When executive compensation isn’t negative

By Felix Salmon
May 3, 2009

Jason Zweig has some very nice things to say about the executive-compensation scheme at Alleghany Corp in his column this week. He talked to the CEO, who didn’t do very well at all last year:

Alleghany pays its long-term incentive awards as “performance shares” that go up or down with the market. Last year, when the stock fell 28%, “the value of my total compensation was negative,” Mr. Hicks says, “as it should have been, since the shareholders didn’t make anything.”

Wow, negative compensation? That’s some clawback! Instead of the company paying Mr Hicks, it seems, Mr Hicks had to end up writing a check to the company. How much did he have to pay? I thought I’d check out Alleghany’s proxy statement to find out.

What did I find? A salary of $1 million in 2008, a bonus of $1.275 million, a stock award of $4.158 million, and various other bits and pieces which add up to total 2008 compensation of $8,223,698. Yes, that’s positive compensation: money paid by the company to its CEO.

So no, Mr Hicks, the value of your total compensation last year was not negative, it was positive. Compensation is how much the company pays you, and if you’re going to talk about negative compensation, then you had better be paying the company. Maybe what you’re talking about is the change in value of your “performance shares” — I daresay they were worth less at the end of 2008 than they were at its beginning. But you still received a very hefty paycheck for doing your job: something over $150,000 per week.

I’m quite stunned that Zweig not only failed to challenge Hicks’s statement, but even put it in his column with no indication that it might be false. I would love to see a company which really did require its CEO to pay back money received in prior years if suddenly everything fell apart. But Alleghany is not that company, no matter what its CEO says.


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There seems to be a lot of confusion about the difference between realized CEO pay and the size of compensation awards. Mr. Hicks may have gotten a positive compensation award but his realized pay was negative.

I have no problem with people focusing on realized pay instead of award pay. In fact, I prefer it, because it allows clearer comparison of pay and performance. However, I don’t like it when we switch the basis of comparison all the time.

Only a small handful of people in this world control everything…Felix, and they get their advise from people like you, in confidence…asking the right questions is very important because it heavily determines whether you get the answers you need to make things work out or not…Governments are powerless in a global sense because they have economical borders that bind them to their physical populations…Corporation and worldwide branding on the otherhand do not! the potential for someone to actually own the whole world is not a vivid daydream taken lightly…it’s a reality that exists for whosoever wants to step up to the plate and have a go…the United States Presidential Elections are a competition between millionaire financed and controlled by billionaire whom are under the thumbs of the trillionaires…who is the Alpha? he’s not on any rich 100 list that’s for sure! you might find him here http://www.theyrule.net

it’s all food for thought…
i like your articals…
be good :)

Posted by Butterfly | Report as abusive

Is Bank of America going to tumble?

The bank: With more than 6,100 branches in 32 states and $884 million in deposits, Bank of America is the closest thing the U.S. has to a nationwide bank.

Stress level: high.

Analysis: Despite that huge deposit base, Bank of America’s core capital remains thin. That makes it a candidate for more government funding (of the sort that’s drawn protests, like the one pictured above.). “We do not think Bank of America’s capital base is strong enough to pass,” Morningstar analyst Jaime Peters says.

Posted by b reed | Report as abusive

Actually, it can be argued that the CEO is telling the truth, and it WAS negative net compensation.

Simply put, the stock, because if it is RESTRICTED and CAN’T BE SOLD, does represent a clawback from previous years.

Thus he got $4M in stock this year, but he had $20M in stock from previous years which he could not sell (unrelaized gains), so net perfromance-based compensation is negative.

Its about the only CEO incentive that works, really. If most of the compensation (in this case, 3/4s) is in stock which can’t be sold for a decade, its the only way to actually force the CEO to truely have interests aligned with the stockholders.

Posted by Nicholas Weaver | Report as abusive

Would this count as a negative salary if it had been constructed as a total return swap sort of thing instead?

I like the idea of deferring pay for these sorts of people for long periods of time; the amount of money that is immune to clawback is allowed to be positive, but the incentives are hopefully mostly long-term. Whether you count that deferred salary as compensation received in the year awarded and then negative compensation when it goes down, or instead simply don’t count it at all until it’s unfettered, I guess I don’t really much care. Accounting and semantics are less interesting to me than reality.