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Speaker 1: This is Masters in Business with Barry Ridholts on Boomberg Radio.

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Speaker 1: This week on the podcast, I have Stephen Clifford. He

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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

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Speaker 1: are paid more than just about anybody else and not

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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,

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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.

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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

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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,

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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

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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,

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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

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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

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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

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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

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Speaker 1: misallocates company investment. Give us an example in between in

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Speaker 1: the last ten years, S and P five have spent

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Speaker 1: three point seven trillion dollars buying back their own stock.

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Speaker 1: Now they buy back their own stock, fire it, retire,

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Speaker 1: but they buy it back to keep the price high. Uh,

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Speaker 1: they're not buying it back because it's undervalued. They're buying

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Speaker 1: it it's already high. They're buying it back to keep

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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

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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

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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

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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

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Speaker 1: in product development, R and D, new technology, UH, job training,

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Speaker 1: all these things for for long term health. And instead

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Speaker 1: of doing that, they bought back their own stock. I mean,

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Speaker 1: this is eating This is America's eating the seed or

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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

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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

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Speaker 1: that this is a fairly uniquely American phenomena. In Japan today,

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Speaker 1: the average ratio between CEO pay and worker pay is

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Speaker 1: sixteen to one. It's a little higher. In Denmark, it's

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Speaker 1: forty eight to one. It's about eighty five to one

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Speaker 1: in the UK. How is it more than five hundred

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Speaker 1: to one in the US. It's so incongruous with the

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Speaker 1: less rest of the corporate world. Well, there are two explanations.

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Speaker 1: One is that US CEOs are thirty times more valuable

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Speaker 1: and productive than Japanese CEOs. That would be one. That's

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Speaker 1: a little bit of a stretch. Another explanation is something's

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Speaker 1: gone terribly wrong here. That seems more likely. Let's look

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Speaker 1: at how this impacts, uh, the overall economy. You actually

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Speaker 1: say that this isn't just a function of within the

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Speaker 1: corporation there's pain equality. You suggest this effects work of morale.

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Speaker 1: You suggest this effects research and development, This affects how

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Speaker 1: we actually build a society. Expound on that. Well, it

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Speaker 1: clearly hurts the companies. I mean we've talked, we have

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Speaker 1: talked about how they've cut R and D and cut

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Speaker 1: investment to keep their socker price high. UH A bigger guy,

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Speaker 1: and they of course waste tens of million dollars on

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Speaker 1: the CEO pay. But that's how the bush back is, Oh,

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Speaker 1: that's company does billions of dollars. Who cares? I mean,

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Speaker 1: so they so they waste that. That's a small part

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Speaker 1: of the cost. A bigger part of the cost is

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Speaker 1: the effect on company morale. I mean, when CEO is

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Speaker 1: making five times what you make and he comes out

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Speaker 1: and he says, there's no I in team, and we're

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Speaker 1: all in this to other, it's pretty tough for you

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Speaker 1: to swallow. And I mean this has been proven by

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Speaker 1: study after study that the more the gap, the worse simmerale.

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Speaker 1: How significant is the correlation between companies that spend billions

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Speaker 1: on share buy backs and the reduction of things like

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Speaker 1: R and D and plant investment, etcetera. Well, it's it's

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Speaker 1: a one to one correlation. The more you spend, the

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Speaker 1: more you spend on share buy backs, the less you

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Speaker 1: have to put into R and D or put into

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Speaker 1: RhE finite pie and and you've got you got so

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Speaker 1: much money. And the more they're using fift of their

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Speaker 1: net income is used to buy back chairs. The share

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Speaker 1: buy backs are twice what they pay on dividends. The

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Speaker 1: data point I thought you were going to go to

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Speaker 1: from the book was that when you look at a

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Speaker 1: company like Dell, I don't mean the E M C

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Speaker 1: version of Dell today, but Dell, the direct built to

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Speaker 1: order PC maker, over the course of that company's history,

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Speaker 1: they spent more on stock buybacks than they ever made

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Speaker 1: in profits the entire company's history, which, if you think

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Speaker 1: about it should be impossible. It should be impossible, and

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Speaker 1: somebody should have woken up and sure, did that stalk

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Speaker 1: very well? It eventually had some real difficulties to it,

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Speaker 1: and it wasn't necessarily apple. But let's let's bring this

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Speaker 1: back um to income inequality. There's a data point I

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Speaker 1: have to reference again. Since c. Ninety eight CEO pay

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Speaker 1: Rose tan X, the median salary in America rose from

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Speaker 1: forty eight thousand to fifty three thousand over the same

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Speaker 1: time period. This is obviously inflation adjusted. That's a less

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Speaker 1: than half a percent a year. What is this due

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Speaker 1: to uh an economy? Well, it is very bad. This level,

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Speaker 1: the level of inequality we income inequality we have in

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Speaker 1: this country is very bad for economic growth. Why is that? Well,

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Speaker 1: to start with, have any percent of our g d

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Speaker 1: P is consumer spending? When the consumers don't get much money,

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Speaker 1: it's hard to spend it. It's the thing I have

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Speaker 1: to pay my workers exactly. And now the money when

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Speaker 1: the money goes to the one tenth of one percent,

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Speaker 1: as it has, let me stop here and say that

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Speaker 1: about since nineteen of all the gains and growth of

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Speaker 1: the economy have gone to the one tenth of one percent.

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Speaker 1: Now that's a hundred and twenty four thousand households. So

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Speaker 1: the reason the average American hasn't gotten a raise. All

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Speaker 1: the money has gone to a very small percentage of people.

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Speaker 1: They don't spend that. I mean, how many yachts can

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Speaker 1: you buy? You know, after you have your fourth, you're

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Speaker 1: not going to buy your pretty much done right, the

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Speaker 1: power boat, a sailboat. Number one, you don't get the

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Speaker 1: consumer spending Number two. Inequality imposes uh, a lot of

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Speaker 1: hidden costs us healthcare as you're in come goes down

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Speaker 1: to your ability to pay for your healthcare goes down. Uh.

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Speaker 1: It imposed. It makes the country less healthy overall. Is

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Speaker 1: that what you're implying it does? Incarceration rises, crime rises.

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Speaker 1: We've seen crime falling over the same period when CEO,

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Speaker 1: although we's even as crime is fallen, we've seen incarceration

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Speaker 1: continue to rise. I could go to a study, but

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Speaker 1: the company it's I think it's too complex to explain

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Speaker 1: the study that says, well, crime would have fallen a

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Speaker 1: lot more if there has been less in equal that

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Speaker 1: makes sense. Let's talk a little bit about the impact

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Speaker 1: of corporate board members and what they have done to

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Speaker 1: pretty much rubber stamp this again. Another data point from

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Speaker 1: the book that that I find is so fantastic. Board

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Speaker 1: members at the company qual Calm quote from two thousand

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Speaker 1: and nine through two thousand and fourteen authorized the repurchase

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Speaker 1: of two hundred and thirty eight million shares at the

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Speaker 1: cost of thirteen point six billion dollars, and at the

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Speaker 1: same time, total shares outstanding increased two How on earth

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Speaker 1: can that happen? Well, they were printing new shares to

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Speaker 1: give to their executives, but two hundred and thirty six

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Speaker 1: million shares was not enough to reduce the share count.

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Speaker 1: The facts speak for themselves. That's astonishing. So another words,

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Speaker 1: based on these prices, they gave away fourteen billion dollars

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Speaker 1: and options to their That that is what the mathematics

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Speaker 1: would say. So what is a board member who has

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Speaker 1: a fiduciary obligation to a company? How do they process

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Speaker 1: that information? What leads them to say yes, I think

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Speaker 1: that's a good idea. What leads them to say that?

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Speaker 1: As they say, first do they get stock of Well,

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Speaker 1: they get stock depends on the company, but they tend

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Speaker 1: to get stock. They get a fee overall and get

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Speaker 1: a gig like that. That sounds like it's a great

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Speaker 1: gig overall at good companies. That science of QualComp you'll

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Speaker 1: be getting three or four thousand dollars a year in

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Speaker 1: stock and cash for attending six meetings. Very nice side gig.

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Speaker 1: And the way you justify it as you say, well,

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Speaker 1: I'm not on the compensation committee, but these are my

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Speaker 1: fellow members, and they've studied it and they have the

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Speaker 1: good consultants, and so whatever the compensation committee proposes almost

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Speaker 1: gets rubber stamped because you don't want to question your

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Speaker 1: board members. And by the way, if you bring up

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Speaker 1: a lot of questions about CEO pay and the other

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Speaker 1: board members, uh, you're not gonna be asked on too

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Speaker 1: many other boards. And as we've said, they're they're a

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Speaker 1: nice gig. Uh. And then you can justify it by saying, well, look,

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Speaker 1: it's what the real problem is. What all these other

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Speaker 1: companies are doing. They're paying their CEO so much that

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Speaker 1: we have to follow. We've got no option. We're forced

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Speaker 1: to follow them. It's not our fault because if we don't,

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Speaker 1: they're just gonna hold their breath till they turn blue

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Speaker 1: and not come to work. Well, the the what they

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Speaker 1: say is, oh, if we don't pay them, they'll go

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Speaker 1: someplace else, which is nonsense. They won't go someplace else.

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Speaker 1: They got no place to go that that that's astonishing.

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Speaker 1: So I'm curious what sort of pushback have you gotten

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Speaker 1: on the book from your fellow board members or or executives.

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Speaker 1: I have gotten zero from uh from them, because why

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Speaker 1: would they want to make noise about this? Uh? They

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Speaker 1: have no effective They just do it. They just ignore it,

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Speaker 1: go away. Here's a quote that I love. This is

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Speaker 1: this is terrific. A good corporate board is like a

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Speaker 1: club where you work on interesting problems with intelligent, congenial companions. Travel,

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Speaker 1: good restaurants, amenities are all provided free of charge. Best

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Speaker 1: of all, instead of paying club dues, the club pays you.

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Speaker 1: So that sounds like a sweet gig. It is a

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Speaker 1: sweet gig. When I was when I was coming close

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Speaker 1: to retirement, I've decided that there was a very good

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Speaker 1: gig and lined up a lot of board spots. And

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Speaker 1: it's been I've I've enjoyed it. It's been wonderful. I've

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Speaker 1: been well paid. Uh I, And yet you're biting the

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Speaker 1: hand that feeds you. I believe that corporate boards have

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Speaker 1: been incredibly irresponsible when it comes to CEO pay. I

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00:26:35,119 --> 00:26:38,720
Speaker 1: tried to be as I learned something about this. I

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00:26:38,840 --> 00:26:41,560
Speaker 1: tried to be more responsible. Some boards didn't like that.

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Speaker 1: A couple of boards I was able to convince to

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Speaker 1: move to a different system of pay. Other boards just

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Speaker 1: ignored it. So here's an interesting quote. In theory, shareholders

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Speaker 1: elect board members to represent them, but in actual practice,

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00:26:57,840 --> 00:27:03,320
Speaker 1: corporate boards are self prepared, actuated well. Corporate boards nominate

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Speaker 1: who is going to be on the board uh absent

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00:27:07,040 --> 00:27:12,920
Speaker 1: a proxy fight or sometimes some egregious UH corporate behavior,

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00:27:13,480 --> 00:27:18,679
Speaker 1: the dominations go out and nobody opposes him. Nobody says, oh,

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Speaker 1: I'm going to run for that board seat. And so

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Speaker 1: every nominee, I would say the re election of boards

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Speaker 1: is roughly the same as the re election of the

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00:27:30,560 --> 00:27:35,960
Speaker 1: North Korean polit bureau. That if you're nominated, you're gonna

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Speaker 1: be Let's put some flesh on those bones. In two

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Speaker 1: thousand and twelve, seventeen thousand and one corporate directors were

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Speaker 1: nominated for board positions. Of that over seventeen thousand nominees,

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00:27:50,280 --> 00:27:54,840
Speaker 1: only sixty one. We're not approved, less than one half

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Speaker 1: of one percent. As I say, we arrived, we arrival

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Speaker 1: North Korea. That that that is just astonishing. So let's

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Speaker 1: talk about independent directors on compensation committees. Wasn't that supposed

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Speaker 1: to be, Hey, we're gonna use outside board members, we're

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Speaker 1: gonna use independent experts, and therefore they don't feel um

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Speaker 1: obligated to to grease the CEO. There's some objectivity. Why

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Speaker 1: hasn't that worked out? Well, it hasn't worked out because really,

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Speaker 1: what has changed. It's not that the it's not that

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00:28:27,960 --> 00:28:32,879
Speaker 1: they're people are not independent. Doesn't mean that the fundamental

429
00:28:33,040 --> 00:28:36,720
Speaker 1: dynamic of the CEO being your friend. The CEO may

430
00:28:36,800 --> 00:28:39,080
Speaker 1: have asked you on the board, but you're still independent.

