The compensation racket, Al Jazeera’s plans, and Boston health costs

By Steven Brill
May 7, 2013

1.     Looking at ‘Ratchet, Ratchet and Bingo’:

In his 2006 annual report to shareholders , Warren Buffett had this to say about compensation consultants:

Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.

Buffett went on to explain how these consultants simply make outsized pay in any industry the norm by ratcheting up the average, so that all executives in a given “peer group” have to get what everyone else gets:

Additionally, the committee is told about new perks that other managers are receiving. In this manner, outlandish “goodies” are showered upon CEOs simply because of a corporate version of the argument we all used when children: “But, Mom, all the other kids have one.” When comp committees follow this “logic,” yesterday’s most egregious excess becomes today’s baseline.

During his talk a year ago at the Berkshire Hathaway annual shareholders meeting, when Buffett called these compensation consultants prostitutes, his vice chairman Charles Munger objected.  “Prostitution would be a step up for them,” Munger said.

I came across this ratchet phenomenon when I reported my story about soaring health care costs in the March 4th issue of Time. I asked an executive at the Memorial Sloan Kettering Cancer Center how it was that executives at hospitals like his make so much more than people in similar positions at other large non-profit organizations. As an example I used the fact that Sloan Kettering’s chief fundraiser makes $1,483,000, compared to $392,000 for the chief fundraiser at Harvard. His answer was disarmingly, if alarmingly, candid: “All of us hospitals have the same compensation consultants, so I guess it’s a self-fulfilling prophecy.” By which he meant that if the same consultants are setting salaries across the hospital industry, then they will define the average in the peer group, and, of course, they can keep defining it up.

In honor of Buffett having just concluded his latest shareholder love-fest in Omaha last weekend, Reuters, Bloomberg, or the Wall Street Journal ought to do a major project on compensation consultants. Who dominates the setting of executive pay in which industries? How do they do their work? On what basis do they get paid? How do they deal with conflicts? Does any firm puncture the stereotype of Buffett’s Ratchet, Ratchet and Bingo?

In fact, the best story would be one that finds a compensation consultant who is well known for advising board compensation committees that their executives are making too much money. Who knows? Maybe there’s someone carving out that specialty working for activist shareholders. Or maybe there’s someone now working at a laundromat or car wash who tried that approach.

2. The coming of Al Jazeera America:

This story from Crains Chicago Business reports that “Al Jazeera America, a new U.S.-based extension of the media organization funded by the Qatar government,” is hiring 800 American journalists, including eight reporters and producers for a Chicago bureau, plus ten other bureaus in cities like Seattle and Dallas, a 120-person Washington office, and a major New York home base. Having spent $500 million to buy Al Gore’s Current TV – which was a business failure but still managed to get placement in tens of millions of cable and satellite TV homes – Qatar is obviously planning to make a serious splash.

So, it’s about time Al Jazeera America got some serious treatment from the press (beyond the stories of Al Gore cashing in with oil money). First, are those numbers – especially the claimed plan to hire 800 journalists – real?  That’s almost as many journalists as the New York Times employs around the world.

And who’s really going to decide what they report? Is this likely to be a serious addition to the TV news line-up that will provide welcome, honest competition for cable news channels that are increasingly more about talk and punditry than reporting? Or, are the suspicions of those who see something more sinister in a government, especially a Middle East oil power, financing such a large and well-distributed news channel justified?

3. Crime victims and medical bills:

In the wake of the Boston Marathon terrorist attack, we’ve seen lots of comforting stories about how Boston area hospitals are forgiving the bills of the injured victims, many of whom are reported to have faced tens or even hundreds of thousands of dollars in bills as they recover from having had limbs amputated. Insurance companies have also been reported to be waiving co-payments or deductibles for the victims, while charities have been organized and richly funded to cover other recovery needs.

It’s a pet peeve of mine that the reports of the amount of the bills — and, therefore, the hospitals’ claimed charity — don’t take into account that the hospitals are using their wildly inflated list prices (called “chargemaster” prices), not the amounts they usually get paid, let alone their actual costs. Hospitals routinely tout their charity using these inflated amounts, rather than the cost of the care. Still, it’s great that the victims have been relieved of this burden.

However, I’ll bet that some time during the day or week of the Marathon bombing someone in Boston without adequate insurance was seriously injured by a mugger or drunk driver and is now stuck with the kinds of bills the bombing victims would have faced.

If, as is highly likely, he or she did lack adequate insurance, these victims of more common crimes might now be getting dunned for those inflated chargemaster bills. Indeed, I know from writing about healthcare billing that thousands of crime victims across the country regularly face this double jeopardy assault on their bodies and then on their wallets.

There are varieties of crime victims’ compensation funds across the country, but the degree to which there are publicized and their effectiveness varies dramatically. I’d like to see an ambitious reporter find a poorly-insured mugging or drunk driving victim injured in Boston the week of the bombing and use the difference in aid extended to him or her as a departure point to explore all of that. (It may turn out that Massachusetts has an effective compensation regime for all victims, but if that were the case why all the hoopla over the aid extended to those injured in the Marathon bombing?)

The rationale for aiding terrorism victims more readily than other crime victims is that we want to show the terrorists that as a community we will unite to mitigate the damage they do. Even if one accepts that argument, questions remain about disparate treatment. The 9/11 victims got a government victims compensation fund. The Oklahoma City bombing victims and the Boston victims had to rely on private aid. How come? Why not have a statute that defines the kind of terrorism attack that merits federal compensation? Have any public officials proposed a law like that? If not, why not? And if it has been proposed, why hasn’t it passed?

PHOTO: Berkshire Hathaway CEO Warren Buffett rests after a table tennis game in Omaha May 5, 2013 the day after company’s annual meeting. REUTERS/Rick Wilking

4 comments

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Mr. Brill, these are “stories I’d like to see” you tackle. They are great questions that require great investigative journalism, and I think you’re up to it. So how about it?

Posted by JL4 | Report as abusive

CEO compensation packages are really quite simple to explain. Members of the Board are not playing with their own money. And they want to say they recruited the very best, so for them that means paying the very most. And the prospective CEO hires agents that negotiate for him, to make sure he gets the highest possible salary and the greatest number of perks. And no matter how outlandish the request, it is often met.

And they are perfectly happy with that arrangement. And that is the total disconnect. One can see that with the push back against disclosing financial information about executive pay and perks. It’s not their money.

Posted by pavoter1946 | Report as abusive

Times have changed dramatically in executive compensation since 2006. Wake up!

Posted by ExecCompConsult | Report as abusive

The executive compensation article is very interesting, but depressing.

Here we see someone as powerful and famous as Warren Buffett publicizing it, and then this very Reuters article publicizing it, and yet it’s obvious nothing will be done about it.

Our political system is truly rotten to the core, hollowed out and filled with points of infection everywhere.

Posted by AdamSmith | Report as abusive