7/08 newsletter
*** Market
SP500 inched up a little bit. Still can not break into new high. On the corporate front, Bank of America (BAC) again made the move to acquire MBNA (credit card issuer) for $35B. BAC is becoming a heavyweight of more than $200B, approaching the size of Citi-Group. Very aggressive CEO indeed...
*** Portfolio
My Portfolio +10%
SP500 +3%
Mid-cap +9%
The smaller cap is moving up while large cap is struggling...
*** Comment
I want to share with you my observation of executive compensation with you. Before that, I want to mention a bible paragraph: Matthews 25:14-29. http://bible.gospelcom.net/passage/?book_id=47&chapter=25&version=31
In the parable of the Talents, it is quite interesting to observe first that the ancient money unit, talent, is used in English as 'ability born with' or 'charisma'. The second observation is that Jesus used a exponential scale for servant's ability, 1000, then 2000, then 5000 (more below). The third observation is that the first two servants were able to double the asset (during the entrusted time window) and Jesus' response was to put them in charge of more things. (And they should continue to double). The fourth observation is that the lazy servant was afraid of taking risk to double the entrusted asset. He hid the money in the ground, and after number of years, he returned the same amount back to the master. The master was very unhappy.
From these observations, does that kind of lead you to think Jesus is quite a savvy capitalist? Especially the point the lazy servant made -- you harvest where you have not sown and gather where you have not scattered seed. That is exactly what a lender is expecting.
Now executive compensation. Let's take a big company like Merck as example. There are many grades and titles in the company career ladder. Let's simplify the picture and say there are 8 major ladders from top (CEO) down to the lower level (say a secretary). This kind of fair -- CEO, subsidiary head (SVP), division head (VP), senior director, director, manager, analyst, technician. I am setting you up.
Now let's say the technician is making $40K per year. And the CEO is making $10 mil per year. If you divide the two numbers, you will get a number of 250. Let's use a rounded number, 256. That is 2^8. Remember I say there are 8 major ladders. So the difference between each ladder is doubling of compensation. I was amazed when I got this number. It is not 10% or 20% higher. It is exponentially higher. Now if I ask you why people are so aggressive in climbing the corporate ladder, you probably will not be surprised.
Money and talent go hand in hand. Of course, people always mention to you the high goal of leadership and serving the society, but you rarely heard about the money part. In this respect, unfortunately, the leaders exhibit the same behavior as the crooks. In fact, corporate America has been fighting hard with Federal Accounting Standard Board (FASB) on the issue of revealing executive compensation for more than 10 years. Only until recently when the executive corruption became so wide-spread, FASB won the battle. And that is when people began to know and be furious of how much the CEOs are making. You wonder why SOX 404 is taking such rigor...
There is another observation I made that is quite interesting. I was aware of there are about 200 so-called senior executives in Merck in a news release that these executives are being protected by a special pension and severance provision right after the Vioxx debacle. If you multiple 200 with say $3 mil of average compensation of these senior executives, you get $600 mil. That is about 1% of Merck's market capitalization as of today. Remember the mutual fund industry charges you 1% for maintaining your investment (no matter they win or lose). Guess what? The senior executives as a whole also charges 1% to the shareholders for their jobs of taking care of the company.
They are not cheap. In fact, quite expensive. So when I hear so-and-so executive is fired, I am no longer surprised, considering how much money he/she is making and how much cost incurred to the shareholders...
But for those of us who are climbing the ladder, that is a different story...
--Steve
SP500 inched up a little bit. Still can not break into new high. On the corporate front, Bank of America (BAC) again made the move to acquire MBNA (credit card issuer) for $35B. BAC is becoming a heavyweight of more than $200B, approaching the size of Citi-Group. Very aggressive CEO indeed...
*** Portfolio
My Portfolio +10%
SP500 +3%
Mid-cap +9%
The smaller cap is moving up while large cap is struggling...
*** Comment
I want to share with you my observation of executive compensation with you. Before that, I want to mention a bible paragraph: Matthews 25:14-29. http://bible.gospelcom.net/passage/?book_id=47&chapter=25&version=31
In the parable of the Talents, it is quite interesting to observe first that the ancient money unit, talent, is used in English as 'ability born with' or 'charisma'. The second observation is that Jesus used a exponential scale for servant's ability, 1000, then 2000, then 5000 (more below). The third observation is that the first two servants were able to double the asset (during the entrusted time window) and Jesus' response was to put them in charge of more things. (And they should continue to double). The fourth observation is that the lazy servant was afraid of taking risk to double the entrusted asset. He hid the money in the ground, and after number of years, he returned the same amount back to the master. The master was very unhappy.
From these observations, does that kind of lead you to think Jesus is quite a savvy capitalist? Especially the point the lazy servant made -- you harvest where you have not sown and gather where you have not scattered seed. That is exactly what a lender is expecting.
Now executive compensation. Let's take a big company like Merck as example. There are many grades and titles in the company career ladder. Let's simplify the picture and say there are 8 major ladders from top (CEO) down to the lower level (say a secretary). This kind of fair -- CEO, subsidiary head (SVP), division head (VP), senior director, director, manager, analyst, technician. I am setting you up.
Now let's say the technician is making $40K per year. And the CEO is making $10 mil per year. If you divide the two numbers, you will get a number of 250. Let's use a rounded number, 256. That is 2^8. Remember I say there are 8 major ladders. So the difference between each ladder is doubling of compensation. I was amazed when I got this number. It is not 10% or 20% higher. It is exponentially higher. Now if I ask you why people are so aggressive in climbing the corporate ladder, you probably will not be surprised.
Money and talent go hand in hand. Of course, people always mention to you the high goal of leadership and serving the society, but you rarely heard about the money part. In this respect, unfortunately, the leaders exhibit the same behavior as the crooks. In fact, corporate America has been fighting hard with Federal Accounting Standard Board (FASB) on the issue of revealing executive compensation for more than 10 years. Only until recently when the executive corruption became so wide-spread, FASB won the battle. And that is when people began to know and be furious of how much the CEOs are making. You wonder why SOX 404 is taking such rigor...
There is another observation I made that is quite interesting. I was aware of there are about 200 so-called senior executives in Merck in a news release that these executives are being protected by a special pension and severance provision right after the Vioxx debacle. If you multiple 200 with say $3 mil of average compensation of these senior executives, you get $600 mil. That is about 1% of Merck's market capitalization as of today. Remember the mutual fund industry charges you 1% for maintaining your investment (no matter they win or lose). Guess what? The senior executives as a whole also charges 1% to the shareholders for their jobs of taking care of the company.
They are not cheap. In fact, quite expensive. So when I hear so-and-so executive is fired, I am no longer surprised, considering how much money he/she is making and how much cost incurred to the shareholders...
But for those of us who are climbing the ladder, that is a different story...
--Steve
posted by Steve at 2:33 PM
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