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.

Read More »

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. 

Read More »

How to increase retirement savings of 60 million employees – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Pensions & Investments

Senate Republicans are voting to repeal the Labor Department’s recent rules that would have expressly allowed states and cities to sponsor a type of individual retirement account, called an automatic IRA. These votes will rescind those rules, because they already have been rejected by House Republicans and the administration supports rescinding them.

While Republicans objected to a patchwork of state-sponsored retirement plans, Congress should promptly pass a federal automatic IRA invested by the private sector. This vehicle, developed by conservatives, is the most feasible way of substantially increasing retirement savings in the U.S.

About a third of all Americans have no retirement savings, and most don’t have enough to retire comfortably. The main reason: More than 60 million American employees have no retirement plan offered to them by an employer.

Such employees are eligible to set up an IRA at a qualified financial institution and receive a tax deduction. But very few get around to filling out an application and making regular contributions.

Read More »

US money market reforms: the gain isn’t worth the pain – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Financial Times

Next month the new rules of the Securities and Exchange Commission (SEC) will become effective for money market funds (MM funds).

Most importantly, MM funds with any assets from institutional shareholders – e.g., corporations, pension plans and insurance companies – will no longer maintain a constant net asset value per share of $1. Instead, the net asset value of institutional MM funds will fluctuate on a daily basis – for example, 99.8 cents per share on one day, and $1.01 per share on the next.

The new SEC rules apply to institutional MM funds investing in short-term debt of cities and states – called “municipal” MM funds. The new rules also apply to institutional MM funds investing primarily in short-term debt of banks and top-rated companies – called “prime” MM funds.

Read More »

This single act would help many Americans reach retirement savings goals — Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From MarketWatch

It’s true for everyone: despite our best intentions, we often fail to accomplish what we set out to do. When it comes to retirement investing, millions of Americans do not meet their own declared saving goals for retirement.

As a result, almost one-third of the U.S. population has no retirement savings at all,while many others will fall well short of what they will need for their Golden Years.

A solution can be found in the field of behavioral economics, which suggests ways tohelp Americans start saving. It seems that saving is a lot like dieting — small changes can help you reach your goal.

For example, many studies have shown that being automatically placed in a savings plan dramatically boosts participation by employees — even if they can opt out.

These studies show that when an automatic savings plan is introduced with an opt-out, 60% to 70% of employees remain in the plan. This may seem like a technical nuance, but there is a big difference between opting in by completing an application versus choosing not to opt out.

A plan designed to take advantage of this behavior is called an automatic IRA. In the same way that many people fail to start saving, those placed in an automatic IRA simply fail to stop saving by withdrawing from the plan. Automatic IRAs help people build their savings using the power of inertia.

Read More »