February 7, 2007

Congress Isn’t the Group That Should ‘Fix’ Executive Pay. In Fact, in 1993 It Made the Problem Worse.

Filed under: Business Moves,Taxes & Government — Tom @ 2:14 pm

And Congress appears about to do it yet again.

Now let me make it clear that executive pay situations like Home Depot’s former CEO Bob Nardelli are an outrage.

That said, I’m not about to acknowledge that Congress can fix the problem; only boards of directors and shareholders, especially the institutions, can.

What they did the last time it was outraged over CEO pay planted the seeds for many of today’s excesses. The $1 million pay cap for tax deductibility for basic salary led to all manner of creative “incentive pay” and stock options, leading to more volatile, less transparent, and often more outrageous executive pay.

So I’m not impressed that Congress thinks it needs to “fix things” again. Nor was OpinionJournal.com last week when it published an editorial that also conveniently recites what happened 14 years ago to get us to this point:

That 1993 law has itself become a classic example of unintended consequences. The biggest “loophole” in that law was an exemption carved out for performance-based compensation, which was meant to alleviate concerns about Congress setting pay rates in the private sector. Back then, even tub-thumping Senator Carl Levin said “I don’t support the government setting CEO pay in the tax code.” Which he and his mates proceeded to do anyway. And businesses promptly responded by shifting CEO pay away from salary and toward stock options and bonuses to circumvent the cap.

….. In the mid-1980s, the average CEO had no stock options. Today, they are ubiquitous in the executive suites of large companies, and the tax code deserves much of the credit. Bill Clinton campaigned in 1992 on a promise to cap CEO pay by imposing the cap. “Let’s treat everybody fairly again” was his mantra at the time, and Congress took it up with gusto. The result was that the middle class got a tax hike and the executives got stock options.

Likewise this time, a much larger pool of people than CEOs could be hit by the new deferred comp cap. People who make a lot less than $1 million have occasion to defer some of their salary, and at many companies even middle managers can do so. If this bill becomes law, those non-millionaires potentially face a 55% tax rate on the income they might otherwise have tried to defer. The tax code is riddled with provisions, such as the Alternative Minimum Tax, the estate tax and any number of phaseouts and caps, that were sold politically as targeting only the “super-rich” but now capture taxpayers of far more modest means.

So, with the Democrats back in control, they’re back at it again, ramming through a law that will give more executives more of the much-maligned options while threatening severe unintended tax consequences on middle managers who have less ability to negotiate their pay packages. Just as the AMT was brought into being by tales of 21 millionaires who avoided all income tax, the pay packages of Home Depot’s Bob Nardelli and Pfizer’s Hank McKinnell seem set to bring into being one more round of tax folly.

Jim Webb and his “new populist” mates can flog CEOs all they want in their speeches. But the people who will end up paying will be shareholders and the ordinary Americans who don’t have the luxury of avoiding yet another millionaire’s trap when it gets sprung on them.

Meet the 2007 Congress, same as the 1993 Congress.

Editorial of the Day: Investors Business Daily’s Economic Recitation

It’s from last Wednesday, written just after the 4th quarter 2006 advance GDP growth report was released, but I don’t want to let it go — it’s too good:

….. our newspapers and TV talking heads are obsessed with stories of mass “inequality” and “middle-class squeeze” and “jobs shipped abroad” and “falling behind.”

Reality is quite different, of course. But reality can never be permitted to get in the way of Bush-bashing — the stock in trade of the mainstream media and their allies in the Democratic Party.

So what’s the real record? Since Bush’s tax cuts took effect in mid-2003:

  • Real gross domestic product is up to $1.33 trillion, or 12.6%.
  • Existing businesses have hired 5.9 million workers (not counting the millions of jobs entrepreneurs have created).
  • Corporate profits have soared 91% to $1.6 trillion.
  • Tax receipts have leapt $503 billion, or roughly 1.1 percentage points of GDP, refuting the notion the tax cuts “caused” deficits.

And thanks to rebounding stock prices and huge gains in home values, Americans’ total wealth has soared 39% to $54 trillion — the biggest expansion ever.

After such a stellar performance, a breather — what economists call a “midcycle correction” — would be in order. Yet the economy continues to power ahead.

In 2006′s final period, GDP growth was 3.5%, and it has averaged 3% since the tax cuts. Real wages rose 1.7% in ’06, much faster than the 0.3% average of the Clinton years. In just the last 12 months, unemployment plunged from 5.0% to 4.5%, near postwar lows.

More of us have jobs, own homes and businesses, and work for higher pay than at any time in history. We’re the richest people on earth. For a change, let this story be told.

