SENATE BILL: Executive Compensation Act of 2014 (Redraft Vetoed)
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  SENATE BILL: Executive Compensation Act of 2014 (Redraft Vetoed)
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Author Topic: SENATE BILL: Executive Compensation Act of 2014 (Redraft Vetoed)  (Read 2392 times)
Southern Senator North Carolina Yankee
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« on: April 22, 2014, 08:39:25 PM »
« edited: June 14, 2014, 08:40:30 AM by Senator North Carolina Yankee »

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Sponsor: TyriontheImperialist
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Southern Senator North Carolina Yankee
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« Reply #1 on: April 22, 2014, 08:39:48 PM »

The sponsor has 24 hours to begin advocating for this legislation.
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President Tyrion
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« Reply #2 on: April 23, 2014, 01:36:43 AM »

Alright. Allow me to address each one of these points, since this bill may be a bit arcane.

1. The PSLRA of 1995 is a highly flawed piece of legislation. It made litigation based on federal securities laws much more difficult. Specifically, the "safe harbor" provision needs to be repealed. The safe harbor provision essentially allows publicly traded companies to "manage expectations" by making public statements about future expectations, and have those statements be protected even if they don't come true. Essentially, this is just psychological management of the stock market, which results in companies being beholden to share price rather than any entity (the government, the workers, the customers, or the shareholders).

I'm sure there's something in that statement for everyone Cheesy

There are some important pieces of the legislation that we should probably keep, like:

a) Full disclosure to investors of attorneys' fees
b) No bonus payments to preferred plaintiffs
c) Judges are permitted to oversee potential conflicts of interest within the legal counsel

I'll work those back in via amendment.

2. The FASB is a private organization that controls accounting standards. It's silly that the government can't just have its own accounting standards, and instead relies on the public sector to make rules with literally no oversight.

3. This is largely unenforceable, but it'll help bridge the gap by making federal expectations clear until the Federal Gov't can make its own accounting standards by the beginning of the 2014-2015 fiscal year. FASB 142 specifically is a problem because assets and valuations are tied to share price, an imaginary psychological construct. Instead, we should be encouraging accounting firms to focus on real assets, with only a secondary measure of market valuation.

4. This is relatively straightforward nationalization of Accounting Standards. This isn't a nationalization of the accounting industry, just the rulebook.

5. So here's the real sticking point: stock based compensation is out. This removes the incentive for employees and executives to manage expectations, as their own short-term compensation is not tied to their ability to do so.

I hope that explanation was satisfactory.
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President Tyrion
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« Reply #3 on: April 23, 2014, 01:48:32 AM »

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Cincinnatus
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« Reply #4 on: April 23, 2014, 06:13:59 PM »

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Status:  Senators have 24 hours to object.
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« Reply #5 on: April 23, 2014, 06:23:15 PM »

What's wrong with stock-based compensation?
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President Tyrion
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« Reply #6 on: April 24, 2014, 05:08:31 AM »

What's wrong with stock-based compensation?

Executives, or whoever receives the compensation, are incentivized to manage stock price to maximize their returns. By definition, this means that they need to manage expectations and then attempt to exceed them, rather than actually perform well.
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Fmr. Pres. Duke
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« Reply #7 on: April 24, 2014, 11:48:26 AM »

I'm really leery about allowing the government to start meddling in what company's do with their own stock. The decision should be left up to them. We can provide people information about executive pay versus lower earning employees and they can change it, but having the federal government step in and say "hey, you can't do whatever you want with your own stock anymore" makes me uncomfortable.

Usually, the way the market works, is performing well = good returns to investors. There are exceptions, sure, but we can't legislate to punish the good because of a few bad apples.

Besides, maximizing stock value is what investors, the owners of the companies, want.
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« Reply #8 on: April 24, 2014, 12:08:34 PM »

What's wrong with stock-based compensation?

Executives, or whoever receives the compensation, are incentivized to manage stock price to maximize their returns. By definition, this means that they need to manage expectations and then attempt to exceed them, rather than actually perform well.

If they are maximizing returns, how is that not performing well?
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Fmr. Pres. Duke
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« Reply #9 on: April 24, 2014, 12:56:47 PM »

What's wrong with stock-based compensation?

Executives, or whoever receives the compensation, are incentivized to manage stock price to maximize their returns. By definition, this means that they need to manage expectations and then attempt to exceed them, rather than actually perform well.

If they are maximizing returns, how is that not performing well?

You can argue in some periods like the financial crisis, where banks were engaging in risky behavior to make huge profits, is an example, but that was not a normal circumstance. Typically, if a company is performing well, their stock is doing well.

