Enron Executives Were Underpaid

The (Canadian) Globe and Mail launches a screed about executive pay thusly:

Bosses – are they worth it? A series of corporate-world disasters over the past decade – the internet bubble, Enron, banks – suggests that a lot of executives are overrated.

Enron is never mentioned again in the article so we don’t know what proof she has to support her position that Enron’s compensation was proof that executives are overpaid. However, I’ll take a stab at talking about Enron executives’ pay.

First, if you have a problem with executives’ compensation, take it up with Towers Pirren, a consulting firm with whom Enron devised its pay packages. Like everything Enron did, auditors and lawyers were circling like hawks. Enron, in its zeal to be transparent, loved to spend money on outsiders and advisers. McKinsey, Arthur Andersen, and Vinson and Elkins all advised Enron. Of course the company would outsource the pay packages.

In a 1999 proxy statement, Enron’s board said its goal was to set executive pay in the 75th percentile of its peer group. It’s not completely clear whom the board included among its peers. It did not expressly list its peers, but did compare itself to Duke Energy, Dynegy and PG&E to assess overall corporate performance.

Thus it is difficult to know if Enron executives were objectively overpaid. Were I to design a study on the situation, I would define Enron’s peers as those alike in market cap, number of employees, and income, then try and figure out what they were paying. The companies listed above were smaller than Enron; I would not be surprised to learn Enron paid more than them because Enron was not a peer.

In its proxy statements, Enron’s board said its “key performance criteria” for executive compensation included, “funds flow, return on equity, debt reduction, earnings per share improvements and other relevant factors.”

By these benchmarks, Enron’s executives did well. Between 1996 and 2000, revenue increased to $100.8 billion from $13.3 billion. Enron’s earnings per share grew to $1.22 from $1.12. Reported earnings climbed to $979 million from $584 million.

The compensation of the top-earning five Enron executives (Ken Lay, Jeff Skilling, Stanley Horton, Mark Frevert, Ken Rice) was inexorably tied to the health of the company. See for yourself:

Year	1996	1997	1998	1999	2000
Top Five Executive Salaries	$3.04	$3.13	$3.62	$3.80	$3.61
Top Five Bonus Payments	4.70	1.85	9.46	11.30	17.55
Top Five Stock Grants	29.71	62.51	54.74	81.40	85.61
Top Five Total Compensation	37.46	67.48	67.82	96.50	107.67

Eighty percent of their compensation was stock. Their livelihoods depended on that stock. The best interest of the company was their own best interest – which is how it should work. Compensating executives with stock is supposed to cement allegiance to the company, keeping them there for a long time (thus the vesting scheme) and doing their best to keep the stock price high.

Between 1996 and 2000, the average chief executive salary and bonus increased by 24% to $1.72 million, according to a Forbes study. Total CEO compensation, including stock options and restricted stock grants, grew 166% to an average of $7.43 million. But look what the top five Enron execs were making.

Their salaries grew only 2.6% from 1996 to 2000. Their bonus payments grew 16.55% from 1996 to 2000. These two figures are well below their peers’ compensation. Their stock grants grew by 85.51% in the same time period – again, below their peers’ 166% figure. At the same time, Enron’s reported earrings grew 97% and revenue increased 99.8%.

That is what you call an argument that Enron’s execs were underpaid.

Enron Stock During October 2001

According to my Enron historical stock data sheet, Enron’s October 16, 2001 write-down announcement had little immediate effect on the share price of Enron’s stock. On October 16, the closing price was 33.84. The next day, when the media were going berserker over the write-down, it was 32.20, a change of less than 5% (4.846% to be exact). The volume as off, but would bounce back on October 18.

What I find much more interesting is that the day after Jeff Skilling announced his resignation (August 15), there was a much greater sell off than the day Enron announced the write-down.

But from October 17 forward, Enron was going to be a seeping wound. They’d never touch the $30 mark again, and the company had begun to seriously spiral.

Over the next ten days, the stock would lose 60% of its value.

If the Dynegy deal had come through, if George Bush had bailed out the company, if Jeff Skilling, Ken Rice, Cliff Baxter, Greg Whalley, Lou Pai and others had been able to pool their money and dump it back into the company… there are a lot of fantasy scenarios but none of them would happen. Enron was on its final course to the bottom.

Enron Stockholder’s Secret Side Deal With Prosecutors

This probably should be listed in one of my “Random Thoughts About Enron” posts because it’s short, but I think the idea is worthy of standing on its own.

Prosecutors say that the Nigerian Barge deal was not legitimate because Andy Fastow made a “secret side deal” with Merrill Lynch, guaranteeing that they would not lose money. Therefore, the prosecutors say, these were not “true sales” and thus the accounting on them was wrong and therefore Enron committed fraud.

I do not accept that this happened. However, for the sake of my argument, I’ll pretend that it did.

Now, the prosecutors have sued various parties, taken enormous chunks of the life savings of Enron executives, and basically tried to wring every bit of money that they could from the executives to return to the people who bought stock. Wouldn’t this, therefore, be fraud since the shareholders did not make a “true sale”? The prosecutors have given them a “secret side deal” that no matter what happens (i.e., Enron collapses), they won’t lose any money.