431
00:28:40,880 --> 00:28:48,480
Speaker 1: The fact that you have these in built in pay

432
00:28:48,560 --> 00:28:53,920
Speaker 1: machine systems that guarantee that the CEO that's the status quo,

433
00:28:54,240 --> 00:28:56,680
Speaker 1: that's the status quo. And so you're an independent director.

434
00:28:56,760 --> 00:28:58,840
Speaker 1: You come on and this is what you do. This

435
00:28:59,040 --> 00:29:01,160
Speaker 1: is how it pays hand gold in. The CEO gets

436
00:29:01,200 --> 00:29:04,320
Speaker 1: a fift increase every year. Why would you, as an

437
00:29:04,400 --> 00:29:08,440
Speaker 1: independent director start to make all sorts of ruckus about this?

438
00:29:08,640 --> 00:29:11,920
Speaker 1: Nobody else is Let's talk about the Old Boys Club,

439
00:29:12,080 --> 00:29:15,040
Speaker 1: the Old Boys Network. The average age of board members

440
00:29:15,120 --> 00:29:18,880
Speaker 1: is sixty three, and women accounted for less than twenty

441
00:29:18,960 --> 00:29:24,880
Speaker 1: percent of total directors. Minorities and the reappointment rate was

442
00:29:26,960 --> 00:29:31,200
Speaker 1: why is it so problematic to get a more diverse board?

443
00:29:31,800 --> 00:29:33,760
Speaker 1: And and the question that also comes up from this,

444
00:29:34,160 --> 00:29:37,240
Speaker 1: why do we have so few women as not only

445
00:29:37,360 --> 00:29:41,280
Speaker 1: board members but CEOs? Well, actually you have a more

446
00:29:41,360 --> 00:29:43,520
Speaker 1: as board members than you have as CEOs. If you're

447
00:29:43,560 --> 00:29:46,720
Speaker 1: looking at Fortune five hundred, less than five percent of

448
00:29:47,280 --> 00:29:53,560
Speaker 1: CEOs are women. And uh, I think if you're looking

449
00:29:53,680 --> 00:29:57,400
Speaker 1: for the number one characteristic of a CEO, you look

450
00:29:57,520 --> 00:30:01,680
Speaker 1: like one tall, good hair, are all good hair, and

451
00:30:03,080 --> 00:30:08,480
Speaker 1: good voice, good presence. Uh they're all They're all cast

452
00:30:08,520 --> 00:30:13,520
Speaker 1: in Hollywood exactly. And so competency doesn't really seem to

453
00:30:13,560 --> 00:30:16,000
Speaker 1: make that much. You know, if if you look at it,

454
00:30:16,320 --> 00:30:20,160
Speaker 1: you'll find it looking like what is probably more important

455
00:30:20,160 --> 00:30:24,000
Speaker 1: than competence. That's incredible, it is incredible. But but they

456
00:30:24,360 --> 00:30:27,239
Speaker 1: are taller, they are in average, there are a few

457
00:30:27,280 --> 00:30:31,240
Speaker 1: inches taller, three inches taller. They're in better shape, they

458
00:30:31,320 --> 00:30:35,680
Speaker 1: work out their trim. Uh I gotta get busy, and

459
00:30:36,120 --> 00:30:39,440
Speaker 1: uh am I too old for human growth hormone? Of this?

460
00:30:40,320 --> 00:30:42,440
Speaker 1: I you know, I don't know. I haven't kept up

461
00:30:42,520 --> 00:30:47,520
Speaker 1: my So let's talk about who the shareholders are these

462
00:30:47,640 --> 00:30:52,840
Speaker 1: days and their impact. Mutual funds essentially owned the vast

463
00:30:52,960 --> 00:30:58,000
Speaker 1: majority of equity stock. Why aren't mutual funds saying hey,

464
00:30:58,160 --> 00:31:01,440
Speaker 1: you guys, are are you know given away the store?

465
00:31:01,640 --> 00:31:04,720
Speaker 1: And we have a fiduciary obligation to our investors to

466
00:31:04,800 --> 00:31:06,560
Speaker 1: make sure you don't. Well, of course, it's it's not

467
00:31:06,680 --> 00:31:10,040
Speaker 1: just mutual funds, if you know, as you know today, Uh,

468
00:31:11,520 --> 00:31:16,000
Speaker 1: index funds are you know, they're half the market now,

469
00:31:16,680 --> 00:31:19,800
Speaker 1: it's still a smaller percentage than active funds, but it's

470
00:31:19,880 --> 00:31:24,320
Speaker 1: growing rapidly. And Bill McNabb is, the CEO of Van Garden,

471
00:31:24,400 --> 00:31:30,040
Speaker 1: said they were setting up um committees to essentially reach

472
00:31:30,120 --> 00:31:33,840
Speaker 1: out and be proactive with corporate management on some of

473
00:31:33,920 --> 00:31:36,959
Speaker 1: the more egregious practice. Well, I think I think Vanguard

474
00:31:37,200 --> 00:31:40,040
Speaker 1: has always been one of the leading companies and one

475
00:31:40,080 --> 00:31:44,440
Speaker 1: of the most responsible companies in that field. But you

476
00:31:44,600 --> 00:31:48,800
Speaker 1: have huge investors, you know, the hedge funds almost always

477
00:31:48,880 --> 00:31:55,160
Speaker 1: just vote straight management. Big big investors t I a craft,

478
00:31:56,000 --> 00:31:59,400
Speaker 1: people like that. They almost always back management. Uh, it's

479
00:31:59,600 --> 00:32:03,920
Speaker 1: very rare for these, for hedge funds or big institutional

480
00:32:04,040 --> 00:32:08,400
Speaker 1: investors to vote against management. The rule had always been

481
00:32:08,680 --> 00:32:10,680
Speaker 1: if you don't like what's going on, sell your stock.

482
00:32:11,040 --> 00:32:13,280
Speaker 1: Don't try and make sense. Well, what about the opposite.

483
00:32:13,320 --> 00:32:17,440
Speaker 1: Let's talk about activist investors who basically go to a

484
00:32:17,520 --> 00:32:19,920
Speaker 1: company and say, you guys are doing it wrong. You

485
00:32:20,000 --> 00:32:22,800
Speaker 1: manage team is terrible. You've got to make some changes.

486
00:32:23,000 --> 00:32:27,720
Speaker 1: What is the impact of activist investors on compensation. I

487
00:32:27,840 --> 00:32:31,400
Speaker 1: haven't seen it. I haven't seen compensation be the major

488
00:32:31,560 --> 00:32:36,040
Speaker 1: issue of activist investors because, as we say, let's say

489
00:32:36,080 --> 00:32:38,800
Speaker 1: you're wasting you know, you paid your CEO a hundred

490
00:32:38,880 --> 00:32:42,920
Speaker 1: million dollars and you should have paid him ten million dollars. Well, frankly,

491
00:32:43,000 --> 00:32:46,880
Speaker 1: ninety million dollars is not enough to raise up an

492
00:32:46,920 --> 00:32:50,000
Speaker 1: activist investor campaign. I mean, you've not going to move

493
00:32:50,040 --> 00:32:53,200
Speaker 1: the needle on a earnings pre share basis, right, So

494
00:32:53,360 --> 00:32:55,720
Speaker 1: you've got to you've got to say that it's it's

495
00:32:55,840 --> 00:33:00,200
Speaker 1: generally that the stock is terribly undervalued, and you can think, well,

496
00:33:00,240 --> 00:33:02,920
Speaker 1: if I split off this division or split off this

497
00:33:03,160 --> 00:33:06,000
Speaker 1: I can get a huge pop on the stock. That's

498
00:33:06,040 --> 00:33:08,480
Speaker 1: when you go in and try and do it. We

499
00:33:08,640 --> 00:33:11,840
Speaker 1: have been speaking with Stephen Clifford, author of the CEO

500
00:33:12,000 --> 00:33:15,280
Speaker 1: pay Machine. If you enjoy this conversation, be sure and

501
00:33:15,400 --> 00:33:18,360
Speaker 1: stick around for a podcast extras where we keep the

502
00:33:18,440 --> 00:33:23,520
Speaker 1: tape rolling and continue discussing all things executive compensation. Be

503
00:33:23,600 --> 00:33:26,080
Speaker 1: sure and check out my daily column on Bloomberg View

504
00:33:26,160 --> 00:33:29,680
Speaker 1: dot com. You can follow me on Twitter at rid Halts.

505
00:33:30,000 --> 00:33:33,719
Speaker 1: We love your comments, suggestions and feedback right to us

506
00:33:33,960 --> 00:33:37,880
Speaker 1: at m IB podcast at Bloomberg dot net. I'm Barry

507
00:33:37,960 --> 00:33:41,600
Speaker 1: rid Holts. You're listening to Masters in Business on Bloomberg Radio.

508
00:33:58,640 --> 00:34:01,120
Speaker 1: Welcome to the podcast, Stephen. Thank you so much for

509
00:34:01,200 --> 00:34:03,960
Speaker 1: doing this. I find this topic to be fascinating. I've

510
00:34:04,040 --> 00:34:06,760
Speaker 1: I've read about and written about this over the years

511
00:34:07,200 --> 00:34:11,440
Speaker 1: because it just seems to be so abusive and so

512
00:34:11,800 --> 00:34:16,719
Speaker 1: unfair to shareholders, and yet there's so much built in inertia.

513
00:34:17,400 --> 00:34:23,120
Speaker 1: The new compensation machine is very difficult to thwart it.

