Alain Tanugi asked:


I think it was the Financier Leo J. Hindery Jr who once said: ‘I think there are people, including myself at certain times in my career, who because of their uniqueness warrant whatever the market will bear.’ But the questions beg HOW much is too much? and Should macroeconomic woes slow CEO pay growth?

I recently read in the Associated Press that even as the economy slowed down in America “CEO pay still chugged to yet more dizzying heights last year.’ The top 10 highest paid CEOs took home a total of more than $500 million, but half of those companies saw huge drops in profitability at their companies.

One of the most exasperating things to shareholders and the public is when a CEO receives millions or tens of millions of dollars of compensation regardless of performance. This practice goes fundamentally against the culture of rewarding on the basis of ability and merit that underpins the free market system. Recent examples include: Marriott International chief J Willard Marriott Jr – his 2007 pay was $44m, up 22%, just six percentage points lower than Marriott’s stock price drop or Stan O’Neal, Merrill Lynch’s former boss, left with $159m after losing $8 billion.

Shareholders and politicians are advocating bringing in rules for companies that would allow shareholders to vote on executive pay. Executives in Europe have home far less compensation than their American counterparts in the past. But with leadership compensation in Europe on the rise, these pay increases have citizens in European nations deeply unsettled. The public indignation on both sides of the Atlantic has contributed to a unique political debate over what to do about excessive executive pay. Executive pay figures in Asia are still not as widely accessible as in Europe and America and it is difficult to compare. A recent study conducted by the CFA Institute Centre for Financial Market Integrity said that reporting compensation of executives on an individual basis is the practice in the United States, Britain and Australia and is advocated by institutional investors worldwide. Prevailing regulations and practices in Hong Kong, Japan and Singapore however leave much to be desired.

Jean-Claude Juncker, president of the European Commission’s “Eurogroup” of finance ministers, recently called excessive pay a “social scourge” and demanded action. When L’Expansion, a French business magazine, calculated that pay for the country’s bosses went up 58% in 2007, the finance minister, Christine Lagarde, said it was “scandalous” and threatened regulation. Nicolas Sarkozy, president of France, and Horst Köhler, president of Germany, have also denounced high pay.

New legislation the Netherlands will see the law setting EU500,000 as the level of annual salary or severance payment at which extra taxes must be paid. Germany’s Social Democratic Party is calling for legislation to curb pay, though its partner in government, Angela Merkel’s Christian Democratic Union, has so far resisted. At the same time the European Commission is working on a response to the Eurogroup’s complaint.

Just how extreme IS executive pay in Europe? As European firms compete for global talent it certainly has risen substantially in the last 10 years. Foreign executives now run seven of the firms in France’s CAC 40 index and five of Germany’s DAX 30. American-style bonuses and long-term incentive plans are now commonplace.

However European firms still pay a fraction of what is paid to their counter parts in America. According to Hay Group, a management consultancy, the median European executive earns just 40% as much as his equivalent in America. It’s also notable that both American presidential candidates – John McCain and Barack Obama – have been making compensation a campaign issue.

There is an important difference though companies in Europe seem to be more determined than American ones to link compensation to performance. In America share grants are often not tied to performance, whereas European firms usually attach performance criteria to any share grants, typically depending on a comparison with a peer group. Dan Vasella, boss of Novartis, a Swiss pharmaceutical giant, and a favourite target of pay activists, earned SFr17m ($14m) in 2007, down 33% from 2006, because he missed his targets.

The extreme rise in European executive pay has sparked an intense debate in countries that have been characterised by a relatively strong sense of economic solidarity and impartiality in the past several decades. A July 2007 Financial Times/Harris public opinion poll found that over 60 percent of those surveyed in the UK, France, Italy, and Spain would like to see their government set caps on top business executive pay. In Germany, a 47 percent plurality supports pay caps.

In America, only 32 percent of the public supports an outright pay cap on executive earnings a recent poll shows. However 77 percent of Americans say corporate executives ‘earn too much.’ Some members of Congress have responded by introducing legislation to curb excessive pay through tax reform and giving shareholders the right to vote on pay packages.

I recently saw an interview with Sarah Anderson, who compiles the Executive Excess report on CEO pay on a yearly basis. She discusses some of the issues raised in this column in her interview and I recommend that you take some time to view it. (www.youtube.com/watch?v=X2lKfRFhG0M.)

From what I have read and heard in the last year signs point to a strong possibility that meaningful reforms to rein in excessive executive compensation could be a prospect, as many political leaders in Europe and the United States seem to be finally catching up to the public uproar. It has to be said though that compensation is a complex issue. Different circumstances and industries dictate different packages and even severance pay may be justified if a change of control is the end goal. One would hope though that politicians would reject laws about pay, which are too widespread to be useful. Strict legislation might well compel leaders away from listed companies and create compensation packages even more complex-and so much more difficult to monitor.