If Enron committed fraud, then that is horrible, but it doesn’t mean the stockholders should be compensated for it. They took a risk, the risk was bad, and they lost. That happens all the time. Either they made a true sale or they didn’t. So which is it?

The Demise of Enron Stock

The Nature of Insider Trading At Enron

Almost every executive accused of crimes was accused of insider trading; it was like a tax for working there. Prosecutors believed it was an easy allegation to make; executives, by virtue of their position, do have insider information, and many did sell. Because the stock did so well for so long, and since, their theory goes, everyone and every project was corrupt from the C-Suite to the mail room, insider trading must have been part of the bundle of malfeasance.

After reading various indictments, however, from Broadband to Corporate, it would appear that the prosecution believes that people sell their stock while it is rising. Some do, I suppose, but if you’re trading on insider information, usually that means you know some material information which will force the stock to decline, thus you save yourself the expected loss. A good example of this is Martha Stewart, who – the theory goes – sold when her friend, the CEO of ImClone, told her that they did not receive FDA approval for an experimental drug and thus, the stock would decline. Stewart sold her stock on the information that nobody else had, and avoided a sharp decline in the value of her stock. That’s what the prosecution says, and I frankly tend to doubt it, but the example is a pretty classic case of insider trading.

Yet if you read what the executives at Enron did, it was generally the exact opposite – they sold when the stock was still rising. Imagine a case in which I told you to sell Cara Ellison Corp. stock because tomorrow we’re announcing a cure for cancer.

Would you sell? If you were wise, no, you’d hold on to those puppies because they’re about to make you a lot of money. In this case, my insider tip to you is worthless. You’re not about to do anything at all but watch your bank account get fat.

Prosecutors can not convict a defendant for declining to sell his stock as stock rises. Yet it appears that in the cases of Jeff Skilling, Ken Rice, Ken Lay, Cliff Baxter, Rex Shelby, Joe Hirko, and Scott Yeager, they all sold when they were still making money. (Sidebar: Ken Rice did make one trade illegally – when Skilling revealed that he was going to leave. But Rice was not convicted of that and it is worth noting that Rice did not dump all his stock – just some.) Most executives wanted to diversify their portfolios. Even Ken Rice said that 80% of his fortune was tied to Enron. It makes sense to diversify (just ask those poor, helpless Enron employees whose retirements accounts vanished because they were too stupid to spread their retirement income over several investments.)

I would like to explore Jeff Skilling’s September 14 stock sale a little more.

On August 14, 2001 Jeff Skilling left Enron.

Almost a month later, on September 6, Jeff called his broker and asked to sell some stock. If he was trading on insider information, as the DOJ alleges, why did he wait a month after he left to sell on insider information? The DOJ alleges that his “insider information” was that Enron was corrupt (ie, the “secret side deals” with LJM.) If indeed that was true, why not start dumping it while he was still CEO? His indictment alleges that the conspiracy was hatched in September 1999. So why did he buy so much stock during the period between September 1999 and August 2001, only to decide to sell it after he’d left. If he knew it was a “house of cards”, why not sell it on August 15? August 14 was a Tuesday, his broker was open, but he didn’t sell anything. He did not sell on Wednesday. Not on Thursday, or that Friday. Instead, he waited three weeks, in which time the stock was in freefall. Why? WHY NOT SELL ON HIS SUPPOSED INSIDER INFORMATION during those weeks? Why wait?

In any case, he was not able to sell because his broker needed confirmation that he was no longer an executive of the company, and thus the sale did not have to be reported.

Skilling said okay and hung up. The next day, Friday, September 7, 2001, his broker received the confirmation he needed. Yet Skilling did not call him back. He did not call him over the weekend with an urgent appeal to sell first thing on Monday. He did not call him back on Monday. On Tuesday, September 11, 2001, the markets closed. On the first day the markets were open again, September 17, he called and sold a much larger block of stock than he had originally planned. Why? Because all the markets were tanking. He still did not sell all of his stock. He sold some. If Skilling possessed insider information about a conspiracy at Enron, September 11, 2001 would have been a fine opportunity to sell off most of the stock. But he didn’t.

After September 17 – his last Enron stock sale – he still netted more Enron stock than he’d had the year before. He was a net Enron investor.

Jeff Skilling did not trade on insider information. It’s true he had plenty of insider information – he knew what the company was doing. But he had no knowledge whatsoever of any conspiracy at Enron.

The same holds true for the other defendants who are accused of selling on insider information. Indeed, the pattern of stock sales shows that most Enron defendants sold when things were good.

The allegation of insider trading at Enron simply doesn’t stand up to scrutiny.

Putin’s Comments Drive Company’s Stock Down $6Billion

Speaking at an industry conference this week, Putin, Russia’s former president and now prime minister, spoke five sentences critical of one of his country’s big steel companies, Mechel, and its billionaire chief executive, Igor Zyuzin.