514
00:34:23,440 --> 00:34:27,440
Speaker 1: It's become part of the firmament, and I assume it's

515
00:34:27,480 --> 00:34:29,560
Speaker 1: going to continue for a while. In the book, you

516
00:34:29,760 --> 00:34:34,040
Speaker 1: talk about a trinity Michael Jensen, Bill Clinton, and Milton

517
00:34:34,200 --> 00:34:41,520
Speaker 1: Rock who who together or separately, helped create the climate

518
00:34:41,640 --> 00:34:44,480
Speaker 1: that we have. So first, who is Michael Jensen? What

519
00:34:44,560 --> 00:34:48,080
Speaker 1: did he do? Michael Jensen is a professor of He

520
00:34:48,320 --> 00:34:52,480
Speaker 1: was long time at the Harvard Business School. UH. He

521
00:34:52,840 --> 00:34:57,560
Speaker 1: was kind of the founder of the theory of founder

522
00:34:57,640 --> 00:35:01,920
Speaker 1: and UH evangelist of the theory of shareholder value that

523
00:35:02,080 --> 00:35:04,520
Speaker 1: the only thing that matters is the stock. He was

524
00:35:04,560 --> 00:35:07,239
Speaker 1: a student of Milton Friedman when he went he went

525
00:35:07,320 --> 00:35:12,880
Speaker 1: to Chicago during the Freedman esque. Uh, you know, the

526
00:35:13,000 --> 00:35:16,359
Speaker 1: market is always right. And then Milton Rock, Milton Rock

527
00:35:16,520 --> 00:35:20,160
Speaker 1: was the first pay, first big pay consultant. And unlike

528
00:35:20,280 --> 00:35:22,080
Speaker 1: the rest of the pay consultants, who I say are

529
00:35:22,239 --> 00:35:32,480
Speaker 1: are essentially corrupt hours Uh he not. Milton Rock wasn't

530
00:35:32,560 --> 00:35:34,799
Speaker 1: that way. I mean, Milton Rock was was I think

531
00:35:34,960 --> 00:35:39,239
Speaker 1: very serious. What Milton Rock never considered was how the

532
00:35:39,480 --> 00:35:43,680
Speaker 1: system would work once everybody used to pay consultant, and

533
00:35:43,840 --> 00:35:49,000
Speaker 1: so how the how this spiral would inevitably start once

534
00:35:49,080 --> 00:35:51,160
Speaker 1: they were all using the same sense. He saw it

535
00:35:51,480 --> 00:35:54,839
Speaker 1: long before it began. I mean he retired early. Yeah,

536
00:35:55,080 --> 00:35:58,040
Speaker 1: he retired early eighties, and and I've got he he

537
00:35:58,160 --> 00:36:00,879
Speaker 1: happened to be a pay consultant. He didn't consider, Gee,

538
00:36:00,960 --> 00:36:03,680
Speaker 1: what if the whole world use these pay consultants, well,

539
00:36:03,719 --> 00:36:07,080
Speaker 1: that we everybody would get a raise every year. We're

540
00:36:07,120 --> 00:36:14,160
Speaker 1: all in the exactly. And then Bill Clinton. Bill Clinton campaigned,

541
00:36:14,880 --> 00:36:18,400
Speaker 1: uh in he saw this as a political issue, and

542
00:36:18,440 --> 00:36:21,000
Speaker 1: he said, I'm going to tax everything over a million dollars.

543
00:36:21,800 --> 00:36:24,839
Speaker 1: He got elected in terms of actual dollar I'm sorry

544
00:36:25,040 --> 00:36:28,040
Speaker 1: not tax Excuse me, i am not going to allow

545
00:36:28,600 --> 00:36:34,760
Speaker 1: tax deductions for all over a million dollars. Well, he yeah, cash,

546
00:36:34,800 --> 00:36:37,960
Speaker 1: stock anything. So he got in, he got in office,

547
00:36:39,040 --> 00:36:42,239
Speaker 1: and then he was lobbied by the business groups that said, well,

548
00:36:43,040 --> 00:36:45,919
Speaker 1: this is this is critical for American industry to pay

549
00:36:46,000 --> 00:36:50,440
Speaker 1: for performance. And so they revised it and said, uh,

550
00:36:50,600 --> 00:36:54,520
Speaker 1: if it relates to performance, then it's tax deductible. So

551
00:36:54,719 --> 00:36:57,920
Speaker 1: and therefore stock options, the stock options by the by

552
00:36:57,960 --> 00:37:02,759
Speaker 1: themselves were an unlimited amounts. We're uh any you know,

553
00:37:02,920 --> 00:37:05,640
Speaker 1: so anything that related to what you can make anything

554
00:37:05,800 --> 00:37:10,600
Speaker 1: and say it relates to performance. Ironically, this this is

555
00:37:10,680 --> 00:37:13,480
Speaker 1: the thing that truly opened the floodgates to CEO pay

556
00:37:13,680 --> 00:37:16,840
Speaker 1: going crazy. This was part of the bill Clint, the

557
00:37:16,920 --> 00:37:20,239
Speaker 1: budget reconciliation bill that had the big new taxes coming in.

558
00:37:22,160 --> 00:37:26,000
Speaker 1: It passed without a single Republican vote. Really, that's amazing.

559
00:37:26,120 --> 00:37:29,080
Speaker 1: And then which is which is really surprising when you

560
00:37:29,160 --> 00:37:31,719
Speaker 1: see what it ended up doing for the money class

561
00:37:31,840 --> 00:37:36,560
Speaker 1: and the executives. There was a wonderful NPR Planet Money

562
00:37:37,520 --> 00:37:42,000
Speaker 1: podcast on this exact topic, and it really fleshes it out.

563
00:37:42,360 --> 00:37:45,520
Speaker 1: So let's talk a little bit about the inertia and

564
00:37:45,680 --> 00:37:51,239
Speaker 1: how entrenched the CEO compensation machine has become. Are there

565
00:37:51,280 --> 00:37:54,480
Speaker 1: any hopes that that we can get out from under

566
00:37:54,560 --> 00:37:56,160
Speaker 1: the scheme or is this going to be with us

567
00:37:56,280 --> 00:38:00,759
Speaker 1: for the foreseeable future? Boards? Uh and rectors will not

568
00:38:00,920 --> 00:38:05,680
Speaker 1: reform this system. Uh by themselves. You have this new

569
00:38:05,880 --> 00:38:10,120
Speaker 1: say on pay, which I don't believe will make much difference. Now,

570
00:38:10,200 --> 00:38:15,279
Speaker 1: say on pay under Dodd frank Up, every at least

571
00:38:15,320 --> 00:38:18,920
Speaker 1: every three years, a corporation must have it offer its

572
00:38:18,920 --> 00:38:25,719
Speaker 1: shareholders the ability to have a non binding vote on

573
00:38:25,880 --> 00:38:29,480
Speaker 1: whether they approve or disapprove of the pay system. What's

574
00:38:29,520 --> 00:38:33,799
Speaker 1: happened is that two or three or four the most

575
00:38:33,880 --> 00:38:39,320
Speaker 1: egregious pay systems and the most egregiously overpaid ceo s,

576
00:38:39,760 --> 00:38:43,000
Speaker 1: there's a campaign on say on pay, and often it's

577
00:38:43,040 --> 00:38:46,840
Speaker 1: effective and it will affect that uh, those three or

578
00:38:46,920 --> 00:38:51,000
Speaker 1: four CEOs. The problem is they're all egregious, and so

579
00:38:51,200 --> 00:38:55,520
Speaker 1: just focusing on anyone just doesn't get it done right, right,

580
00:38:55,600 --> 00:38:58,480
Speaker 1: I mean, you've got you've got every one of these,

581
00:38:58,880 --> 00:39:03,600
Speaker 1: Uh CEO is ridiculously overpaid and the whole system is

582
00:39:03,680 --> 00:39:07,000
Speaker 1: causing so much harm to the to the country that

583
00:39:07,360 --> 00:39:10,359
Speaker 1: UH hoping that say on pay is going to make

584
00:39:10,400 --> 00:39:14,960
Speaker 1: any difference is uh, you know, it's like swatting swatting

585
00:39:15,000 --> 00:39:18,400
Speaker 1: a few flies. So so we can't talk about executive

586
00:39:18,440 --> 00:39:23,600
Speaker 1: compensation without bringing up Yahoo and Marissa Meyer. She she

587
00:39:23,800 --> 00:39:27,960
Speaker 1: joined the company. It seems like less than ten years ago. UH,

588
00:39:28,320 --> 00:39:32,200
Speaker 1: revenue has gone down, profits have gone down, market share

589
00:39:32,239 --> 00:39:36,400
Speaker 1: has gone down. The thing of value at Yahoo is

590
00:39:36,480 --> 00:39:39,719
Speaker 1: their steak in Ali Baba, which Merissa Meyer had nothing

591
00:39:39,800 --> 00:39:43,080
Speaker 1: to do with. And she's been compensated to the tune

592
00:39:43,120 --> 00:39:47,720
Speaker 1: of just about a quarter billion dollars. How on earth

593
00:39:47,800 --> 00:39:50,520
Speaker 1: does something like that make any sense? Uh? This is

594
00:39:51,960 --> 00:39:54,680
Speaker 1: most of CEO pay turns out to be paid for luck,

595
00:39:55,120 --> 00:39:58,880
Speaker 1: not pay for performance. All. All of the studies have

596
00:39:59,080 --> 00:40:04,120
Speaker 1: shown that, UH, CEO compensation and performance, no matter how

597
00:40:04,239 --> 00:40:09,880
Speaker 1: you define it, is at best weekly weekly, correlated and

598
00:40:10,080 --> 00:40:14,239
Speaker 1: a worse negatively carlate, which means the more you pay

599
00:40:14,320 --> 00:40:18,279
Speaker 1: the CEO, the worse you perform. Now, Marissa Mayer was

600
00:40:18,400 --> 00:40:22,719
Speaker 1: an example of this. She was there five years. By

601
00:40:22,880 --> 00:40:26,439
Speaker 1: every measure her, the performance of the company was poor.

602
00:40:26,640 --> 00:40:30,560
Speaker 1: Now maybe that's all her fault. I don't think it's

603
00:40:30,600 --> 00:40:33,560
Speaker 1: all her fault because I think that the CEO is

604
00:40:34,400 --> 00:40:37,320
Speaker 1: is not responsible for everything that happens. You know, the

605
00:40:37,400 --> 00:40:43,840
Speaker 1: CEO has limited abilities to move a big ship. So

606
00:40:44,640 --> 00:40:47,120
Speaker 1: Marissa didn't do a great job. Does she get singled

607
00:40:47,120 --> 00:40:49,920
Speaker 1: out because she's a woman, and then making her the

608
00:40:50,160 --> 00:40:54,640
Speaker 1: post a girl of over compensated? Well, I could give

609
00:40:54,680 --> 00:40:59,799
Speaker 1: you executives who have been equally overcompensated. Who were men.

610
00:41:00,200 --> 00:41:03,440
Speaker 1: Let's let's name a few. Well, i'll just take your name.

611
00:41:03,600 --> 00:41:06,560
Speaker 1: You certainly name names in the book, Well, you know

612
00:41:06,800 --> 00:41:09,399
Speaker 1: the book. What I did was I took the four

613
00:41:09,600 --> 00:41:13,880
Speaker 1: highest page CEOs, the people named the highest paige CEO

614
00:41:14,040 --> 00:41:16,680
Speaker 1: from two thousand and eleven to two thousand and fourteen.

615
00:41:17,200 --> 00:41:20,560
Speaker 1: I didn't select them because I thought that they were

616
00:41:21,160 --> 00:41:26,160
Speaker 1: examples of overpaide CEOs. I just took the highest I

617
00:41:26,239 --> 00:41:28,440
Speaker 1: just took the highest page. So let's say you wanted

618
00:41:28,480 --> 00:41:31,160
Speaker 1: to look at baseball players, and I took the baseball

619
00:41:31,239 --> 00:41:33,759
Speaker 1: player had the highest batting affage for the last four years.

620
00:41:34,480 --> 00:41:37,359
Speaker 1: Uh Now, when I got into that, it turned out

621
00:41:37,520 --> 00:41:41,160
Speaker 1: that the first of all, if I took the base

622
00:41:41,400 --> 00:41:44,239
Speaker 1: four baseball players with the highest batting AVU, you would

623
00:41:44,239 --> 00:41:47,160
Speaker 1: have heard of them and there's only so many people

624
00:41:47,280 --> 00:41:50,600
Speaker 1: can hit a hundred mile basketball or or a hanging

625
00:41:50,640 --> 00:41:53,880
Speaker 1: curve ball. It sounds like lots of people can do

626
00:41:54,000 --> 00:41:59,040
Speaker 1: with these various executives. It would appear to me that

627
00:42:01,440 --> 00:42:09,040
Speaker 1: executive baseball players, let's say, seldom go from superstars two

628
00:42:09,160 --> 00:42:12,359
Speaker 1: bums in a single season. This happens all the time

629
00:42:12,400 --> 00:42:15,840
Speaker 1: with CEOs. I mean, we've seen we've seen CEOs crash

630
00:42:15,920 --> 00:42:19,319
Speaker 1: and burn. You know, they're brilliant, they're they're the new

631
00:42:19,480 --> 00:42:23,399
Speaker 1: poster child for for CEO, for top CEOs. Next year,

632
00:42:23,480 --> 00:42:27,000
Speaker 1: they're out of a job. Most of Look, I was

633
00:42:27,040 --> 00:42:29,520
Speaker 1: a CEO for fourteen years. When I was in the

634
00:42:29,640 --> 00:42:31,760
Speaker 1: right place at the right time, I was a genius.