Some shareholders want executives to hold stock because their performance directly determines their pay.
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Southern Senator North Carolina Yankee
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« Reply #10 on: April 24, 2014, 06:04:04 PM »

What's wrong with stock-based compensation?

Executives, or whoever receives the compensation, are incentivized to manage stock price to maximize their returns. By definition, this means that they need to manage expectations and then attempt to exceed them, rather than actually perform well.

If they are maximizing returns, how is that not performing well?

Consider also that in the past thirty years we have seen that companies reward executives even when they are failing, and also for reducing the long term strength of the company in preference for short term gains. This is a systemic cultural problem on the street that forces quarterly considerations to be paramount first and foremost. I think though that should be considered.
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Southern Senator North Carolina Yankee
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« Reply #11 on: April 24, 2014, 06:15:02 PM »

Amendment 60:69 by Tyrion has been adopted by like a few seconds. Unless I missed an objection somewhere in there.
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President Tyrion
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« Reply #12 on: April 24, 2014, 09:06:09 PM »

I'm really leery about allowing the government to start meddling in what company's do with their own stock. The decision should be left up to them. We can provide people information about executive pay versus lower earning employees and they can change it, but having the federal government step in and say "hey, you can't do whatever you want with your own stock anymore" makes me uncomfortable.

Usually, the way the market works, is performing well = good returns to investors. There are exceptions, sure, but we can't legislate to punish the good because of a few bad apples.

Besides, maximizing stock value is what investors, the owners of the companies, want.

That's just not true.

Share price increases when expectations are exceeded. Raw performance can be absolutely terrible in such a case, so long as expectations were managed well enough so as to allow a quarterly report or whatnot to exceed them.

What's wrong with stock-based compensation?

Executives, or whoever receives the compensation, are incentivized to manage stock price to maximize their returns. By definition, this means that they need to manage expectations and then attempt to exceed them, rather than actually perform well.

If they are maximizing returns, how is that not performing well?

I meant the maximization of personal returns, as opposed to the maximization of returns for the company, the consumers, the lower level employees, or society.
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Fmr. Pres. Duke
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« Reply #13 on: April 24, 2014, 09:14:19 PM »

Share price can increase regardless of company performance. It is almost arbitrary. But yes, it normally increases if the company exceeds expectations. Sure, raw performance may be poor, but normally it is compared to performances of other companies. It's rare that a company that is performing poorly has a high stock price.
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President Tyrion
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« Reply #14 on: April 25, 2014, 05:15:46 AM »

Share price can increase regardless of company performance. It is almost arbitrary. But yes, it normally increases if the company exceeds expectations. Sure, raw performance may be poor, but normally it is compared to performances of other companies. It's rare that a company that is performing poorly has a high stock price.

But stock-based compensation increases in valuation not because of nominal value, but because of percentage gains. If your stock is being traded at $0.02000 per share, and you pay your CEO (to circumvent executive compensation rules) just $100,000 worth of shares at the current price, then it no longer matters where the nominal price is at. If the CEO exceeds expectations, this company (which is treated by investors as a "poor performer") will still net the CEO a large profit, not because of good performance, but because of managing expectations at a poor performer.
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Fmr. Pres. Duke
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« Reply #15 on: April 25, 2014, 11:36:55 AM »

Managing expectations is the name of the game in the stock market. Every company does it. Most issue lower than expected guidance each quarter so it can "beat" expectations next quarter. It sometimes increases the stock, sometimes not.

And in regard to executive compensation, most stock based compensation packages come in the form of options, yes some get actual shares, but that's not always the case, and the options have a set date when the individual can buy or sell the shares. They aren't just trading on the open market when they so please. That would lead to insider trading controversies because CEO's know their companies performance before we do.

All this bill does really is allow forbid the company from issuing options that can be cashed in prior to them leaving the company, but since all options have a set date, i.e. June 2015 calls, etc, and people don't always know when they will leave the company, I'm not sure how it will work, unless they aren't given the options or stock until after they leave the company. And the CEO will still realize a massive payout when he leaves, as the markets tend to go up over time.
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President Tyrion
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« Reply #16 on: April 25, 2014, 03:45:52 PM »

Managing expectations is the name of the game in the stock market. Every company does it. Most issue lower than expected guidance each quarter so it can "beat" expectations next quarter. It sometimes increases the stock, sometimes not.

Which is pretty much the problem...

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Well, right, so the options would have a set date in the future. And, in any case, the inflationary expectations would be included in the cost of employment in any sane compensation package, so that's not a particularly large issue.