Steve Jobs’ Open Letter on Digital-Rights Management Rocks the Music World

Filed under: Business Moves,Privacy/ID Theft — Tom @ 7:40 am

From his “Thoughts on Music” letter posted yesterday (HT Information Week, which, in their daily e-mail overview, described it as “Steve Jobs Takes A Sledgehammer To His Own Monopoly”):

Imagine a world where every online store sells DRM-free music encoded in open licensable formats. In such a world, any player can play music purchased from any store, and any store can sell music which is playable on all players. This is clearly the best alternative for consumers, and Apple would embrace it in a heartbeat. If the big four music companies would license Apple their music without the requirement that it be protected with a DRM, we would switch to selling only DRM-free music on our iTunes store. Every iPod ever made will play this DRM-free music.

Why would the big four music companies agree to let Apple and others distribute their music without using DRM systems to protect it? The simplest answer is because DRMs haven’t worked, and may never work, to halt music piracy. Though the big four music companies require that all their music sold online be protected with DRMs, these same music companies continue to sell billions of CDs a year which contain completely unprotected music. That’s right! No DRM system was ever developed for the CD, so all the music distributed on CDs can be easily uploaded to the Internet, then (illegally) downloaded and played on any computer or player.

In 2006, under 2 billion DRM-protected songs were sold worldwide by online stores, while over 20 billion songs were sold completely DRM-free and unprotected on CDs by the music companies themselves. The music companies sell the vast majority of their music DRM-free, and show no signs of changing this behavior, since the overwhelming majority of their revenues depend on selling CDs which must play in CD players that support no DRM system.

So if the music companies are selling over 90 percent of their music DRM-free, what benefits do they get from selling the remaining small percentage of their music encumbered with a DRM system? There appear to be none. If anything, the technical expertise and overhead required to create, operate and update a DRM system has limited the number of participants selling DRM protected music. If such requirements were removed, the music industry might experience an influx of new companies willing to invest in innovative new stores and players. This can only be seen as a positive by the music companies.

It should also be noted that an attempt by one music company (Sony) to impose DRM on CD buyers wound up being a computer-compromising, malware-exposing, privacy-invading disaster of epic proportions.


UPDATE: Cory Docotorow at Boing Boing has some thoughts, including a real tantalizer:

This is a big day — a huge day. If Steve Jobs comes through with his promise to offer DRM-free music from artists who will allow it, we’re at the beginning of the end of the DRM wars. I look forward to the day when the iTunes Music Store catalog shows a little warning icon next to those few holdout tracks sold with DRM, a skull-and-crossbones to tell you that you’re about to buy some poisonous bits.

Especially if Steve follows this up by offering iTunes videos — especially the Pixar movies, which he directly controls as the single largest shareholder in Disney — without DRM!

A Tyrant Consolidates His Power; It Surely Wasn’t Big News

Filed under: Economy,MSM Biz/Other Ignorance,Taxes & Government — Tom @ 6:18 am

I’m referring of course to Venezuelan dictator-in-trainingfact Hugo Chavez, (backup link here) about whom the following story was written last Thursday, with not very prominent US media notice:

Chavez gains free rein in Venezuela
Thu Feb 1, 2:24 AM ET

CARACAS, Venezuela – President Hugo Chavez was granted free rein Wednesday to accelerate changes in broad areas of society by presidential decree, a move critics said propels Venezuela toward dictatorship.

Convening in a downtown plaza in a session that resembled a political rally, lawmakers unanimously gave Chavez sweeping powers to legislate by decree and impose his radical vision of a more egalitarian socialist state.

….. The law gives Chavez, who is beginning a fresh six-year term, more power than he has ever had in eight years as president, and he plans to use it during the next 18 months to transform broad areas of public life, from the economy and the oil industry in particular, to “social matters” and the very structure of the state.

His critics call it a radical lurch toward authoritarianism by a leader with unchecked power — similar to how Fidel Castro monopolized leadership years ago in Cuba.

“If you have all the power, why do you need more power?” said Luis Gonzalez, a high school teacher who paused to watch in the plaza, calling it a “media show” intended to give legitimacy to a repugnant move. “We’re headed toward a dictatorship, disguised as a democracy.”

….. The law also allows Chavez to dictate unspecified measures to transform state institutions; reform banking, tax, insurance and financial regulations; decide on security and defense matters such as gun regulations and military organization; and “adapt” legislation to ensure “the equal distribution of wealth” as part of a new “social and economic model.”

That bolded word in the last excerpted paragraph is quite inconvenient, given that AP writer Fabiola Sanchez said in the first para that it was (only) critics who thought Chavez was heading towards dictatorship. If he dictating laws (“measures”), he’s already there.