635
00:42:32,600 --> 00:42:34,600
Speaker 1: When I was in the wrong place at the wrong time,

636
00:42:34,680 --> 00:42:38,480
Speaker 1: I was a more Most of success is being in

637
00:42:38,600 --> 00:42:42,560
Speaker 1: the right place at the right time, or something called fit,

638
00:42:43,560 --> 00:42:48,600
Speaker 1: meaning that your skills, the particular skills you have, fit

639
00:42:48,760 --> 00:42:52,440
Speaker 1: for what that company needs at that time. So let

640
00:42:52,480 --> 00:42:56,520
Speaker 1: me take an icon of American business, Henry Ford. Henry

641
00:42:56,560 --> 00:43:00,239
Speaker 1: Ford was a superb fit for the automobile industry when

642
00:43:00,440 --> 00:43:06,839
Speaker 1: mass production and manufacturing efficiency were what was critical. When

643
00:43:07,080 --> 00:43:12,120
Speaker 1: it became a question of customers styling Henry Foker is

644
00:43:12,239 --> 00:43:15,480
Speaker 1: terrible fit any color as long as it's black, exactly.

645
00:43:15,960 --> 00:43:20,360
Speaker 1: So you know when you're when you're fit, when you

646
00:43:20,520 --> 00:43:23,200
Speaker 1: have the right fit for the right time in the company.

647
00:43:23,400 --> 00:43:27,000
Speaker 1: You look pretty good when your skills are So I'm

648
00:43:27,200 --> 00:43:30,440
Speaker 1: I'm a serendipity and luck really pay a big, big role.

649
00:43:31,520 --> 00:43:35,919
Speaker 1: The race is not to the swift. So let's let's

650
00:43:35,960 --> 00:43:39,600
Speaker 1: talk a little bit about consultants. I referenced them in

651
00:43:39,760 --> 00:43:43,080
Speaker 1: my book. You spend a lot of time talking about consultants.

652
00:43:43,560 --> 00:43:46,080
Speaker 1: And I have to begin with a quote, as I

653
00:43:46,160 --> 00:43:49,200
Speaker 1: so often like to do, from Charlie Monger. I would

654
00:43:49,360 --> 00:43:52,720
Speaker 1: rather throw a viper down my shirt fronts than hire

655
00:43:52,880 --> 00:43:56,759
Speaker 1: a compensation consultant. So Charlie is not a big fan

656
00:43:57,840 --> 00:44:01,040
Speaker 1: of them. Why do you think that is? Well, because

657
00:44:02,760 --> 00:44:09,719
Speaker 1: compensation consultants are part of the ore. Are a parasitic profession. Uh,

658
00:44:10,120 --> 00:44:13,000
Speaker 1: you'll have to put a little detail to that. Uh.

659
00:44:13,320 --> 00:44:17,040
Speaker 1: Compensation consultants come in and say we're going to give

660
00:44:17,080 --> 00:44:20,200
Speaker 1: you all sorts of studies in an objective way to

661
00:44:20,360 --> 00:44:26,279
Speaker 1: pay your CEO. And uh, they're very anctious and and

662
00:44:28,360 --> 00:44:32,040
Speaker 1: you'll pretend to be very serious and basically, what the

663
00:44:32,600 --> 00:44:35,800
Speaker 1: what the CEO knows they're going to do is juice

664
00:44:35,880 --> 00:44:41,800
Speaker 1: is pay. That's that's all. That's all these compensations. You

665
00:44:41,880 --> 00:44:43,719
Speaker 1: don't even have to wink and nod. You just look

666
00:44:43,760 --> 00:44:45,880
Speaker 1: at the record. And this is a big business. I

667
00:44:46,040 --> 00:44:50,520
Speaker 1: was stunned to learn from your book management consulting industry.

668
00:44:50,680 --> 00:44:52,680
Speaker 1: I would have guessed it was a couple of billion dollars.

669
00:44:52,840 --> 00:44:57,160
Speaker 1: It's a two billion dollar industry. Oh yeah, now I'm not.

670
00:44:57,640 --> 00:45:00,920
Speaker 1: I'm I don't paint all management cons aultants with the

671
00:45:01,080 --> 00:45:07,560
Speaker 1: same brush. I find compensation consultants. Uh how big of that?

672
00:45:07,920 --> 00:45:11,040
Speaker 1: Too much billion? To all pie are the compensations. I

673
00:45:11,320 --> 00:45:14,839
Speaker 1: could not find a number on that. There's nothing, there's

674
00:45:14,920 --> 00:45:18,399
Speaker 1: nothing public. Uh I would you know all of all

675
00:45:18,440 --> 00:45:22,239
Speaker 1: of these companies have, all big companies have compensation consultants,

676
00:45:22,600 --> 00:45:26,160
Speaker 1: and you know they're paid a million to ten million

677
00:45:26,239 --> 00:45:31,000
Speaker 1: dollars at these places. Um, and really the only thing,

678
00:45:31,239 --> 00:45:35,120
Speaker 1: the only thing they do is give you a big

679
00:45:35,320 --> 00:45:39,120
Speaker 1: report and a lot of slides and a big power

680
00:45:39,239 --> 00:45:42,040
Speaker 1: point and goose the CEO s pay. It's that simple.

681
00:45:42,600 --> 00:45:46,320
Speaker 1: So here's an idea for any billionaire who wants to

682
00:45:46,400 --> 00:45:49,279
Speaker 1: pursue it. You know, we've seen the way the thing

683
00:45:49,400 --> 00:45:54,000
Speaker 1: tanks managed to push ideas out into the world, even

684
00:45:54,080 --> 00:45:56,960
Speaker 1: though they may not be great ideas such as a

685
00:45:57,160 --> 00:46:02,160
Speaker 1: shareholder value. Someone needs to for him in executive compensation

686
00:46:02,320 --> 00:46:05,960
Speaker 1: think tank. They need to dog all of these consultant

687
00:46:06,000 --> 00:46:09,200
Speaker 1: companies and essentially debunk every time they put out a

688
00:46:09,280 --> 00:46:13,400
Speaker 1: slide deck to study something, and eventually, by doing that,

689
00:46:14,320 --> 00:46:19,239
Speaker 1: someone will find a way to um put into the ether,

690
00:46:19,560 --> 00:46:22,880
Speaker 1: put into the media and the conversation. Hey, these guys

691
00:46:22,920 --> 00:46:27,200
Speaker 1: are wildly overpaid and for everything they say, you have

692
00:46:27,280 --> 00:46:29,440
Speaker 1: to come up with the opposite, and I nominate you

693
00:46:29,560 --> 00:46:32,839
Speaker 1: to do that. Well, and the book is a good start.

694
00:46:32,960 --> 00:46:35,680
Speaker 1: I I don't I don't think that would work. Why not?

695
00:46:37,280 --> 00:46:41,840
Speaker 1: Look does media pressure impacted comprit Directors would have to

696
00:46:41,920 --> 00:46:45,839
Speaker 1: be brain dead not to know that their CEOs are

697
00:46:45,920 --> 00:46:50,360
Speaker 1: wildly overpaid. I mean, how can you realistically go to

698
00:46:50,680 --> 00:46:53,440
Speaker 1: you know, attend a meeting and say, oh, yeah, okay,

699
00:46:53,560 --> 00:46:55,840
Speaker 1: so we're paying Joe this. So Joe has made forty

700
00:46:55,880 --> 00:46:58,360
Speaker 1: million dollars this year. Well that's all right, because you

701
00:46:58,400 --> 00:47:01,320
Speaker 1: know his peers are all paid. Let me give you

702
00:47:01,400 --> 00:47:06,960
Speaker 1: an example. Suppose in nineteen eighty we had insurance consultants

703
00:47:07,280 --> 00:47:09,319
Speaker 1: and they came to the boards and they said, hey,

704
00:47:09,480 --> 00:47:12,160
Speaker 1: we got a great new way to do insurance. See,

705
00:47:12,239 --> 00:47:13,960
Speaker 1: we're gonna have a peer group. We're gonna see what

706
00:47:14,000 --> 00:47:17,040
Speaker 1: all your peers are paying for insurance. Okay, and then

707
00:47:17,239 --> 00:47:19,400
Speaker 1: we're gonna have you pay at seventy at the seventy

708
00:47:20,960 --> 00:47:23,520
Speaker 1: because you're well, no, no, this is a great idea

709
00:47:23,719 --> 00:47:26,040
Speaker 1: that that you're a good company, you'll pay there. And

710
00:47:26,160 --> 00:47:28,759
Speaker 1: by the way, because you need premium insurance your top court,

711
00:47:28,880 --> 00:47:32,120
Speaker 1: top quart tile. And by the way, then um, we'll

712
00:47:32,239 --> 00:47:34,759
Speaker 1: set for the for the insurance company. We're gonna set

713
00:47:34,840 --> 00:47:37,600
Speaker 1: performance goals and if they hit those goals, will will

714
00:47:37,680 --> 00:47:42,600
Speaker 1: double our our premiums cost. So so you accept that,

715
00:47:43,000 --> 00:47:46,120
Speaker 1: you say, the company accepts that. It's now two thousand seventeen,

716
00:47:46,239 --> 00:47:48,799
Speaker 1: you're on the board and you say, hey, I've been

717
00:47:48,880 --> 00:47:52,799
Speaker 1: looking at our insurance. You know the cost, the real

718
00:47:52,960 --> 00:47:57,160
Speaker 1: inflation inged cost has gone up a thousand percent, ten

719
00:47:57,280 --> 00:48:03,000
Speaker 1: times uh and with how many our coverage is worse? Why?

720
00:48:03,280 --> 00:48:06,800
Speaker 1: Why did? Why are we listening to these consultants? That's

721
00:48:06,920 --> 00:48:09,359
Speaker 1: the position there in with CEOs, But they won't ask

722
00:48:09,400 --> 00:48:12,480
Speaker 1: that question. So what has to be done to pressure

723
00:48:12,920 --> 00:48:16,200
Speaker 1: board members, either through the media or what have you

724
00:48:17,120 --> 00:48:22,839
Speaker 1: to my view, and this is this will be uh

725
00:48:23,680 --> 00:48:26,960
Speaker 1: is that you need a blunt instrument, need a very

726
00:48:27,040 --> 00:48:31,000
Speaker 1: blunt instrument to to wake these guys up. A law

727
00:48:33,360 --> 00:48:35,920
Speaker 1: or I mean the Dodd Frank rule that requires the

728
00:48:36,840 --> 00:48:40,640
Speaker 1: say on pay and the publication of this that hasn't

729
00:48:40,680 --> 00:48:44,759
Speaker 1: seemed to thwart it. What what my because nothing else

730
00:48:44,840 --> 00:48:47,480
Speaker 1: has worked. I'm saying you need a very blunt instrument.

731
00:48:47,880 --> 00:48:50,799
Speaker 1: And what I'm saying is you need a luxury tax.

