SENATE BILL: Executive Compensation Act of 2014 (Redraft Vetoed)

[President Tyrion]

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 Specifically, the "safe harbor" provision needs to be repealed.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

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.

[President Tyrion]

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[President Tyrion]

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.

[President Tyrion]

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.

[President Tyrion]

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.

[President Tyrion]

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.

[President Tyrion]

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.

[President Tyrion]

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

[President Tyrion]

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?

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).

[President Tyrion]

I would accept an amendment to that effect.

[President Tyrion]

Atlasia uses a July to June fiscal year, yes, which is why I'm said that.

DC, I'll accept either July (beginning of the fiscal year) or January (beginning of the Calendar/tax year). October is just arbitrary.

And the rest of the amendment is HOSTILE. I can't accept the amendment without a framework to replace the FASB for publicly traded companies, and I am very, very wary of allowing FASB 142 to continue to be enforced.

[President Tyrion]

Edited the amendment back to July 1 dates.

As for Tyrion's comment, FASB 142 is practically irrelevant for companies that aren't publicly traded.

True.

Tyrion, which parts are hostile again?

The changes are all friendly except cutting out the first sentence of the current clause 4, which I find hostile until we agree on a framework to replace the FASB standards for publicly traded companies.

[President Tyrion]

Yeah, Cinci's version of it seems fair enough.

[President Tyrion]

Nay

[President Tyrion]

Edited the amendment back to July 1 dates.

As for Tyrion's comment, FASB 142 is practically irrelevant for companies that aren't publicly traded.

True.

Tyrion, which parts are hostile again?

The changes are all friendly except cutting out the first sentence of the current clause 4, which I find hostile until we agree on a framework to replace the FASB standards for publicly traded companies.

Wouldn't IFRS be that framework according to DC's amendment?

Sorry for not being clear. I would prefer an Atlasian framework for those standards, as there's no reason to assume homogeneity of Best Accounting Practices.

[President Tyrion]

I see a 4-4 count right now.

[President Tyrion]

Tyrion, what are your thoughts at present?

Thanks for not torching this while I was on LOA.

Allow me to circle back and outline what I might need from this bill going forward.

[President Tyrion]

Upon further examination, I think we can move toward a final vote. I think this is the version that will get bipartisan support.

[President Tyrion]

Aye

[President Tyrion]

If anything, executives will receive even more 5 years after retirement, as markets typically increase over time.

That's a thing people know, though. Why wouldn't that get factored into the cost of compensation, consciously or subconsciously? I'm sure it wouldn't be perfect, since humans aren't rational decision-makers, but most people who make such deferred payments would at least account for inflation in the payment type.

[President Tyrion]

If you have learned anything, dear Tyrion, it is that humans are not irrational, despite what economics will tell you - and I usually buy into most of what I have studied in that field. I doubt section 4 would do anything to curb executive compensation.

In fact, I wouldn't be surprised to see options being used more to make up for the fact that executives wouldn't be allowed to cash them in while working! Think of the inflation, they will say! As with all measures to limit executive compensation, they usually have the opposite effect on what we intend; see: capping the tax write off for executive compensation, which led to this whole stock compensation in the first place.

Either one of us could be right on this matter, but I just fear that this would have an opposite effect and executives may do better in the long term. Yeah, they may be poorer while they work, but that wouldn't last. And we run the risk of having high executive turnover because people will move around in order to cash in on their options. If people want to get their money, they will find a way to do it.

Let's not forget the lengths people will go to satisfy their greed.

Humans aren't irrational?

Maybe it's just a definition of terms issue, but I define "rational" decision-making as making the best decision all the time. I guess if you want to be pedantic, the best decision is hardly an objective term, but, anyway, that is beside the point.

What I'm saying is that humans will inherently make mistakes. Such is life. Not every decision will be the right one, is all I'm saying.

I don't particularly intend Section 4 to cut executive compensation. I intend for it to change the incentives surround executive compensation. Indeed, I do not believe that executives should not earn money, in general. If we can incentivize (apparently Krugman doesn't want me to use that as a verb, but who cares?) better work from executives, then they do indeed deserve a higher salary than they might otherwise. Maybe conservatives and liberals have different ideas of what an executive might deserve to begin with (or maybe not), but the fact remains that I want to make all workers, from the factory to the boardroom, work better. Good work is a good economy.

Why did I drop that diatribe? Because I think this system would incentivize better long term decisions, and thus result in better work by executives. Inflationary expectations do beget inflation, and inflation in the market functions differently as inflation in buying power; both of these statements are true. So there is likely the end result that executives may receive more compensation from this bill, in raw buying power terms. I don't really see that as an issue; executives who get $10 in Year 1 should be able to grow that money with the market until Year 5, and the increased diversification of not having the money tied in one company has value as well. But hell, if you want to spin this as a bill that might increase compensation, that might be a reason for conservatives to vote for it; I don't really mind the route to the conclusion insofar as I enjoy the conclusion itself.

[President Tyrion]

My biggest concern with section 4 really comes down to turnover. Companies need certainty in markets and with their executive team, and I fear that if we put this law into place, we will see high executive turnover because they wish to cash out earlier rather than later. The only way to curb this would be to force them to work for a company for X number of years, but that is far too many strings attached than makes me comfortable, and probably not legal.

This isn't slavery after all. It's a basic right to be able to move around as you please assuming there is no non-compete contract in place.

Well, I'm not sure why you'd bring up a counter-plan only to call it slavery

In any case, I don't think this would promote turnover. If you leave a company immediately, you sacrifice your earning potential with that company. Think of it this way: I offer you $500 (adjusted for inflation as time passes) five years after you leave your job. Do you quit your job now just to get that $500 sooner? Are you really going to risk unemployment just to get that money sooner? That just wouldn't make sense. You'd have to have another job lined up to even consider it, and, even then, it would have to be a job equal to or better than the job you have currently (not to mention the underlying costs of switching jobs).

[President Tyrion]

Yankee, I would like to vote on the redraft. I do not want to withdraw the bill.

There aren't enough votes for a veto override, are there? I'll accept the current version, but I'd rather have the original. In any case, I'd rather pass this than not at all, even if it's a lot weaker than I originally intended.

[President Tyrion]

Aye

[President Tyrion]

I will not motion for an override, as we obviously don't have the votes.