Alain Tanugi asked:


I think it was the Financier Leo J. Hindery Jr who once said: ‘I think there are people, including myself at certain times in my career, who because of their uniqueness warrant whatever the market will bear.’ But the questions beg HOW much is too much? and Should macroeconomic woes slow CEO pay growth?

I recently read in the Associated Press that even as the economy slowed down in America “CEO pay still chugged to yet more dizzying heights last year.’ The top 10 highest paid CEOs took home a total of more than $500 million, but half of those companies saw huge drops in profitability at their companies.

One of the most exasperating things to shareholders and the public is when a CEO receives millions or tens of millions of dollars of compensation regardless of performance. This practice goes fundamentally against the culture of rewarding on the basis of ability and merit that underpins the free market system. Recent examples include: Marriott International chief J Willard Marriott Jr – his 2007 pay was $44m, up 22%, just six percentage points lower than Marriott’s stock price drop or Stan O’Neal, Merrill Lynch’s former boss, left with $159m after losing $8 billion.

Shareholders and politicians are advocating bringing in rules for companies that would allow shareholders to vote on executive pay. Executives in Europe have home far less compensation than their American counterparts in the past. But with leadership compensation in Europe on the rise, these pay increases have citizens in European nations deeply unsettled. The public indignation on both sides of the Atlantic has contributed to a unique political debate over what to do about excessive executive pay. Executive pay figures in Asia are still not as widely accessible as in Europe and America and it is difficult to compare. A recent study conducted by the CFA Institute Centre for Financial Market Integrity said that reporting compensation of executives on an individual basis is the practice in the United States, Britain and Australia and is advocated by institutional investors worldwide. Prevailing regulations and practices in Hong Kong, Japan and Singapore however leave much to be desired.

Jean-Claude Juncker, president of the European Commission’s “Eurogroup” of finance ministers, recently called excessive pay a “social scourge” and demanded action. When L’Expansion, a French business magazine, calculated that pay for the country’s bosses went up 58% in 2007, the finance minister, Christine Lagarde, said it was “scandalous” and threatened regulation. Nicolas Sarkozy, president of France, and Horst Köhler, president of Germany, have also denounced high pay.

New legislation the Netherlands will see the law setting EU500,000 as the level of annual salary or severance payment at which extra taxes must be paid. Germany’s Social Democratic Party is calling for legislation to curb pay, though its partner in government, Angela Merkel’s Christian Democratic Union, has so far resisted. At the same time the European Commission is working on a response to the Eurogroup’s complaint.

Just how extreme IS executive pay in Europe? As European firms compete for global talent it certainly has risen substantially in the last 10 years. Foreign executives now run seven of the firms in France’s CAC 40 index and five of Germany’s DAX 30. American-style bonuses and long-term incentive plans are now commonplace.

However European firms still pay a fraction of what is paid to their counter parts in America. According to Hay Group, a management consultancy, the median European executive earns just 40% as much as his equivalent in America. It’s also notable that both American presidential candidates – John McCain and Barack Obama – have been making compensation a campaign issue.

There is an important difference though companies in Europe seem to be more determined than American ones to link compensation to performance. In America share grants are often not tied to performance, whereas European firms usually attach performance criteria to any share grants, typically depending on a comparison with a peer group. Dan Vasella, boss of Novartis, a Swiss pharmaceutical giant, and a favourite target of pay activists, earned SFr17m ($14m) in 2007, down 33% from 2006, because he missed his targets.

The extreme rise in European executive pay has sparked an intense debate in countries that have been characterised by a relatively strong sense of economic solidarity and impartiality in the past several decades. A July 2007 Financial Times/Harris public opinion poll found that over 60 percent of those surveyed in the UK, France, Italy, and Spain would like to see their government set caps on top business executive pay. In Germany, a 47 percent plurality supports pay caps.

In America, only 32 percent of the public supports an outright pay cap on executive earnings a recent poll shows. However 77 percent of Americans say corporate executives ‘earn too much.’ Some members of Congress have responded by introducing legislation to curb excessive pay through tax reform and giving shareholders the right to vote on pay packages.

I recently saw an interview with Sarah Anderson, who compiles the Executive Excess report on CEO pay on a yearly basis. She discusses some of the issues raised in this column in her interview and I recommend that you take some time to view it. (www.youtube.com/watch?v=X2lKfRFhG0M.)

From what I have read and heard in the last year signs point to a strong possibility that meaningful reforms to rein in excessive executive compensation could be a prospect, as many political leaders in Europe and the United States seem to be finally catching up to the public uproar. It has to be said though that compensation is a complex issue. Different circumstances and industries dictate different packages and even severance pay may be justified if a change of control is the end goal. One would hope though that politicians would reject laws about pay, which are too widespread to be useful. Strict legislation might well compel leaders away from listed companies and create compensation packages even more complex—and so much more difficult to monitor.