732
00:48:50,880 --> 00:48:54,560
Speaker 1: I'm taking a page from Major League Baseball, a luxury

733
00:48:54,640 --> 00:48:56,640
Speaker 1: you know, the Major League Baseball says, look, if your

734
00:48:56,640 --> 00:49:00,239
Speaker 1: payroll gets over x, you gotta pay at tax. So

735
00:49:00,400 --> 00:49:04,640
Speaker 1: I'm gonna say, if you pay your ceo everything over

736
00:49:04,760 --> 00:49:08,279
Speaker 1: six million dollars to any executive, you gotta pay a

737
00:49:08,360 --> 00:49:11,120
Speaker 1: tax to the federal government dollar for dollar. And by

738
00:49:11,160 --> 00:49:13,560
Speaker 1: the way, I'm going to include everything. What you know,

739
00:49:13,680 --> 00:49:19,319
Speaker 1: these number jets, the club got the biggest, the biggest thing.

740
00:49:19,680 --> 00:49:22,440
Speaker 1: You know, when a CEO cashes in his stock options

741
00:49:22,800 --> 00:49:26,399
Speaker 1: that's not reported as pay. Yeah. That so let's talk

742
00:49:26,440 --> 00:49:29,200
Speaker 1: about fasby a little bit. There was an ongoing debate,

743
00:49:29,800 --> 00:49:35,759
Speaker 1: primarily driven by Silicon Valley, which was do stock options

744
00:49:36,000 --> 00:49:40,359
Speaker 1: counts as compensation, and one would think they should count

745
00:49:40,360 --> 00:49:45,280
Speaker 1: as compensation, but they don't, well what they They finally

746
00:49:45,400 --> 00:49:49,000
Speaker 1: forced them to say, yes, it's compensation. So this is

747
00:49:49,080 --> 00:49:52,759
Speaker 1: the way. Then the accountants and the companies got around that.

748
00:49:52,960 --> 00:49:56,359
Speaker 1: They said, well, when when we barry, we're gonna give

749
00:49:56,400 --> 00:50:00,640
Speaker 1: you a million options at twenty. Stock is currently twenty now,

750
00:50:01,320 --> 00:50:05,040
Speaker 1: so those million options will run it through a black

751
00:50:05,080 --> 00:50:07,640
Speaker 1: Shoals model or something like that, and we'll say, okay,

752
00:50:07,800 --> 00:50:12,880
Speaker 1: each option is worth is worth a dollar today. So

753
00:50:13,120 --> 00:50:15,360
Speaker 1: we say you've got compensation of a million dollars. You

754
00:50:15,440 --> 00:50:20,080
Speaker 1: got a million options. Now seven years later, the stock

755
00:50:20,200 --> 00:50:22,440
Speaker 1: is at fifty. Not because you've done a good job,

756
00:50:22,560 --> 00:50:25,880
Speaker 1: just because the market really well. Right, So you now

757
00:50:26,120 --> 00:50:29,080
Speaker 1: cast in your million options for a gain of thirty

758
00:50:29,120 --> 00:50:32,320
Speaker 1: dollars in option, you pocket thirty million dollars. That's not

759
00:50:32,400 --> 00:50:36,960
Speaker 1: considered compensation. That is when when you read these ratio

760
00:50:37,239 --> 00:50:40,480
Speaker 1: is three company have to go out when you exercise

761
00:50:40,520 --> 00:50:43,160
Speaker 1: the option and replace that stock. It either has to

762
00:50:43,280 --> 00:50:48,239
Speaker 1: replace that stock or print more stocks, or it's it's

763
00:50:48,280 --> 00:50:53,680
Speaker 1: either dilutive or expensive. The shareholder loses. Uh. But according

764
00:50:53,760 --> 00:50:57,759
Speaker 1: to the company, this uh, this money came from the

765
00:50:57,840 --> 00:51:00,080
Speaker 1: tooth fairy. He just came in in the middle of

766
00:51:00,160 --> 00:51:04,120
Speaker 1: the night put thirty million dollars under your pillow, and uh,

767
00:51:04,920 --> 00:51:07,359
Speaker 1: very nice of them. And you know you left out

768
00:51:07,440 --> 00:51:12,640
Speaker 1: the other half of that story, or the other possibility

769
00:51:12,719 --> 00:51:16,960
Speaker 1: of that story, which is the stock doesn't go to fifty.

770
00:51:17,040 --> 00:51:21,800
Speaker 1: The stock goes to ten, at which point the board

771
00:51:21,920 --> 00:51:25,360
Speaker 1: reprices the stock options down to ten. There are no

772
00:51:25,640 --> 00:51:27,719
Speaker 1: I don't even know if there's taxed, because you paid

773
00:51:27,800 --> 00:51:31,040
Speaker 1: tax at twenty and clearly that calculation was wrong because

774
00:51:31,080 --> 00:51:33,800
Speaker 1: it's not worth twenty, it's worth ten. And so you

775
00:51:33,920 --> 00:51:37,200
Speaker 1: might even have a little fun with your tax amendment,

776
00:51:37,239 --> 00:51:40,640
Speaker 1: do you amending your previous return. And then if subsequently

777
00:51:40,760 --> 00:51:44,040
Speaker 1: that stock runs up, the companies in the same situation,

778
00:51:44,120 --> 00:51:45,880
Speaker 1: it goes back to twenty and all of a sudden,

779
00:51:45,920 --> 00:51:49,280
Speaker 1: you're mate, you're making money because because it's been repriced,

780
00:51:49,520 --> 00:51:51,960
Speaker 1: because we had to give you the incentive. Now, this

781
00:51:52,160 --> 00:51:54,120
Speaker 1: is this is one of the worst parts of it,

782
00:51:55,320 --> 00:52:03,000
Speaker 1: the idea that these huge uh option packages at various

783
00:52:03,080 --> 00:52:09,040
Speaker 1: other pay packages are necessary to motivate you. Now, CEOs

784
00:52:09,040 --> 00:52:11,600
Speaker 1: are highly motivated to start with. You don't get you

785
00:52:11,680 --> 00:52:13,600
Speaker 1: don't get to be a CEO if you know if

786
00:52:13,640 --> 00:52:17,880
Speaker 1: you show up at eleven o'clock every morning. UM, A

787
00:52:18,000 --> 00:52:24,399
Speaker 1: pay system is should only channel the motivation properly. Now,

788
00:52:25,160 --> 00:52:32,640
Speaker 1: financial incentives at the CEO level, UH tend to have

789
00:52:34,320 --> 00:52:38,640
Speaker 1: because they're so powerful, tend to narrow your focus completely.

790
00:52:38,880 --> 00:52:42,200
Speaker 1: You're a ceo. You can make thirty million dollars this

791
00:52:42,360 --> 00:52:45,120
Speaker 1: year if you increase earnings per share by x per cent.

792
00:52:45,280 --> 00:52:48,959
Speaker 1: Let's say your whole bonus is based on You're gonna

793
00:52:49,040 --> 00:52:53,520
Speaker 1: make that. You're gonna make that. You're going to make that.

794
00:52:53,640 --> 00:52:57,399
Speaker 1: I mean, look, as you know, I could always make

795
00:52:57,840 --> 00:53:00,400
Speaker 1: earning experience. I jump up and dance the mac arena

796
00:53:00,480 --> 00:53:02,880
Speaker 1: with a you know, a few accounting changes. But but

797
00:53:03,160 --> 00:53:05,200
Speaker 1: you're gonna make that. I don't care what you have

798
00:53:05,280 --> 00:53:06,960
Speaker 1: to do. You're gonna make that. You are going to

799
00:53:07,160 --> 00:53:12,120
Speaker 1: neglect everything else. You're gonna focus totally, totally on the

800
00:53:12,360 --> 00:53:17,239
Speaker 1: Suppose I suppose I said, Barry, your performance measure next

801
00:53:17,360 --> 00:53:23,240
Speaker 1: year is, UM, how many headlines your your radio story

802
00:53:23,360 --> 00:53:26,920
Speaker 1: makes in the New York Post. Okay, you're gonna get

803
00:53:26,960 --> 00:53:31,800
Speaker 1: thirty million dollars. If you make You're gonna be interview anybody.

804
00:53:31,880 --> 00:53:36,200
Speaker 1: You'll make a headline. You don't care what right I mean,

805
00:53:36,280 --> 00:53:40,480
Speaker 1: thirty million dollars is a powerful, powerful motivator there, right,

806
00:53:40,920 --> 00:53:43,480
Speaker 1: you can ruin your show, but it's thirty million dollars

807
00:53:44,000 --> 00:53:48,759
Speaker 1: and executives do the same thing. It's so powerful that that.

808
00:53:49,600 --> 00:53:51,560
Speaker 1: And by the way, this has been shown in study

809
00:53:51,600 --> 00:53:55,560
Speaker 1: after study and an experiment after experiment that for all,

810
00:53:56,160 --> 00:54:04,320
Speaker 1: for all, um all, except repetitive, repetitive tasks or really

811
00:54:04,400 --> 00:54:08,239
Speaker 1: distasteful tasks like you know, knocking on doors and selling magazines.

812
00:54:08,800 --> 00:54:14,920
Speaker 1: Financial incentives tend to harm performance your your You perform best,

813
00:54:15,640 --> 00:54:19,160
Speaker 1: and I'm sure you perform best when you are motivated

814
00:54:19,280 --> 00:54:22,440
Speaker 1: by your conception of what a job well done is

815
00:54:24,040 --> 00:54:27,920
Speaker 1: just pride and workmanship. I know that's old school, but

816
00:54:28,000 --> 00:54:31,520
Speaker 1: I think it's important. It's it's, it's, it's it's not

817
00:54:31,880 --> 00:54:36,719
Speaker 1: old school, in fact, is what how humans perform um

818
00:54:37,480 --> 00:54:43,400
Speaker 1: And so you're saying stock options are motivating CEOs towards

819
00:54:43,480 --> 00:54:47,520
Speaker 1: one thing, which is stock price. Yes, yeah, it's it's,

820
00:54:47,600 --> 00:54:51,080
Speaker 1: it's and that's why. That's why. And you combine that

821
00:54:51,360 --> 00:54:58,160
Speaker 1: with the theoretical justification of shareholder value, and this is

822
00:54:58,400 --> 00:55:00,480
Speaker 1: one of the I think the is one of the

823
00:55:00,520 --> 00:55:03,120
Speaker 1: worst things that's happened to American industry. So there are

824
00:55:03,160 --> 00:55:06,279
Speaker 1: two issues that raises and and a shorter one and

825
00:55:06,320 --> 00:55:09,160
Speaker 1: along the one. Let's start with the shorter one first.

826
00:55:11,680 --> 00:55:14,600
Speaker 1: I've read numerous times people said, well, when you give

827
00:55:14,680 --> 00:55:19,279
Speaker 1: stock options to executives, their interests or aligne with shareholders.

828
00:55:19,400 --> 00:55:22,359
Speaker 1: But that doesn't make sense. They haven't taken any risk,

829
00:55:22,400 --> 00:55:25,759
Speaker 1: they haven't put up any money, they're not thinking long term.

830
00:55:25,840 --> 00:55:28,839
Speaker 1: To them, all they need to do is have um

831
00:55:29,440 --> 00:55:32,520
Speaker 1: the stock price go up, whether they're responsible or not.

832
00:55:33,080 --> 00:55:36,880
Speaker 1: How on earth does that align them with the interests?

833
00:55:37,000 --> 00:55:40,200
Speaker 1: It is amazing. I look at these company proxies and

834
00:55:40,280 --> 00:55:43,920
Speaker 1: you know, they have forty pages on executive compensation and

835
00:55:44,080 --> 00:55:47,160
Speaker 1: the word alignment is used at least twenty or thirty

836
00:55:47,239 --> 00:55:51,480
Speaker 1: times in each proxy. And you're absolutely right, there's no

837
00:55:51,600 --> 00:55:56,080
Speaker 1: alignment at all. I mean heads heads I win, tails

838
00:55:56,200 --> 00:55:59,000
Speaker 1: I break even with an option unless there's a repricement

839
00:55:59,040 --> 00:56:01,400
Speaker 1: in which even tails went right, which even tails I win.

