan with “a path to achieve financial performance.” The letter reconciles these potentially conflicting objectives by pushing companies to pursue “long-term value creation” rather than short-term profits. In other words, they can enhance their long-term financial returns to shareholders by serving the needs of other stakeholders—even if this lowers short-term profits.

While BlackRock was trying to sensitize companies to their social responsibilities, the letter could undermine the accountability of corporate directors to their shareholders. CEOs could hypothetically justify any decline in annual earnings by claiming they were serving all stakeholders in hopes of increasing long-term financial results. How will shareholders later assess whether these stakeholder-focused policies actually resulted in higher financial returns? And does the long term mean five, 10, or even 20 years? Read More »

You’re probably paying more for your car loan or mortgage than you should – Christopher Palmer

MIT Sloan Assistant Professor Christopher Palmer

From The Conversation

The Federal Reserve makes headlines from New York to Hong Kong anytime it lifts its benchmark interest rate. Rightfully so, as any increase tends to drive up borrowing costs on everything from credit cards to auto loans and mortgages.

There’s a more important factor that determines how much you’ll pay when you borrow money to buy a car or home, and it’s entirely in your hands: it’s the lender you choose. That’s because how much a lender might charge you for a loan can vary dramatically from one to the next. That’s why it pays to shop around.

My research on auto loans shows that most consumers don’t do that, which can cost them hundreds or even thousands of dollars over the life of a loan or lead them to purchase a lower-quality car than initially planned. Fortunately, it’s pretty easy to avoid that.

Bargain hunters

Most of us shop until we drop for price bargains on clothes, computers or virtually anything else. With the internet, finding the best deal among products and companies is easier than ever. Read More »