CEOs and “Creating Value”

Today’s Globe and Mail carried a story on the front of the business section about Jason Underwood, CEO of Whiterock REIT (a real-estate development income trust).  He earned $4.8 million compensation last year (an increase of 475% from the previous year), which is especially surprising since the entire fund has a market value of just $373 million.  (REITs, like other income trusts, consist of investments in various operations which flow through to the trust’s unit-holders, thus evading the corporate income tax.)

There’s nothing really new about another exorbitant CEO compensation package.  The thing that caught my attention was Mr. Underwood’s justification of his largesse:

“I hope people understand that I have been paid well because I have created a lot of value for investors, and if I did not perform I would be the lowest-paid executive in the industry.”

The latter claim is based on his base salary consisting of a mere $150,000 per year.  The rest of his compensation is based on various bonuses tied to the performance of the trust’s unit price.

Just for context, even if his annual income had been a mere $150,000 (unlikely to ever occur, given the low hurdles habitually established for these CEO bonus schemes), that would still put Mr. Underwood in the 97th percentile of Canadian earners.  I don’t think the word “worst-paid” should ever be allowed to appear in the same sentence as “$150,000.”

But my bigger point has to do with his claim that he “created value” for investors.  This self-important shorthand is regularly invoked by business leaders to justify whatever it is they are doing.  But do CEOs really “create value,” even if the share price of whatever organization they are in charge of happened to increase in a certain time period?  A more accurate and neutral statement would be that Mr. Underwood was in charge of this REIT during a year when the market value of its unit price increased.  Does this mean he “created value”?  Of course not.

The market value of those units could increase for all kinds of reasons that have nothing whatsoever to do with Mr. Underwood’s talents: like a renewal of low-interest credit creation being used for speculative purchases of real estate-related financial assets (gee, I’ve seen that movie before, and it doesn’t end nicely), overall investor sentiment, the impact of low interest rates on capitalized real estate prices, the impact of tax loopholes on the value of income trusts (indeed, Mr. Underwood’s firm would not even exist where it not for the enormous and blatant tax loophole for income trusts which the federal government is finally now partially closing), and other macro factors.

The only people in Mr. Underwood’s industry who actually “created value” are the workers who actually build and maintain the structures which his firm owns, operates, and markets.  Needless to say, the compensation for these genuine value-creators did not increase by 475% last year.

15 comments

  • Your parenthetical point about tax avoidance is on target. Whiterock incredibly manages to characterize all of its distributions as a “return of capital.” They are not subject to personal income tax until they are included in the capital gain when a unitholder sells.

    Many income trusts report some of their distributions as a return of capital. But most distributions at least partly consist of “other income,” which is fully and immediately subject to personal income tax (unless held in an RRSP or TFSA).

  • “This self-important shorthand is regularly invoked by business leaders to justify whatever it is they are doing.”

    Given the prevalence of this meme, I have to wonder if it is in fact a solid belief that they hold rather than mere self-aggrandizing double-talk; petty bourgeois proprietors are prone to the same mistake and are pretty vehement about defending it.

  • I do believe CEOs do actually add some value, there are decisions to be made and directions to be taken, and I am sure they are not easy choices. Whether they personally actually make those decisions are mainly irrelevant, but they are responsible for them.

    However, whether there decisions reflect that “value” is, as mentioned, unlikely.

    The whole legitimacy of their position and role is but a construct of our fetishism with capitalism, and of course, a neat way to justify their salary within our celebrity culture.

    I guess the problem lay with the gatekeepers of our culture as greatness these days can be generated, given enough cash.

    The you have people who truly are great- like Lady Gaga!

    Actually, local union activists truly are some of the greatest people I have met. They work so hard and are on the front lines of the fight. I swear I have never met such ferociously good people.

  • You all need to learn basic arithmetic. The law of large numbers is the only reason these people can get rich at all. The game is to gain control over assets or monopolizing institutions for the number of financial transactions.

    If I own a bank that serves millions of people, all those peoples transactions are concentrated under the control of a minority of stakeholders.

    It’s because their is no checks and balances on what people can earn balanced against population size. That is the fundamental problem with capitalism, but good luck selling ‘limits to accumulation’ to people who think they ‘earned that money’.

    The vast majority of rich people don’t earn that money they just take advantage of large population sizes and the legal institution of private property that allows such amounts to be legally protected from people by governments run by rich people.