840
00:56:01,640 --> 00:56:03,800
Speaker 1: So let's talk about the bigger issue, which is what

841
00:56:03,920 --> 00:56:10,520
Speaker 1: I think the compensation that is attributed to stock options

842
00:56:10,600 --> 00:56:14,640
Speaker 1: get so wrong. When you are giving a huge pile

843
00:56:14,760 --> 00:56:19,480
Speaker 1: of stock options to an executive, you're essentially compensating them

844
00:56:20,080 --> 00:56:23,000
Speaker 1: not for how well their company does relative to their peers,

845
00:56:23,080 --> 00:56:26,080
Speaker 1: not for how well they do, but you're compensating them

846
00:56:26,120 --> 00:56:29,759
Speaker 1: based on how well the stock market does. Absolutely, as

847
00:56:29,920 --> 00:56:34,320
Speaker 1: as as you know, sevent of a company stock movement

848
00:56:34,520 --> 00:56:37,320
Speaker 1: has to do with the general stock market or the

849
00:56:37,440 --> 00:56:39,480
Speaker 1: industry and the sector. Right, the two of those are

850
00:56:39,520 --> 00:56:43,239
Speaker 1: at least not more. The company itself is responsible for

851
00:56:43,239 --> 00:56:46,080
Speaker 1: about a third if that much, if that much, and

852
00:56:46,280 --> 00:56:48,719
Speaker 1: so hey, if you're in the right industry, in the

853
00:56:48,840 --> 00:56:52,920
Speaker 1: right market, you're going to get big stock option gains,

854
00:56:53,280 --> 00:56:56,840
Speaker 1: even if you perform much below your peer group. This

855
00:56:57,000 --> 00:57:01,000
Speaker 1: is another thing that that stuns me. We say we're

856
00:57:01,000 --> 00:57:03,120
Speaker 1: gonna they always say, okay, we're gonna pay according to

857
00:57:03,200 --> 00:57:06,279
Speaker 1: a peer group. And then they say, but you're you're

858
00:57:06,320 --> 00:57:08,600
Speaker 1: going to be paid at the seventy five percentile because

859
00:57:08,640 --> 00:57:12,160
Speaker 1: we're a good company. They never ever test that you

860
00:57:12,320 --> 00:57:15,920
Speaker 1: have to perform at the seventy five percent dial or

861
00:57:16,000 --> 00:57:18,960
Speaker 1: you have to beat your peers at anything. That's shocking.

862
00:57:19,520 --> 00:57:23,720
Speaker 1: There is never, there is never that test in everyone

863
00:57:23,880 --> 00:57:27,920
Speaker 1: I've ever looked at once. Once you set your base

864
00:57:28,200 --> 00:57:32,640
Speaker 1: at seventy peer group, you are not held for any performance.

865
00:57:32,960 --> 00:57:38,960
Speaker 1: You're that you may have a uh your compensation may

866
00:57:39,000 --> 00:57:40,840
Speaker 1: be linked to your stock price, it may be linked

867
00:57:40,840 --> 00:57:43,600
Speaker 1: to earnings per share, but nothing about beating these peers,

868
00:57:43,840 --> 00:57:47,640
Speaker 1: right the old line as I'm astonished but not surprised.

869
00:57:48,400 --> 00:57:52,000
Speaker 1: So so here you raised the question that that uh

870
00:57:52,240 --> 00:57:56,720
Speaker 1: I was thinking of, which is how did this company

871
00:57:56,840 --> 00:58:01,400
Speaker 1: do relative to revenue? For is their peers relative to

872
00:58:01,560 --> 00:58:07,360
Speaker 1: market share, relative to patents filed, relative to product introduction,

873
00:58:07,480 --> 00:58:12,520
Speaker 1: relative to market penetration, relative to geographic expansion relative You

874
00:58:12,640 --> 00:58:16,760
Speaker 1: could come up very easily with a dozen or hundred

875
00:58:17,400 --> 00:58:20,360
Speaker 1: different metrics that you could use a loan or in

876
00:58:20,480 --> 00:58:24,760
Speaker 1: combination with each other that would fairly say, hey, how

877
00:58:24,880 --> 00:58:29,040
Speaker 1: has this company done relative to other companies in the space,

878
00:58:29,160 --> 00:58:32,600
Speaker 1: relative to other companies of the same size, relative to

879
00:58:32,840 --> 00:58:38,400
Speaker 1: any reasonable pier and those gains are the basis for

880
00:58:38,760 --> 00:58:42,320
Speaker 1: our bonuses and compensation. You could although that would that

881
00:58:42,400 --> 00:58:46,720
Speaker 1: would be that would be highly complicated. I I prefer

882
00:58:46,880 --> 00:58:49,880
Speaker 1: much simpler system, which would be my simple. My My

883
00:58:50,080 --> 00:58:54,960
Speaker 1: system is you get a salary pretty good salt, you know.

884
00:58:55,080 --> 00:58:57,360
Speaker 1: Do you get a salary two three two million bucks

885
00:58:57,920 --> 00:59:01,120
Speaker 1: and you get restricted stock? How can I live on

886
00:59:01,160 --> 00:59:03,800
Speaker 1: two million dollars? Well, you know, maybe you know what

887
00:59:03,920 --> 00:59:05,920
Speaker 1: the dudes are at the golf club. It's and I

888
00:59:05,920 --> 00:59:09,000
Speaker 1: don't even play golf, but still it's very expensive. To

889
00:59:11,560 --> 00:59:16,000
Speaker 1: let me tell you, I've I've lived very well. I've

890
00:59:16,080 --> 00:59:19,000
Speaker 1: lived very well, and I belonged to a very nice

891
00:59:19,040 --> 00:59:22,200
Speaker 1: golf club. Uh and I've never made two million dollars

892
00:59:22,200 --> 00:59:28,120
Speaker 1: a year. That's a that's a book title scraping. So uh,

893
00:59:30,840 --> 00:59:35,240
Speaker 1: I say restricted stock, and then there's one restricted stuff,

894
00:59:35,280 --> 00:59:38,200
Speaker 1: not an option, but restricted stock. How long do they

895
00:59:38,240 --> 00:59:42,760
Speaker 1: have to hold that stuff? To hold that stock until

896
00:59:43,640 --> 00:59:47,880
Speaker 1: about five years after they've retired, after they've not even

897
00:59:47,920 --> 00:59:50,800
Speaker 1: after they've left the company, after after they've left after

898
00:59:50,880 --> 00:59:53,280
Speaker 1: I'm sorry, after they've left the company. So in other words,

899
00:59:53,600 --> 00:59:58,040
Speaker 1: you're making them think long term plus five and there's

900
00:59:58,120 --> 01:00:03,080
Speaker 1: only one performance requirement. M hmm, long term plus five.

901
01:00:03,640 --> 01:00:06,680
Speaker 1: That stock has to perform better than the SMP five

902
01:00:07,560 --> 01:00:10,919
Speaker 1: really lose half of it. So in other words, half

903
01:00:10,960 --> 01:00:15,320
Speaker 1: the SMP five hundred is gonna underperform. One would think,

904
01:00:15,400 --> 01:00:18,440
Speaker 1: I mean the distribution. So I'm just saying, look, you

905
01:00:18,560 --> 01:00:20,520
Speaker 1: get you get a lot of stock in the company,

906
01:00:20,800 --> 01:00:24,840
Speaker 1: so you're you're a shareholder that and your your interests

907
01:00:24,920 --> 01:00:27,640
Speaker 1: truly are aligned. Your interest truly are aligned and you're

908
01:00:27,640 --> 01:00:30,320
Speaker 1: a long term shareholder because you can't even get out

909
01:00:30,400 --> 01:00:33,720
Speaker 1: the day you quit the company. Uh. And there there's

910
01:00:33,760 --> 01:00:36,080
Speaker 1: a complicated way of how you can reduce this over

911
01:00:36,160 --> 01:00:42,440
Speaker 1: time and um. And your test is that during that

912
01:00:42,680 --> 01:00:45,160
Speaker 1: period you have to form better than the other guys

913
01:00:45,200 --> 01:00:48,000
Speaker 1: are half your restricted share is goot forfeited And you

914
01:00:48,080 --> 01:00:50,960
Speaker 1: mentioned blunt instruments. The way to make this work, one

915
01:00:51,000 --> 01:00:55,760
Speaker 1: would imagine, would be to create a tax incentive if

916
01:00:55,800 --> 01:00:59,320
Speaker 1: you use this plan, and a higher tax if you don't.

917
01:00:59,440 --> 01:01:02,080
Speaker 1: That's right, right, that would I didn't I didn't have

918
01:01:02,200 --> 01:01:04,560
Speaker 1: that in my book. But I think that's an excellent idea. Well,

919
01:01:04,760 --> 01:01:07,400
Speaker 1: the the only way to get anybody to adopt something

920
01:01:07,680 --> 01:01:12,480
Speaker 1: is to give them incentive or disincentives. And the current plan.

921
01:01:12,640 --> 01:01:15,440
Speaker 1: Should you combine your you were three quarters away there

922
01:01:15,480 --> 01:01:18,400
Speaker 1: your luxury tax with you don't pay the luxury tax.

923
01:01:18,480 --> 01:01:21,000
Speaker 1: If you do it this way, you had both completely

924
01:01:21,040 --> 01:01:24,440
Speaker 1: We we should have I should have had this interview

925
01:01:24,520 --> 01:01:27,880
Speaker 1: before I read this. Well, can these are your ideas?

926
01:01:27,920 --> 01:01:31,320
Speaker 1: I'm just add the luxury tax with this. I think

927
01:01:31,360 --> 01:01:34,240
Speaker 1: it's an excellent idea. It's it's a way to make sense.

928
01:01:34,280 --> 01:01:36,040
Speaker 1: The second edition will have it in there. You go,

929
01:01:36,160 --> 01:01:39,000
Speaker 1: you can you can you can edit that UM before

930
01:01:39,080 --> 01:01:41,680
Speaker 1: we go to our our standard questions, our favorite questions

931
01:01:42,240 --> 01:01:46,920
Speaker 1: I had UM. I had one last question I had

932
01:01:46,960 --> 01:01:50,120
Speaker 1: to ask you, which I thought was hilarious. A board

933
01:01:50,200 --> 01:01:53,720
Speaker 1: member once asked you, how do you measure the first

934
01:01:53,840 --> 01:01:58,439
Speaker 1: year's progress on a three year turnaround? So, in other words,

935
01:01:58,480 --> 01:02:01,640
Speaker 1: people have bonuses and incent of every year on what

936
01:02:01,840 --> 01:02:05,840
Speaker 1: was supposed to be a three year turnaround. How can

937
01:02:05,880 --> 01:02:09,400
Speaker 1: you legitimately measure where you are? One of the problems

938
01:02:09,640 --> 01:02:13,000
Speaker 1: is with the bonus system. You get an annual bonus

939
01:02:13,440 --> 01:02:18,600
Speaker 1: as if everything important falls nice calendar within a calendar year.

940
01:02:19,080 --> 01:02:21,400
Speaker 1: And the analogy that I used to show you how

941
01:02:21,440 --> 01:02:25,480
Speaker 1: absurd an annual bonus system is. The analogy as he

942
01:02:25,560 --> 01:02:28,560
Speaker 1: used in the book, is think of setting a bonus

943
01:02:28,600 --> 01:02:33,480
Speaker 1: system for generals in wartime because we need to motivate them.

944
01:02:33,560 --> 01:02:37,680
Speaker 1: We need not self motive. They're not self motivate, and

945
01:02:37,800 --> 01:02:40,960
Speaker 1: we need to you know, they'll perform better if we

946
01:02:41,120 --> 01:02:43,480
Speaker 1: give them a bonus. Well, that's the same that you have.

