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A Reflection On Sun Executive Payouts For Failure
With the Oracle/Sun merger finally completing at the end of January, one former Sun worker has taken the time to reflect a bit on the extravagant compensation and golden parachutes that the former executives at Sun are receiving for failing at their jobs. "I think it's fair to say that, for all the miscues that eventually led to its demise, the company created many products and technologies of value along the way, enough so that Oracle thought it was worth it to acquire them and try to keep them going. However, I think that it's equally fair to conclude that, after years of running losses, including about $2 billion in fiscal 2009, so that a buyout was necessary to avoid looming bankruptcy, Sun's executives did nothing to deserve lavish rewards, by any conceivable meaning of the word 'deserve.' But what actually happened is by now a familiar story. [...] And here's a prediction that I feel quite certain of: if, against expectations and my hopes, Ellison drops the ball and things start going south for Oracle, it's the employees who will suffer for it, and he'll be doing just fine."
If only they would have gone on Undercover Boss. All would have been solved.
How Companies Work
There are a few top managers, and they run the company for their own interests. If they have stockholders, they have to make some pretense that they are working for the stockholders, but look how much stock _they_ are getting out of the company. Sometimes they collect a $1/year salary to look good, while they get many Millions of dollars in stock per year. Rarely do people at this level work for anyone but themselves.
Then there are a number of second-tier managers, whose goal is to make the most out of the company that they can, or to make it to that top level so that they can run the company for their own interest. Sometimes people at this level have other motivations.
Then there are lots of other people. Often these people haven't even thought very deeply about what their motivations are. They are essentially treated as work-units which keep the company operating, but they are as expendible as a server in a rack. Fortunately, companies do need their talents, at least for now.
Then there are the small stockholders. They cross their fingers and hope the managers will do a good job for them, but they really do not have any power to influence the company.
Then there is the government. The government's job is to protect little guys with no power (the general population) from big guys with lots of power. But unfortunately the big guys essentially own the government, because of the fact that they pay for political campaigns and in other ways influence politicians, and because they are gate-keepers on jobs for voters.
All of this motivated self-interest is supposed to result in a good working system for the general population. It doesn't work terribly well. However, there are many other systems that work even worse, so people are reluctant to change it. Also, the average person can not be bothered to concern himself enough so that in the aggregate with other people that person can effect change.
Bruce Perens.
While there's no doubt golden parachutes in contracts are often excessive, in this case (from a quick scan of the article), the bulk of the compensation these guys received are from the buyout of the stock. They owned lots of stock (due to stock grants and options from the company, most likely), and so they get a big payout when Oracle buys all of that stock. Yes, they got a straight cash parachute too, but the bulk seems to be from stock.
So, isn't the fact that they owned a lot of stock in the company, and thus their personal fortunes were tied directly to the company's performance, a good thing? We can argue all day as to whether or not their compensation in general was excessive (and it probably was), but it seems to me the fact that most of their golden parachute was due to the buyout of stock they already owned is a good thing.
...But if we hadn't paid them a competitive salary we might have lost them.
SJW: Someone who has run out of real oppression, and has to fake it.
In the introduction I referred to what I call the "Reaganist dogma" of the free market, my description of what a Republican might refer to as "capitalism" as opposed to "socialism".
Reagan got that from the economists. He didn't think that up himself. That's one of the incorrect assumptions economists use in their models and theories - free markets always work and that the market is rational.
Free markets work only within a narrow range of economic activity. If they exceed those ranges then you get bubbles and collapses. That's why the Fed was created to try to eliminate those things. Of course, if you get a Randian dogmatic believer in the free markets of a Fed Chairman (Greenspan), then you end up with serial bubbles: stock market and real estate.
There's a few other blanket assumptions that economists make that are horribly incorrect in the real World, but I'll save those for another time.
Oh, and economists need to get over their physics envy. They develop these impressive mathematical models and everything but the underlying assumptions are incorrect. As in this example, the assumption is that markets are rational. As we have seen, they are hardly rational.
Reading assignment: rational irrationality.
Oh, OK the last thing: the behavioral economists are redeeming the whole "profession"! :-P
Well, not that you mention it... :)
Diatribe or not (no, I didn't bother to read it), I don't think Oracle's is going to be anywhere near the kind of situation Sun ended up in for the foreseeable future. Sun had multiple sources of direct competition across a good deal of their product range and many IT budgets just couldn't justify paying the extra cash for the few extras Sun brought to the equation. Oracle, on the otherhand, has seen off almost all of its competition: DB2, Ingres and Informix are either history or essentially relegated to also-rans in the marketplace for high-end DB servers with paid-for support and an SLA that you could take to court if you had to. It's going to take a screw-up of positively epic proportions for Oracle to go down the pan; "dropping the ball" wouldn't even come close...
UNIX? They're not even circumcised! Savages!
Techies often have trouble understanding this, coming as they do from a very strongly meritocratic culture: the world at large is so far from being meritocratic that the sheer extent of its non-meritocracy strains the imagination. Professional academics often run into the same blank wall of incomprehension.