    Rich people never earned anything, as populations expand the concentration of just financial transactions becomes dangerous and hence our screwed up little world.

    In the ideal world we’d have accumulations scaled against the populations size so we wouldn’t have billionaires and homeless people in the same damn society.

  • http://www.indexmundi.com/commodities/

    Just look at this chart and it will tell you all you need to know about value and populations.

    Look at the food commodity index- the price for most foods have jumped near 30% in the last year. Is that value we have here being generated by companies? Or is it mere speculation of coming shortages?

    As to BB I merely point out there are other systems and structures (some capitalist) where individuals make decisions over large populations but do not covet the personal income that we witness here in N. America.

    Of by the way, the site I am pointing to, if you have not used it before, it is an amazingly cool site for global stats and prices. Awesome- we need to post some links to cool internet helpers such as this somewhere on the pef site.

  • BB wrote:

    “It’s because their is no checks and balances on what people can earn balanced against population size.”

    ?

    So what population are you “balancing” earnings against, given capitalism’s incessant desire to move beyond real or imaginary boundaries?

    (I’m sniffing a Malthusian stench here . . . .)

  • @Todd

    You’re not sniffing anything you’re reading things into what I said that are not there.

    Markets by themselves will never solve income inequality because the market is a legal and political structure at it’s foundation backed by force (i.e. prisons). Much of economics is a political and cultural phenomenon, not a law of nature. A good chunk of it is imposed from the outside by structuring the laws of society and propagandizing doctrines and values in a particular way.

    What I’m getting at is rich people control financial spots in transactional networks that allow them to accumulate so much money. The can capture profits by creating instruments that allow them to control large aspects of the economy.

    There’s lots of ‘any tranasaction goes’ in what passes for economic theory without dealing with peoples intentions and desires for domination, control and subjugation of others via debt and price manipulation which are very real phenomenons.

    Since income inequality is the unequal distribution of debt. Since if you don’t have enough income to cover your future expenses it’s the same thing as being in debt, despite what numerical value is shown on your bank/investment statements.

    Anyone who does not possess enough money to cover the basics for their lifetime is naturally a debt peon to those who own capital and property. Hence even the vast majority of the middle class are technically in debt because if you were debt free in capitalist society there would be no need to work at all.

    What people have in terms of money/assets in their accounts vs their combined lifetime expenses is their real debt.

    If you subtract what they have vs all expenses they will incur in their lifetime you’ll find out most people are in debt to a tiny minority of the population.

    This allows that tiny minority to structure society in particular ways and control large networks of incoming financial transactions from large populations.

    When I say large populations I mean “economies of scale”, but “economies of scale” only exist because of large populations to begin with.

    You can run simple experiments where you have a company that can make more widgets then there is population size and then grow that population over time and the widget maker makes more and more money not because he earned it but simply because of transactional increase because of _population increase_ that has nothing to do with hard work or “earning” anything.

    It’s a natural outcome of using oversimplified rules of exchange i.e. I will give you this widget if you pay me this amount of political value (money).

    Money is not a neutral institution and we need to start doing serious critiques of the nature of economic transaction itself under the capitalist model.

  • @Paul

    “Just look at this chart and it will tell you all you need to know about value and populations.”

    Not all populations are of equal value because of income inequality, this I understand but even with the plutocratic class there still needs to be sufficient number of participants to concentrate financial transactions to be wealthier then the next guy.

    Large populations do play a part you only need to scale them to a certain point because in capitalist society the vast majority of humanity has no economic rights and are serfs to the wealthy.

    This still doesn’t mean having sufficient population size is not relevant, you’ve done nothing but try to change the subject. You still need customers to exist to be able to structure those transactions towards yourself.

    Also lets not forget that wealthy people capture things people want to by in order to take advantage of economies of scale, sometimes these economies of scale aren’t dependent on ALL the population, but they still depend on the laws of large numbers and the natural first principles that allow people to accumulate unlimited amounts of money because we have no real force in the world to check the concentration of financial power which allows wealthy people to buy up governments, politicians, laws and take away our civil rights.

    Think about how corporations want to take away our right to own things, this is especially prevalent in the “Intellectual property” industry.

    http://www.destructoid.com/lionhead-used-games-worse-than-piracy-201343.phtml

    This is nothing more then an outright attack on civil rights and our rights as human beings that many generations fought for. Where having money equals you get to push your brand of authoritarianism on society because you can afford to buy influence that leads to laws being passed in your favor.