947
01:02:43,760 --> 01:02:46,680
Speaker 1: I mean, it's so absurd, but although invade easy targets,

948
01:02:46,800 --> 01:02:52,040
Speaker 1: they won't fight exactly exactly. It's pretty crazy. I mean,

949
01:02:52,080 --> 01:02:55,800
Speaker 1: if if the Soviet Union, I'm Soviet univer that shows

950
01:02:55,840 --> 01:03:01,560
Speaker 1: out my age. If if Russia wanted to truly debilitate

951
01:03:01,760 --> 01:03:05,439
Speaker 1: the army, the military, and the United States, it would

952
01:03:05,480 --> 01:03:09,919
Speaker 1: introduce an annual bonus system. That's amazing. So so let's

953
01:03:10,000 --> 01:03:14,240
Speaker 1: talk a little bit about some of our standard questions.

954
01:03:14,280 --> 01:03:17,040
Speaker 1: And these are the things I asked all of my guests. Um,

955
01:03:17,520 --> 01:03:19,760
Speaker 1: tell us a little bit about your background that people

956
01:03:19,840 --> 01:03:25,439
Speaker 1: don't know about you. Uh, well people don't. I doubt

957
01:03:25,480 --> 01:03:29,640
Speaker 1: your listeners know anything about me, so they will after this, okay. Um.

958
01:03:31,200 --> 01:03:33,880
Speaker 1: The first the job I had the most fun at

959
01:03:34,040 --> 01:03:37,440
Speaker 1: was when I was Deputy Controller of the City of

960
01:03:37,520 --> 01:03:40,600
Speaker 1: New York during the financial crisis. That was pretty interesting,

961
01:03:40,800 --> 01:03:43,520
Speaker 1: was fascinating. I mean the cast of characters I was

962
01:03:43,600 --> 01:03:46,360
Speaker 1: working with, uh and the issues I was working when

963
01:03:46,480 --> 01:03:48,280
Speaker 1: I was a kid. I was thirty four years old,

964
01:03:48,680 --> 01:03:50,600
Speaker 1: so that that was that was a lot of fun.

965
01:03:51,040 --> 01:03:54,240
Speaker 1: My father in law used to own the New York

966
01:03:54,280 --> 01:03:58,160
Speaker 1: City General Obligation bonds and when I think they had

967
01:03:58,200 --> 01:04:02,640
Speaker 1: a coal function in two thousand something like that, and

968
01:04:02,720 --> 01:04:05,520
Speaker 1: I remember he came came to me and said, all right,

969
01:04:05,560 --> 01:04:07,520
Speaker 1: I have these bonds that are called in New York

970
01:04:07,600 --> 01:04:10,680
Speaker 1: City geos. He was buying them for years in the seventies.

971
01:04:11,040 --> 01:04:14,880
Speaker 1: They've been playing twelve four? What can you get me

972
01:04:15,200 --> 01:04:17,480
Speaker 1: to replace him? And I said, I could get you

973
01:04:18,000 --> 01:04:20,760
Speaker 1: some treasuries at four and a half five percent if

974
01:04:20,800 --> 01:04:23,600
Speaker 1: you want muni bonds, they're just a tiny bit riskier,

975
01:04:23,880 --> 01:04:26,760
Speaker 1: but it's tax free and they'll pay about four percent.

976
01:04:27,160 --> 01:04:28,480
Speaker 1: And he's like, what the hell am I going to

977
01:04:28,600 --> 01:04:32,480
Speaker 1: do with that? Were you there during the that was

978
01:04:32,560 --> 01:04:34,920
Speaker 1: quite quite a period of time. My father in law,

979
01:04:35,000 --> 01:04:38,000
Speaker 1: who is no longer with us, correctly surmised New York

980
01:04:38,080 --> 01:04:40,320
Speaker 1: City UH is still gonna be around. So that was

981
01:04:40,480 --> 01:04:43,600
Speaker 1: a yes to say the least. Tell tell us about

982
01:04:43,640 --> 01:04:46,800
Speaker 1: some of your early mentors who affected um the way

983
01:04:46,880 --> 01:04:50,560
Speaker 1: you approach being a CEO or a board member. You know.

984
01:04:52,200 --> 01:04:54,720
Speaker 1: I would say that two early mentors I had were

985
01:04:54,800 --> 01:04:58,560
Speaker 1: when I was in government UH in New York. One

986
01:04:58,720 --> 01:05:01,320
Speaker 1: was a fellow named Bob will Ers, who is now

987
01:05:02,560 --> 01:05:08,520
Speaker 1: longtime CEO of M ANDT Bank and the most As

988
01:05:08,520 --> 01:05:10,200
Speaker 1: a matter of fact, his bank, which I think is

989
01:05:10,200 --> 01:05:12,600
Speaker 1: about the twentieth biggest bank in the country, has the

990
01:05:12,760 --> 01:05:16,720
Speaker 1: very fast growing recently has been the most successful bank

991
01:05:16,800 --> 01:05:22,440
Speaker 1: stock among all banks that's grown at about twenty a

992
01:05:22,560 --> 01:05:26,320
Speaker 1: year from forever. And then, uh, I just had lunch

993
01:05:26,360 --> 01:05:28,320
Speaker 1: with him. And I just had lunch with another one

994
01:05:28,360 --> 01:05:30,920
Speaker 1: of my former mentors, Jay Golden, who was the controller

995
01:05:31,040 --> 01:05:35,240
Speaker 1: of the Brilliant Brilliant Guy New York City or New

996
01:05:35,320 --> 01:05:38,960
Speaker 1: York State, New York City. I definitely recognized the name

997
01:05:39,960 --> 01:05:44,040
Speaker 1: who affected your thoughts on executive pay. Again, you're not

998
01:05:44,160 --> 01:05:48,200
Speaker 1: a typical CEO slash board member. What steered you? Who

999
01:05:48,320 --> 01:05:51,280
Speaker 1: steered you in the direction you move? You know, I'd

1000
01:05:51,320 --> 01:05:55,360
Speaker 1: have nobody steered me. I just kept, as you know,

1001
01:05:55,480 --> 01:05:58,720
Speaker 1: I was doing this at a company level to try

1002
01:05:58,800 --> 01:06:01,080
Speaker 1: and to say, look doesn't make any sense. I mean,

1003
01:06:01,120 --> 01:06:03,439
Speaker 1: the incentives are all wrong in their perverse and they're

1004
01:06:03,440 --> 01:06:05,840
Speaker 1: going the wrong way. And then as I got into

1005
01:06:05,920 --> 01:06:08,760
Speaker 1: it and into it, I said, this is an outrage.

1006
01:06:09,040 --> 01:06:10,920
Speaker 1: And you know, I like to write, and so I

1007
01:06:11,000 --> 01:06:13,000
Speaker 1: started to write about it. But no, no, but no,

1008
01:06:13,920 --> 01:06:19,000
Speaker 1: I steered myself. That's that's interesting. Um. This is uh

1009
01:06:19,520 --> 01:06:22,840
Speaker 1: a listener question that that we've adopted every week, and

1010
01:06:22,920 --> 01:06:25,760
Speaker 1: it's it's actually one of the most popular questions we get.

1011
01:06:26,120 --> 01:06:29,160
Speaker 1: Tell us about some of your favorite books, fiction, nonfiction,

1012
01:06:29,800 --> 01:06:37,120
Speaker 1: compensation related or not. Okay, In the last three years,

1013
01:06:37,960 --> 01:06:42,360
Speaker 1: I would say my two favorite books were Daniel Kahneman's

1014
01:06:42,480 --> 01:06:45,920
Speaker 1: Thinking Fast and Thinking Slowly and I'll tell you a

1015
01:06:46,000 --> 01:06:51,640
Speaker 1: story about that. Uh and um, Why Nations Fail? That's

1016
01:06:51,640 --> 01:06:53,160
Speaker 1: a that was a big book that came out a

1017
01:06:53,280 --> 01:06:57,000
Speaker 1: year or two ago. Two M. I T. Professor hard

1018
01:06:57,080 --> 01:06:59,560
Speaker 1: one Harvard won M I T. I guess what was

1019
01:06:59,600 --> 01:07:05,120
Speaker 1: the author name of that? It's I know that. I'm

1020
01:07:05,160 --> 01:07:07,480
Speaker 1: gonna pull that up right now. Hold on a second.

1021
01:07:07,680 --> 01:07:10,640
Speaker 1: Let me tell you a fascinating story about Daniel Cokay,

1022
01:07:12,200 --> 01:07:14,320
Speaker 1: I read. I read his book, Thinking Fast and Thinking

1023
01:07:14,400 --> 01:07:17,560
Speaker 1: So I love the book. But I thought he had

1024
01:07:17,720 --> 01:07:24,520
Speaker 1: one Darren Asmo Glue, who was a recent UM guest

1025
01:07:24,600 --> 01:07:29,400
Speaker 1: on the show will be broadcast later uh this month. Well,

1026
01:07:29,440 --> 01:07:32,080
Speaker 1: he's a brilliant, absolutely brilliant thing. Well by the time

1027
01:07:32,160 --> 01:07:35,800
Speaker 1: this broadcast, it will have been last week or so. Okay,

1028
01:07:35,880 --> 01:07:40,400
Speaker 1: So Daniel Koneman, Nobel Prize winner, wrote this brilliant book.

1029
01:07:40,840 --> 01:07:42,640
Speaker 1: I thought he had one thing wrong. I thought he

1030
01:07:42,680 --> 01:07:45,960
Speaker 1: had made I thought he I had a better explanation

1031
01:07:46,080 --> 01:07:48,880
Speaker 1: for one of his examples than he did. So I

1032
01:07:49,560 --> 01:07:51,600
Speaker 1: don't need to go into it. I sit down and

1033
01:07:51,720 --> 01:07:54,360
Speaker 1: I this is at ten o'clock Seattle time. Ten am.

1034
01:07:54,400 --> 01:07:56,919
Speaker 1: It's one o'clock Princeton time. Where he is. I write

1035
01:07:56,960 --> 01:08:00,280
Speaker 1: him up an email. I said, dear Mr, I mean

1036
01:08:00,320 --> 01:08:05,480
Speaker 1: I enjoyed your doctor. I enjoyed your book. Uh, but

1037
01:08:05,600 --> 01:08:10,880
Speaker 1: I think you got one thing wrong. Ten minutes later,

1038
01:08:11,360 --> 01:08:16,559
Speaker 1: one ten Princeton time, I get back an email saying,

1039
01:08:16,920 --> 01:08:20,600
Speaker 1: thanks for the kind comments about your book. Uh, your explanation,

1040
01:08:21,040 --> 01:08:24,960
Speaker 1: uh would would seem to be pretty good. However, we

1041
01:08:25,160 --> 01:08:29,360
Speaker 1: checked before we did this, and here's why our explanation

1042
01:08:29,520 --> 01:08:33,120
Speaker 1: is right and yours is wrong. And I said, here's

1043
01:08:33,120 --> 01:08:37,080
Speaker 1: a No Bill Prize winner one ten answering an email

1044
01:08:37,120 --> 01:08:40,760
Speaker 1: from somebody he's never heard. I just found out astonishing.

1045
01:08:40,920 --> 01:08:44,800
Speaker 1: He's a fascinating guy. When I'll tell we don't have

1046
01:08:44,880 --> 01:08:47,240
Speaker 1: time for it, but I'll tell you a funny story

1047
01:08:47,280 --> 01:08:50,560
Speaker 1: about him, which I actually relate in that podcast. But

1048
01:08:50,920 --> 01:08:54,719
Speaker 1: he's really a fascinating guy. Um. So that's one book.