One of the Least Surprising Stories So Far This Year

Filed under: Business Moves,Immigration,Taxes & Government — Tom @ 6:13 am

From North Carolina:

Audit turns up illegal workers at UNC Hospitals
January 29, 2006

An investigation of University of North Carolina Hospitals by the state auditor’s office led to the resignation or termination of 17 employees who used invalid Social Security numbers to get their jobs at the hospital, to UNC Hospitals spokesman Lynn Wooten said Monday.

The results of the investigation, released Monday in a report signed by State Auditor Les Merritt, indicated that some of the employees listed Social Security numbers that were determined to be invalid by the Social Security Administration, while others were using the Social Security numbers of dead people.

The audit also concludes that UNC Hospitals has not performed required quarterly verification of Social Security numbers for its employees.

Very small tip, very large iceberg.

Three Words of Advice for Morgan Stanley on Its NY Times Investment

Filed under: Business Moves — Tom @ 6:08 am

In light of the “Pinch” Sulzberger’s temper-tantrum decision to pull family money from your institution, combined with the New York Times Company’s dual-class family-control structure, you’re left with little choice in what to do with your investment.

So, three words of advice — They’re the same as the title of this blog.

Lawmakers: These Guys Are Golden Geese, So Would You Please Not Kill (or Injure) Them?

Filed under: Business Moves,Economy,Taxes & Government — Tom @ 6:03 am

From the Tax Foundation’s Tax Policy blog:

While they (the largest oil companies) were recording record profits last year, they were also writing checks to Uncle Sam to the tune of $100.7 billion — two and a half times what they made in net profit. In fact, previous Tax Foundation research found that from 1977 to 2004, federal and state governments extracted $397 billion by taxing the profits of the largest oil companies and an additional $1.1 trillion in taxes at the pump. In today’s dollars, that’s $2.2 trillion.

That $100 bil would be in the neighborhood of 4% of the federal budget — not bad for just one industry.

Positivity: Five-year-old girl thanks firefighters for saving her life

Filed under: Positivity — Tom @ 5:58 am

From Lancaster, Ohio:

Article published Feb 3, 2007

You can still see the burn scars on the 5-year old girl’s neck, but the smile on her face melted the crowd of firefighters at Engine House 1 Friday morning.

Cierra Rager suffered second- and third-degree burns on most of her body from the neck down from a house fire Dec. 1.Firefighters were grateful to see she was doing well so soon after the fire.

She shook their hands and hugged the medics who saved her life two months ago.

“I can’t thank these guys enough,” said Greg Rager, Cierra’s father. “They did a great job and saved her life.”

It was 10:38 a.m. Dec. 1 when Lancaster firefighters got the call about smoke billowing out of a home in the 500 block of East Chestnut Street.

Steve Maffin, Ben Burke and Ralph Conrad were the first medics on the scene. They arrived within two minutes of being dispatched and before the fire trucks.

“She was standing in the yard,” Maffin said. “We couldn’t see the flames, but we could tell by the way she was moving she was still on fire.”

Cierra, her 4-year-old brother, C.J., and her father had run out of the house as flames flared inside the home.

Cierra’s clothing was on fire. Greg Rager burned his hands trying to put out the fire on his daughter’s clothes.

“We just wanted to get her in the truck and get her to the hospital as fast as possible,” Conrad said. “You can’t imagine how painful it is to get burned liked that. But she was a real trooper. She talked to us in the truck and answered our questions as we were going to the hospital. She was a very brave little girl.”

Burke said when they roll onto a scene like that one Dec. 1, it is difficult on all of them.

“We all have children, and you can’t help but see the pain as if it was your own kids eyes looking back at you as you treat them,” Burke said. “We just wanted to get her to a burn unit and make sure her life was saved.”

Medics took Cierra to Fairfield Medical Center and then on to the burn unit at Children’s Hospital in Columbus.

She spent many days in critical condition and six weeks in the hospital before being released.

She still has a long recovery process, said Greg Rager.

“We have to keep her wearing bandages until Dec. 22,” Greg Rager said. “But we want to thank everyone for their thoughts and prayers.”

Cierra told the firefighters she doesn’t remember a lot about the fire and the trip to hospital, but she doesn’t want to get into an ambulance again.

“I want to become a teacher when I grow up,” Cierra said.

….. The Ragers are back in their home on East Chestnut. Fire investigators believe the fire started from children playing with a lighter.

Lancaster Fire Capt. Tom Dempsey said the whole fire crew was affected by the fire and Cierra’s strength.

“All of us hate to see fires, but when there are little ones involved it always gets to you,” Dempsey said. “It means a lot to see someone like Cierra come through this. I know all the guys were touched by the visit.”