  • Hmm. Lots of stuff here . . . .

    “Markets by themselves will never solve income inequality”

    Yes.

    “because the market is a legal and political structure at it’s foundation backed by force (i.e. prisons).”

    I’m assuming here you’re talking about the “field” where transactions take place, right? If that’s the case, you’re barking up the wrong tree for finding the reason why markets themselves can’t help people. You have to go back at least a step further to the relationship between worker and owner of capital.

    “Much of economics is a political and cultural phenomenon, not a law of nature. A good chunk of it is imposed from the outside by structuring the laws of society and propagandizing doctrines and values in a particular way.”

    Right.

    “What I’m getting at is rich people control financial spots in transactional networks that allow them to accumulate so much money. The can capture profits by creating instruments that allow them to control large aspects of the economy.”

    From the looks of this statement, I’d say you’re putting far too much emphasis on the financial side of things. Deciding who owns what, which is what finance is all about, must be preceded by the creation of that “what” that gets owned.

    “There’s lots of ‘any tranasaction goes’ in what passes for economic theory without dealing with peoples intentions and desires for domination, control and subjugation of others via debt and price manipulation which are very real phenomenons.”

    Yup, but those last two are pretty much epiphenomenal to capitalist social relations. Price manipulation doesn’t have to exist for capitalism to “work fine” without it, and debt is just one way for capitalism to overcome material barriers to its growth. It’s not intrinsic to the wealth and poverty creation that goes on under capitalism.

    “Since income inequality is the unequal distribution of debt.”

    Well, it certainly involves it, but the word “income” is there for a reason, too.

    “Since if you don’t have enough income to cover your future expenses it’s the same thing as being in debt”

    ??

    At what point, though? How far into the future are you supposed to look?

    “despite what numerical value is shown on your bank/investment statements.”

    ??

    This means everyone is always in debt (especially if one measures future expenses in a “charitable manner” ie all expenses that can be imagined at the moment); all you’ve done is replace a positive sign (money) for a negative one (debt). Nothing else has changed.

    “Anyone who does not possess enough money to cover the basics for their lifetime is naturally a debt peon to those who own capital and property.”

    While there have been plenty of historical examples of “debt peonage” eg working for a company and being forced to buy things in the company store, this hardly describes either all poor people or all people in debt (not even a majority).

    “if you were debt free in capitalist society there would be no need to work at all.”

    Wow.

    I can assure you that _lots_ of debt-free people have to work in capitalist societies (and the bulk of them aren’t rich, either). How else could they get even the basics to reproduce themselves?

    “you’ll find out most people are in debt to a tiny minority of the population.”

    Yes, but you’ll find that this also holds true if lots of people simply aren’t paid enough for working for business owners.

    “This allows that tiny minority to structure society in particular ways and control large networks of incoming financial transactions from large populations.”

    Yes, but it works in ways that go beyond (masses of) simple financial transactions.

    “When I say large populations I mean ‘economies of scale’, but ‘economies of scale’ only exist because of large populations to begin with.”

    I don’t think that’s necessarily true. Yes, you need to have a certain number of bodies to be able to take advantage of economies of scale, but that certain number is completely relative to what you want from those economies of scale to begin with.

    “You can run simple experiments where you have a company that can make more widgets then there is population size and then grow that population over time and the widget maker makes more and more money not because he earned it but simply because of transactional increase because of _population increase_ that has nothing to do with hard work or ‘earning’ anything.”

    If a given group of consumers won’t buy widgets any more because they already have them, more consumers are required, which means selling at a farther distance, getting rid of the widgets past customers already have, etc. The widget-maker doesn’t have to and simply cannot wait for the given original population to increase naturally; more consumers/customers need to be found or created. This isn’t anything new.

    Furthermore, once competition gets involved, the money the widget-maker gets decreases despite the fact that he got to that particular group of customers first and “controls” the cash-flow.

    Yes, the owner of the widget-factory does get something for nothing without his having to lift a finger, but it has nothing to do with population numbers. You could replicate the same story with one owner/consumer and one worker/consumer.

    “Money is not a neutral institution”

    Right.

    “and we need to start doing serious critiques of the nature of economic transaction itself under the capitalist model.”

    Maybe it just hasn’t been explained well to me, but a critique of economic transactions/exchanges, while not unhelpful in itself, isn’t going to find much of anything to use against capitalism. You have to dig deeper.