And yeah, the options would be restricted essentially to severance packages, and couldn't really be year-to-year compensation in any form.
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Cincinnatus
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« Reply #17 on: April 27, 2014, 06:50:51 PM »

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Fmr. Pres. Duke
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« Reply #18 on: April 27, 2014, 08:12:30 PM »

I just think this is a case where I won't see eye to eye with those who want something like this in effect. At the end of the day, I see nothing wrong with allowing a company to issue stock based compensation - it gives executives and in some cases employees a chance to have a stake in the company they work for.

Further, I don't really understand the rationale behind replacing the FASB. Sure, the government could write their own standards, but hell, if anyone is familiar with the IRS code and regulations, they'll know it's a mess. I'm not sure I want the government taking on this responsibility too. We already do have real book value versus market value, so I don't buy into the argument that it's wrong we asses value not factoring in the market perception of things. Even if that is a problem, we can fix that without nationalizing the standards.
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President Tyrion
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« Reply #19 on: April 28, 2014, 05:05:30 AM »

I just think this is a case where I won't see eye to eye with those who want something like this in effect. At the end of the day, I see nothing wrong with allowing a company to issue stock based compensation - it gives executives and in some cases employees a chance to have a stake in the company they work for.

Further, I don't really understand the rationale behind replacing the FASB. Sure, the government could write their own standards, but hell, if anyone is familiar with the IRS code and regulations, they'll know it's a mess. I'm not sure I want the government taking on this responsibility too. We already do have real book value versus market value, so I don't buy into the argument that it's wrong we asses value not factoring in the market perception of things. Even if that is a problem, we can fix that without nationalizing the standards.

There's no reason that the federal government should have federal agencies upholding standards not even vetted by the federal government itself. It's essentially privatizing legislation, which is not something by which I can abide.
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Southern Senator North Carolina Yankee
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« Reply #20 on: April 30, 2014, 08:54:00 AM »

So where are we right now.


I am with Tyrion to the exent the I don't much care for the move towards stock based compensations, but on the flip side I don't think I support handling of FASB in the text.
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President Tyrion
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« Reply #21 on: April 30, 2014, 05:16:52 PM »

Well, what's a version of this bill that could pass in your minds, Duke and Yankee?
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Fmr. Pres. Duke
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« Reply #22 on: April 30, 2014, 05:49:17 PM »

Well, what's a version of this bill that could pass in your minds, Duke and Yankee?

In short, I don't know. I'm not sure I could support limiting what a company does with its own stock because, to quote TNF, "muh free enterprise." Even in your bill as it is, all we really do is prolong the inevitable of executives cashing in their lucrative options. They will still make loads of money. All this does is make them wait till the stock could arguably be trading even higher since markets in the long run typically go up.

As for the FASB, I guess we could adopt different standards, but again, I don't see the purpose of going through the expense of doing it. What is inherently wrong with the FASB and why does it need to be replaced? Maybe the federal government can provide oversight of the FASB instead of unilaterally replacing them? Maybe we just have different philosophies on this matter? Tongue

I am really big on if it isn't broken, don't try to fix it. But if you want to find a way for the government to provide oversight, I might consider that.
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TNF
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« Reply #23 on: May 01, 2014, 10:26:57 AM »

I strongly support this bill.
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President Tyrion
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« Reply #24 on: May 01, 2014, 03:42:36 PM »

Well, what's a version of this bill that could pass in your minds, Duke and Yankee?

In short, I don't know. I'm not sure I could support limiting what a company does with its own stock because, to quote TNF, "muh free enterprise." Even in your bill as it is, all we really do is prolong the inevitable of executives cashing in their lucrative options. They will still make loads of money. All this does is make them wait till the stock could arguably be trading even higher since markets in the long run typically go up.

As for the FASB, I guess we could adopt different standards, but again, I don't see the purpose of going through the expense of doing it. What is inherently wrong with the FASB and why does it need to be replaced? Maybe the federal government can provide oversight of the FASB instead of unilaterally replacing them? Maybe we just have different philosophies on this matter? Tongue

I am really big on if it isn't broken, don't try to fix it. But if you want to find a way for the government to provide oversight, I might consider that.

Well, for starters, I do think the FASB is broken, but I suppose all might not agree. Would you consider a committee of some sort to evaluate the necessity of true Federal Accounting Standards? And, yes, from a personal perspective, I don't think the federal government should allow private industry to dictate our standards for essentially what's "right" and "wrong" in accounting.

I'm not overly concerned with executives making more in the long run from this bill. Giving them the money up front allows them to invest it at a similar rate of return anyway (with less volatility, since active investments would be more broad).
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