In a sign of Putin’s enduring power in Russia and around the world, that criticism came with a price: about $1.2 billion per sentence in lost shareholder value.

This is a perfect illustration of how sensitive the markets are. When Schumer wrote his nastygram warning against IndyMac, IndyMac failed. When Bethany McLean and cohorts at the Wall Street Journal began publishing nasty Enron-related articles day after day after day, Enron collapsed. When Meredith Whitney wrote an opinion a week ago about Wachovia, Wachovia plummeted to the very brink of bankruptcy. Words matter. One must use them responsibly.

Such is the power of Putin’s words – even after “stepping down” to prime minister in May – that shares in Mechel, a coal mining and steel company, plunged almost 38 percent on the New York Stock Exchange after Putin complained that the company was charging more to its domestic customers than to its foreign ones. The comments wiped out, at least for a day, about $6 billion in stockholder value.

Mechel, which closed Wednesday at $36.61 in New York, tumbled $13.77 on Thursday to close at $22.84, after Putin spoke. The company, which responded Friday, was up $3.15, or 13.8 percent at $25.99 in afternoon trading.

The company’s shares trade as American depository receipts in New York. Putin spoke Thursday evening at the conference in Nizhny Novogorod, southeast of Moscow.

On the heels of the imprisonment of one tycoon and some bare-knuckled corporate raids and renegotiations of large energy contracts under Putin, the market did not take this talk lightly.

Over all, the Russian stock market slid more than 5 percent Friday, on fears that Putin’s comments might presage another attack on a company similar to the destruction of the Yukos oil company in 2004.

The remarks also coincided with the departure of the American chief executive of the British energy company BP’s joint venture in Russia, which is under pressure from its Russian partners and the government, in another glum sign for investors here.

Putin’s speech began simply enough.

“We have a respected company, Mechel,” Putin said in introducing his subject.

“By the way, we invited the owner and director of the company, Igor Vladimirovich Zyusin, to today’s meeting, but he suddenly got sick. Meanwhile, it is known that in the first quarter this year the company exported raw materials abroad at half the domestic, and world, price. And what about the margin tax for the government?”

He added: “Of course, sickness is sickness, but I think Igor Vladimirovich should get better as quick as possible, otherwise we’ll have to send him a doctor.”

Putin’s comments came in the broader context of a discussion of rising raw materials costs and the prospect of imposing high export tariffs on steel as a result.

With inflation soaring in Russia, particularly for manufacturing inputs like steel, government officials are concerned about the impact on a vast infrastructure rebuilding effort that is a centerpiece of Putin’s economic program.

The government is also seeking to diversify the economy away from dependence on raw materials exports, to provide employment and protection against a possible retreat in global commodity prices. Putin has asked business owners to comply with this approach, even at the cost of profits.

In response, the company issued a statement Friday seeking to calm the waters.

“Mechel shares the concerns of the government of the Russian Federation, steel plants and metallurgical industry in regard to the growth of prices for steel and raw materials in the recent time,” the statement said.

“Mechel is ready for cooperation with federal authorities of the Russian Federation and, if required, will provide complete information on any arising issues,” it added.

If there were any doubt over who holds sway over Russia’s oil-fueled economy, the power of Putin’s words could be seen putting that to rest. Indeed, his successor, Dmitri Medvedev, has spoken often of the need to burnish Russia’s investor image and improve the rule of law, so far with little effect.

Terrifying, isn’t it?

NYT Q2 Profit Plummets 82%

Move over Meredith Whitney, I’m the new queen of calling bad companies.

New York Times Co. says its second-quarter earnings fell 82 percent from the year-ago quarter boosted by a one-time gain. Meanwhile, print advertising revenue continued to shrink.

The New York-based newspaper publisher says its quarterly net income dropped to $21.1 million, or 15 cents per share, which included 11 cents per share in buyout costs.

Analysts polled by Thomson Financial expected income of 22 cents per share in the latest quarter. Analyst estimates typically exclude special items.

Revenue dropped 6 percent to $741.9 million, missing the average Wall Street estimate for $754 million. Ad revenue slipped down 11 percent, hurt mostly by fewer classified ads.

Chief Executive Janet Robinson says business was hurt by the “U.S. economic slowdown and secular forces playing out across the media industry.”

In other words, Ms. Robinson, your company is going the way of the horse and buggy. My estimation is that if they shut down the paper altogether and went strictly online, they might fare better (and this is true for all newspapers.) I think that the New York Times – and many others – believe the paper is an institution, and thus can not be allowed to succumb to the modern way of life (ie, online). But the New York Times can’t prove it knows how to run a company.

Furthermore, their leftwing crowing is tiresome. They reject an opinion piece by a presidential candidate. They regularly reveal the identities of some of the USA’s highly placed intelligence assets. They get caught lying time and again. Surely this has some effect on consumer confidence. With the internet, reporters simply can’t get away with sloppiness or one-sided partisan hack jobs.

The New York Times is on life support. I don’t have any particularly strong feelings on its survival, but I hope that if it does collapse, something can be learned from it. That is, no matter how big you are, how prestigious, you are still held accountable by the immutable laws of the market.