  • Todd wrote,
    “…but a critique of economic transactions/exchanges, while not unhelpful in itself, isn’t going to find much of anything to use against capitalism.”

    No, but you will dig up general critiques that apply equally well to the economy of ancient Rome. I think they call that transaction cost economics or something.

  • @bb
    You missed my point, go back and read my comment. The chart had nothing to do with you points.

    I say that we need a utter and grand rethink of ‘value’on every level, every tv screen, every polluted river, every plastic island adrift in the ocean, every degree Celsius the ave temp rises, every consistently empty belly, every tube of lipstick, every $ 1000 guitar string, every transistor thrown into a landfill. An utter rethink of value and decision makers.

    We need new rules for the rulers.

  • Someone mentioned a “Malthusian stench” a ways up in the discussion. Taking that far out of context . . . I realize Malthus was a pro-market capitalist and had odd ideological drivers and purposes behind his doomsaying. And I realize that current and recent food shortages, high prices and so on have more to do with market manipulation than actual shortages. And I realize that we in the first world use far more per capita than other people and if we all were vegetarians and ate as many calories as people in India or something, the world would have less stress on its systems for a given population level.

    The fact remains that the number of people on the planet is huge, and talking about each individual consuming less as a serious solution is somewhat like talking about “intensity” targets rather than actual emission caps when you’re trying to stop global warming. At these numbers even a quite frugal human population corners too much of the world’s resources–too much of the soil, too much of the water, too much wood, too many fish–too much habitat. Fewer people would be a good idea. The only country to get serious about this issue so far has been China–and while their solution is problematic, I think everyone else saying “Oh, how horrible” when their own solutions have tended to involve sticking fingers in ears saying “I’m not listening” and often actively discouraging birth control is in a poor position to criticize.

    If saying orders of magnitude more people than the earth has ever before had to support is too many makes a person Malthusian, then so be it. I rather resent that some guy upthread makes some glancing reference to popuation size and just that is enough to bring out the labelling–it’s an attempt to bring the mere mention or discussion of the implications of population size off limits, which I don’t think is a legitimate approach. It seems more like the kind of delegitimation, Commie-bashing tactic I associate with the right.

  • PLG wrote:

    “I rather resent that some guy upthread makes some glancing reference to popuation size and just that is enough to bring out the labelling”

    That was me, and this is the sentence from BB that started that line of thinking:

    “It’s because their is no checks and balances on what people can earn balanced against population size.”

    After BB clarified a bit, I saw that he wasn’t getting into Malthus.

    (Belated apology for that misunderstanding, BB.)

    “it’s an attempt to bring the mere mention or discussion of the implications of population size off limits”

    Given that it’s usually rich bastards and their mouth-pieces who talk loudly about “The Multiplying Poor” eating up everything in sight (shades of the ultra-popular zombie meme), I confess to a knee-jerk dislike of discussions that involve mating concepts of population size, wealth or income, and who needs to do what now.

    I certainly have no objections to people willingly using birth control, but, given the current reality of the distribution of commodities (such as food, arable land, and water) and the wherewithal to procure said commodities, I’m still far from convinced that population size (and bourgeois government-planned, forcible control of it) is a much bigger or urgent issue than distribution.

    “I don’t think [the above] is a legitimate approach. It seems more like the kind of delegitimation, Commie-bashing tactic I associate with the right.”

    Heavens! You have a problem with delegitimation as a tactic? And here I only have a problem with it _depending on who uses it for what purpose_.

    The right likely commie-bashes because (a) they probably believe people worth under a certain money-value can’t think beyond that level, and (b) there literally is no reasonable argument in favour of (the kind of) class society (they want). I use the same kind of idea when I see (what looked at the time like) a ridiculous old idea that’s long been discredited being flogged as something fresh and vital. Naturally, I’ll want to pound another stake into its heart (if not blow the fucker up with a grenade).

  • Agree.
    A REIT would break up their earnings internally across different factors to determine what contributed to the overall sucess.

    The return contributed from their benchmark (maybe the ishares S&P TSX REIT Index Fund) would not be factored in for the value of the trust’s management. The benchmark gains for CAD REITs were about 15% over 2010, although they are probably cashing in on 09’s 25% gain as well.

    Trust manager’s know that their personal contribution is the gain or loss relative to the benchmark. So they know that they’re stealing bonuses.

    The counter argument would be that they lost bonuses during the recession. But clearly this is a case of a misaligned compensation package.

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