1049
01:08:55,200 --> 01:08:59,920
Speaker 1: Uh why why Nations Fail? It was to me, come

1050
01:09:00,080 --> 01:09:05,439
Speaker 1: pleat eye opener. Uh, fascinating. I never thought I love

1051
01:09:05,479 --> 01:09:07,400
Speaker 1: a book that all of a sudden makes you think

1052
01:09:07,880 --> 01:09:10,200
Speaker 1: the way I've been thinking all my life is wrong

1053
01:09:10,320 --> 01:09:13,680
Speaker 1: on this particular serspective changer. Yes, yes, I mean just

1054
01:09:15,000 --> 01:09:18,559
Speaker 1: what they call it paradigm. So what else? What else

1055
01:09:18,720 --> 01:09:22,599
Speaker 1: is give me one more book? Well, unless you have more, uh,

1056
01:09:23,160 --> 01:09:25,479
Speaker 1: I would have to you know, the most influential books

1057
01:09:25,560 --> 01:09:28,759
Speaker 1: that I've ever read. I would say that Richard Dawkins

1058
01:09:28,840 --> 01:09:33,559
Speaker 1: a selfish gene, probably influenced my thought more than any

1059
01:09:34,000 --> 01:09:40,040
Speaker 1: other book I've run across. That's that's fascinating. Um, So

1060
01:09:41,280 --> 01:09:44,280
Speaker 1: what do you see as the next shifts in the

1061
01:09:44,360 --> 01:09:48,320
Speaker 1: world of executive compensation? Is this going to continue on

1062
01:09:48,720 --> 01:09:52,559
Speaker 1: this trajectory with no ability to change it? Or are

1063
01:09:52,600 --> 01:09:55,800
Speaker 1: we going to start to see some changes? Uh? I

1064
01:09:55,880 --> 01:09:58,439
Speaker 1: don't think we'll see any changes until it becomes a

1065
01:09:58,479 --> 01:10:01,920
Speaker 1: political issue. I now, isn't isn't it a bit of

1066
01:10:01,960 --> 01:10:05,760
Speaker 1: a politicalitial already with with the incoming equality and or

1067
01:10:05,840 --> 01:10:08,040
Speaker 1: is that still a minor factor. I don't see it

1068
01:10:08,120 --> 01:10:10,679
Speaker 1: as a politic I don't think boards are scared. Boards

1069
01:10:10,680 --> 01:10:14,200
Speaker 1: are going to have to get scared and say to themselves,

1070
01:10:14,360 --> 01:10:17,200
Speaker 1: you know, if we don't reform ourselves, somebody else is

1071
01:10:17,240 --> 01:10:20,160
Speaker 1: going to. That's when it will start. They're not in

1072
01:10:20,240 --> 01:10:24,080
Speaker 1: that position now, nobody. You don't see anybody threatening legislation.

1073
01:10:24,320 --> 01:10:25,960
Speaker 1: It's got I think it's got to get to the

1074
01:10:26,040 --> 01:10:29,160
Speaker 1: point that where they say, you know, if we better

1075
01:10:29,240 --> 01:10:31,960
Speaker 1: do something. That Bernie Sanders won the election, they might

1076
01:10:32,000 --> 01:10:34,920
Speaker 1: have been a little more nervous, exactly exactly. And if

1077
01:10:35,000 --> 01:10:38,439
Speaker 1: you get you know, if in the next Democratic primary

1078
01:10:38,479 --> 01:10:44,639
Speaker 1: you get another Sanders type candidate who who's not quite

1079
01:10:45,000 --> 01:10:47,679
Speaker 1: to the you know, a little to the right of Bernie,

1080
01:10:47,760 --> 01:10:50,880
Speaker 1: but starts saying, if elected, I'm going to do something

1081
01:10:50,960 --> 01:10:54,040
Speaker 1: about this, then populous. Yeah, then I think boards might.

1082
01:10:54,439 --> 01:10:57,840
Speaker 1: But not until then that that's quite that's quite fascinating.

1083
01:10:58,200 --> 01:11:00,360
Speaker 1: So tell us about a time you fail, old and

1084
01:11:00,479 --> 01:11:04,479
Speaker 1: what you learned from the experience. We could be here

1085
01:11:04,479 --> 01:11:07,360
Speaker 1: a long time if I was just going to tell

1086
01:11:07,400 --> 01:11:10,880
Speaker 1: you about all the times I failed. And I looked

1087
01:11:10,920 --> 01:11:14,880
Speaker 1: at that question and I thought, I'm not sure I

1088
01:11:15,040 --> 01:11:19,320
Speaker 1: learned anything. Uh. Here, I failed because I was too bold,

1089
01:11:19,640 --> 01:11:21,559
Speaker 1: and then I failed because I was too timid at

1090
01:11:21,640 --> 01:11:25,439
Speaker 1: different times. So less I've failed when I when I

1091
01:11:25,560 --> 01:11:29,440
Speaker 1: didn't consult enough people, and I failed when I consulted

1092
01:11:29,439 --> 01:11:33,559
Speaker 1: a lot of people. So I've had as a CEO,

1093
01:11:33,600 --> 01:11:36,200
Speaker 1: you're going to fail a lot. So it's the luck

1094
01:11:36,280 --> 01:11:38,760
Speaker 1: and the fit issue more than anything, I think. I

1095
01:11:38,960 --> 01:11:41,920
Speaker 1: think the one thing I've learned be in the right

1096
01:11:41,960 --> 01:11:45,280
Speaker 1: place at the right time always helpful. UM, tell us

1097
01:11:45,320 --> 01:11:47,800
Speaker 1: what you do to keep mentally and or physically fit?

1098
01:11:47,880 --> 01:11:50,920
Speaker 1: What do you do to relax outside the I get

1099
01:11:51,000 --> 01:11:55,080
Speaker 1: tremendous amounts of exercise. Uh, And I find as I

1100
01:11:55,400 --> 01:11:59,360
Speaker 1: at your age, I'm seventy four and look well, thank you.

1101
01:11:59,600 --> 01:12:03,360
Speaker 1: I'm I'm thirty six, and I looked terrible as you

1102
01:12:03,560 --> 01:12:08,680
Speaker 1: as you age. Uh, physical exercise is the absolute key.

1103
01:12:08,760 --> 01:12:12,560
Speaker 1: It sends messages somehow to your body that hey, you

1104
01:12:12,720 --> 01:12:15,560
Speaker 1: gotta stay alive, you gotta stay alert. So I do

1105
01:12:15,720 --> 01:12:20,080
Speaker 1: a lot of exercising, uh, jim or anything in particular.

1106
01:12:20,400 --> 01:12:24,800
Speaker 1: Well I do I know? Well, I work out. I

1107
01:12:24,920 --> 01:12:28,439
Speaker 1: do about forty minutes on the elliptical every morning as

1108
01:12:28,520 --> 01:12:33,719
Speaker 1: I read the newspaper. Then I do about a forty

1109
01:12:33,760 --> 01:12:37,720
Speaker 1: minutes strength uh, stretching, strengthening, And then I played nine

1110
01:12:37,760 --> 01:12:42,160
Speaker 1: holes of golf most days. Really yeah, but I played. No,

1111
01:12:42,240 --> 01:12:45,320
Speaker 1: I'm not that I've actually I'm at at age seventy

1112
01:12:45,320 --> 01:12:46,960
Speaker 1: four and playing the best golf of my life. But

1113
01:12:47,240 --> 01:12:49,560
Speaker 1: what I do is the courses I live in in

1114
01:12:49,640 --> 01:12:51,760
Speaker 1: the city of Seattle, but I belonged to a course.

1115
01:12:51,800 --> 01:12:54,960
Speaker 1: It's about five minutes from my house. I play either

1116
01:12:55,040 --> 01:12:57,400
Speaker 1: by myself or in a twosome and we do it

1117
01:12:57,479 --> 01:13:01,000
Speaker 1: in an hour using a car. To you walking, I'm walking,

1118
01:13:01,240 --> 01:13:06,280
Speaker 1: And who's carrying your bag? I'm pulling it. Really that's

1119
01:13:06,320 --> 01:13:10,360
Speaker 1: pretty good. Um, alright, our last two questions, these are

1120
01:13:10,400 --> 01:13:12,200
Speaker 1: our favorite questions. I know we have to get you

1121
01:13:12,280 --> 01:13:15,360
Speaker 1: out of here in a few minutes. So what sort

1122
01:13:15,400 --> 01:13:17,920
Speaker 1: of advice would you give to a millennial or someone

1123
01:13:18,000 --> 01:13:24,400
Speaker 1: who's just starting their career as it relates to compensation. Uh, well,

1124
01:13:24,479 --> 01:13:27,080
Speaker 1: I'd have to repeat, avoid the wrong place at the

1125
01:13:27,120 --> 01:13:29,760
Speaker 1: wrong time, be in the right place at the right time,

1126
01:13:30,960 --> 01:13:34,479
Speaker 1: always good advice. And and our final question, what is

1127
01:13:34,560 --> 01:13:38,879
Speaker 1: it that you know about executive compensation and stock options

1128
01:13:38,920 --> 01:13:42,200
Speaker 1: and boards today that you wish you knew twenty or

1129
01:13:42,240 --> 01:13:45,519
Speaker 1: thirty years ago. You know, if I had known all

1130
01:13:45,600 --> 01:13:48,560
Speaker 1: of this twenty or thirty years ago and seeing it

1131
01:13:48,680 --> 01:13:50,519
Speaker 1: at the start, I might have been able to do

1132
01:13:50,760 --> 01:13:54,479
Speaker 1: something to uh, to arrest it at that time before

1133
01:13:54,520 --> 01:13:58,600
Speaker 1: it got amazingly out of control. I mean, it's so

1134
01:13:59,120 --> 01:14:03,280
Speaker 1: blatantly insane. I I say, it's this is it's kind

1135
01:14:03,320 --> 01:14:06,800
Speaker 1: of like doctors who used to bleed people. Why did they?

1136
01:14:07,960 --> 01:14:10,400
Speaker 1: Why did why did they didn't know better? Well, no,

1137
01:14:10,600 --> 01:14:14,400
Speaker 1: because everybody bled people. I mean, this is what doctors did.

1138
01:14:14,880 --> 01:14:16,960
Speaker 1: So this is the way a lot of people think about. Well,

1139
01:14:17,160 --> 01:14:19,760
Speaker 1: this is what this is how we do compensation, this

1140
01:14:19,960 --> 01:14:21,840
Speaker 1: is this is how a board is supposed to work.

1141
01:14:22,120 --> 01:14:24,720
Speaker 1: Thank you so much for being so generous with your time. Well,

1142
01:14:24,800 --> 01:14:27,320
Speaker 1: thank you for having me. This has been I've really

1143
01:14:27,439 --> 01:14:30,439
Speaker 1: enjoyed the talk. Here. We have been speaking with Stephen Clifford.

1144
01:14:30,600 --> 01:14:34,360
Speaker 1: He is the author of the CEO pay Machine. If

1145
01:14:34,439 --> 01:14:37,360
Speaker 1: you enjoyed this conversation, be shure and check out all

1146
01:14:37,439 --> 01:14:40,400
Speaker 1: of our other such talks. You can see the nearly

1147
01:14:40,520 --> 01:14:43,759
Speaker 1: hundred and fifty or so over the past three years

1148
01:14:43,960 --> 01:14:50,680
Speaker 1: at Apple, iTunes, Overcast, Bloomberg dot com and SoundCloud. I

1149
01:14:50,760 --> 01:14:53,320
Speaker 1: would be remiss if I did not thank my head

1150
01:14:53,360 --> 01:14:57,920
Speaker 1: of research, Michael bat Nick, and my recording engineer, Medina Parwana.

1151
01:14:58,280 --> 01:15:03,040
Speaker 1: Taylor Riggs is our producer slash Booker. We love your comments,

1152
01:15:03,600 --> 01:15:08,720
Speaker 1: feedback and suggestions right to us at m IB podcast

1153
01:15:08,880 --> 01:15:12,840
Speaker 1: at Bloomberg dot net. I'm Barry Hults. You're listening to

1154
01:15:13,000 --> 01:15:15,479
Speaker 1: Masters in Business on Bloomberg Radio,