Kevin Dunbar asked:


Analogy in Politics and Science: Like all tools, handle with care!

Kevin Niall Dunbar, University of Toronto

How Analogy is used to persuade the electorate to vote a particular way, propose new theories and make complex issues understandable has been of intrigue to writers, scientists, politicians and speechwriters for decades.   Catchy analogies can move a whole nation as when the elder George Bush said that “Saddam Hussein is Hitler” and helped sway the US congress to vote for troops to enter Kuwait and drive Iraqi forces away. Powerful analogies like these are part and parcel of all elections and are used by politicians and journalists to influence public opinion away from the opponent and towards their position.  Usually,politicians and journalists, particularly op-ed writers achieve this goal by by projecting a positive emotion for their own side and a negative emotion for the opponent’s side.  Isabelle Blanchette and I found that in the final few days of a referendum on whether Quebec should leave the country of Canada hundreds of analogies were used in the newspapers using this strategy.

What happens when analogies are used is that components of something that is well known, like Hockey in Canada, are mapped over onto the political debate, like separating from Canada.  What is really amazing or insidious, depending on your point of view, is that the journalist or politician doesn’t have to draw a conclusion for the public to understand the analogy; our brains do it automatically.  Just open a newspaper and you will see analogies: In the economic meltdown of 2008-2009 the New York Times helped the public make sense of the heretofore unknown mega companies at the heart of the meltdown (in this case AIG) by saying that it was similar to people “not knowing about the appendix until they feel the pain.”  Analogy not only helps make sense of confusing situations such as the first few hours after 9/11 where over a dozen analogies were made by media outlets to prior events like Pearl Harbor, the Oklahoma Bombings, IRA attacks in London etc, but analogy allows us to fill in gaps in our knowledge and make predictions.  Scientists also use analogy this way. When NASA scientists found that there is water on the planet Mars, they then predicted that there will be life there.  Of course, analogies don’t always lead to the correct predictions and we have been waiting for many years to see if there is life on Mars, or on Jupiter’s’ satellite Europa, (which has been likened to a pristine underwater lake in Antarctica called Lake Vostok) that may harbor ancient life forms. Because of this analogy NASA is piloting a mission to Lake Vostok, which is a mile underneath the Antarctic ice to see if NASA can retrieve ancient life forms without contaminating the lake with everyday bacteria or viruses.  If this works, then NASA plans to conduct the same type of mission on Europa.  Here we can see that an analogy can motivate a multi-million dollar mission to outer space.

So what is analogy? Is it seeing two things as being similar? Yes and no!  What is really interesting about analogy is that it is much more than seeing two things as similar. It is seeing the relations between two things as similar.  Seeing a computer virus and a human virus as similar has been a very powerful analogy: Both types of viruses cause damage, both infiltrate a host, and both often hijack the hosts’ machinery to cause damage.  These are relations between the virus and the host.  People can easily map from the relations of the biological virus to the computational virus.  The real power of analogy is when something about a familiar situation can be mapped onto a new situation resulting in a new solution to a problem.  Continuing with our virus analogy, biological viruses can be immunized against, by mapping from the biological virus to the computer virus, computer programmers have devised ways of immunizing computers against future viruses, often using the same types of mechanisms as the biological viruses.

One final property of analogies is that they are often emotional, particularly in politics and advertising.  When politicians want you to choose them rather than their rival, they often use a positive analogy such as a happy family for their side and a divorced family for the opponents’ side.  Sports analogies are particularly popular with politicians as most people are familiar with sports and the familiarity combined with emotions and excitement make sports analogies almost irresistible for journalists to use.  When Hillary Clinton and Barak Obama were debating in March 2008 the journalist Stephen J Silver used this analogy to add drama to the debate:  ”Obama leads Hillary 21 to 10 in a game of football. Hillary is driving with 2 seconds left on the clock. Hillary throws a Hail Mary pass and Obama is called for pass interference. Because the game cannot end on a penalty, Hillary gets one last snap with no time left on the clock. Even if Hillary scores the touchdown and converts a two-point conversion, she cannot win the game. The only way for her to win is if Obama runs on the field and kills one of the referees, forfeiting the game.”  This turned a somewhat dry debate into a cliff hanging game of epic proportions.  Yet analogies can be overdone as noted in the New York Times in March 2009 about the new chairman of the Republican party: “Most chairmen wave the party flag; Mr. Steele smiles and shreds it. A man of constantly colliding analogies, he compares Republicans to drunks in need of a 12-step program and to the mentally ill. He has insulted Rush Limbaugh and moderate Republican senators alike, and he has promised a “hip-hop makeover” that would attract even “one-armed midgets” to his party”