By no means am I saying that this is a good thing, or even that it is strictly necessary (though that is certainly a possibility given primate psychology), but the fact remains that the normal means of acquiring wealth is by conniving, cheating, swindling, and deceiving to one degree or another. If wealth was awarded on the basis of hard work, knowledge, or creativity, then the world would be full of super-rich construction workers, mathematicians, and artists. Instead, it is awarded on the basis of how good you are at talking (or coercing) people into giving it to you. Period. Things like quality, reliability, creativity, and utility are, at most, means to an end, and are by no means indispensable, except perhaps as grist for motivational speeches given to the people who do the work by the people who receive the rewards.
Proud member of the Weirdo-American community.
In my mind it is the scope of reward that is evil and wrong. In the article, it is mentioned that one of the Sun executives is getting a severance package worth $175 MILLION dollars. That compensation package is enough to pay 1750 employees $100,000 for a year. Those 1750 imaginary employees who would be making that $100,000 are employees who are doing the jobs given to them by senior management. For all intents and purposes, those people are probably doing their jobs competently. Despite the fact that they are competent at their job, they are getting laid off.
People who are competent get laid off. The person responsibility for the health of the company gets enough money that he could pay 1749 other people a significant amount of money, even though he completely failed to keep the company going.
As the blog post mentions, the problem is fiduciary responsibility and the fact that in many cases (including Sun), the major share holders are also the executives themselves. So the CEO, CFO, Chairman of the Board and the rest of the executives set things up so that even in failing, they increased their stock value 42%. Thousands of employees lose their jobs, but those guys at the top get hundreds of millions of dollars among them.
There is a saying that "There is no greater sin than not knowing when you have enough." Corporate America is out of wack. The guys at the top fail so seriously that their companies go bankrupt. Despite that, they get millions of dollars. Employees who do their jobs don't get millions of dollars, and when the company fails they get assed out.
The "evil" that you don't understand is the rewarding of failure that leads to the suffering of others.
To make it easier to understand and to make a more basic explanation, lets replace "money" with "food". Lets say that the executive in charge of Sun has a machine that makes food for thousands of people. He runs the machine so poorly that it breaks down, and thousands of people no longer have access to the food it provides. In the process of breaking the machine, he manages to engineer it so that the very last time he runs the machine, it makes enough food to feed him, his family and his friends' families for a couple hundred years if they manage the food he created properly.
If there weren't laws in place to protect the asshole running the machine, the masses would tear him apart and divvy up the food he set aside for himself. Since there are laws in place, the asshole gets labeled "evil and wrong".
If there were justice in the world, or if the person running the machine were moral, he'd divvy up the remains equally among the tribe who helped him run the machine. There isn't justice in the world, and the man running the machine isn't moral. He took the lions share of what the machine produced and left everyone else out in the cold.
1. USA
2. Europe
3. Japan
Here, "relative" means dividing (1) the annual income of the chief executive officer by (2) the average annual income of the employees who are not part of the management structure.
Table 2 on page 6 of an interesting document analyzing the financial compensation of American CEOs is instructive. For the sake of this discussion, we can reasonably assume that figure in the aformentioned category #2 is approximately the same throughout the West.
Table 2 then, in effect, gives us the relative compensation of the CEOs in the West. The typical American CEO in 2003 received annual compensation that is worth $2.2 million. The typical European CEO received $700,000. The typical Japanese CEO received $460,000.
Was the American CEO worth his pay? American neoconservatives answer, "Yes." They say that such compensation enables American companies to be top-notch competitors in high-technology.
On 2009 November 5, "The Economist" issued a startling report. It asserts, with plenty of evidence, that Japanese companies are the sole manufacturers of numerous components that are critical to the operation of high-technology devices ranging from tiny disk drives to huge nuclear reactors.
So, who is telling the truth? American neoconservatives or the "The Economist"?
All three parts of your claim there are wrong, which makes you completely wrong, not "half-right." From :
To understand that passage, it's important to know that publically-owned banks in the USA are structured as a public holding company, which privately owns a bank. This is important because what you bought was shares of Washington Mutual Inc. (let's call it WMI), the holding company for Washington Mutual Bank (WMB). WMB failed, so the OTS seized it away from WMI and gave it to the FDIC, which then disposes of the assets and liabilities of WMB in order to make insured deposits and secured debtholders whole. At that point, WMI is bankrupt, so your stock investment is not really worth nothing anymore.
But the more important thing to note is that Chase didn't buy WMI from the shareholders; they bought from FDIC the WMB assets and obligations that the FDIC was on the hook for.
You're also wrong about the "buying all the assets, but not the liabilities part." From the FDIC statement on the closure:
This is a standard FDIC bank closure; the FDIC takes care of insured deposits and secured debt of the banks it takes over, and only if there's anything left over from the bank's assets, then unsecured creditors and shareholders get some (in that order). Chase bought the WMB's assets and all the liabilities that the FDIC is on the hook for. The liabilities that Chase didn't get are the ones that the FDIC doesn't normally cover. So basically, the folks who are owed those debts were wiped out by the FDIC takeover, not by the sale to Chase.
And thirdly, the WaMu executives that you claim got paid off handsomely were not paid by Chase. They were paid by WMI, the holding company that went bankrupt. Though the $17.5 million guy actually declined it:
So basically, you made a bet on a bank that was about to fail, without understanding even a single iota of what happens when banks fail, and then you failed to learn how your investment failed. I can certainly understand and sympathize the part about making the bet on something you don't understand, if you hedge your bet accordingly (which you certainly seem to have done). What I can't understand is your inability or refusal to actually learn how your investment failed.
Are you adequate?