Top 10 highest paid college majors.

Engineering, computers and finance.

Coca Cola's stock split

Coke is in the news because it has just announced a 2:1 stock split.  Predictably the price went up on the announcement, although the reasons why the price should go up are shaky at best.

Lets take a look at some of the arguments:

• Coke's CEO has argued that this will increase the liquidity of the stock.  But for a stock like KO which already has a bid-asked spread of only a penny, it is unclear how the liquidity could be increased much further.  
• An another explanation is that this somehow makes the stock more affordable for every day investors.  This is sometimes called "the optimal trading range hypothesis".   But this makes little sense really as investors can vary the number of shares that they buy.  Also, by this reckoning a $40 stock today is massively more affordable than a $40 stock 30 years ago.  Apple and Google also don't appear too bothered about this - both have stocks trading for the hundreds of dollars.
• KO has stated that the split decision is based on the board's long term positive expectations for the stock.   But for this signal (of a positive future) to be credible, it has to be costly and hard to fake.  This is not really the case for a stock split - they are pretty cheap to do and anyone can do it.   I will note however, that if you knew that your future outlook was bad, then a stock split might not be a good idea if it would result in the price being so low that the stock could be de-listed. 

There is also quite a bit of confusion about price reactions around stock splits.  The largest price reaction typically occurs on the announcement date and is on average around 2%.  On the actual pay date - the date of the split - the price reaction is much smaller, only around 0.5%.   Even 0.5% is surprising as there should be no price reaction around a previously know event (counter to what this article suggests).

In conclusion, stock splits don't make a lot of economic sense from the point of view of shareholders.  They should be non-events.  But they might make sense for executives in particular if these executives have stock and option based compensation that would increase in value from the price pop around a stock split.  In fact, this is the very result that I find in a working paper with Bill Elliott and Erik Devos.  We're currently revising the paper to expand the data set and explore some other results before we send it back to a journal.  I'll post more on the topic when we get the results written up.

Who's to blame for CEO pay? It's the economists of course.

At least so says the Guardian. 

While the article is utter rubbish, it does illustrate how little you need to know about finance and economics to get a job writing about finance and economics for a major newspaper.

CEO Pay and value added

Tyler Cowen with a nice post on what we know about CEO pay and performance.

Executive Stock Options

Ron Elmer who writes "Investor Cookbooks" has posted a lengthy discussion of why executive stock options are bad, and why, in his opinion, they should be outlawed.

He makes some very good points.  I have a few comments.

First, I fully agree that the big problem with Wall Street firms is that they converted from being partnerships to being publicly traded.  As Ron points out, when they were partnerships, risk management was everyone's business.  The banks became public largely because the existing partners wanted a way to cash out.  They benefited and risk management suffered.

Second, I disagree that options do not align incentives.  The example given assumes that a manager will exercise his options at some future date and convert the gains straight to cash.  The important thing to remember here, is that up to the time when he cashed in his options, his incentives were very much aligned.  In fact, well in the money options are very much like stock.

Third, I agree that options represent a huge unknown in compensation because we really don't have any idea what they will be worth 5 or 10 years.  But I think the issue here is with the quantity of options that are being issued, not the option per-se.  Firms seem to make very large option grants that end up being worth huge amounts in the future.

Finally, Ron alludes to the bigger question of whether US CEOs should make 300 to 400 times what the rank and file worker makes.  This ratio is higher in the US than for most developed countries and I am also pretty sure it is higher now than it was, say 30 years ago.  I don't know what the correct ratio should be, but 400 seems high.  Having said that, I note that movie stars and professional athletes make stupid amounts of money for doing stuff that seems pretty unimportant in the big scheme of things.

2010 CEO Pay

CEO pay from the Wall Street Journal.  Phillipe Dauman of Viacom leads the table with $84 million for 2010.   I am sure he's good at what he does, but $84 million does seem to be an awful lot of money.

Executive Pay

David Yermack, an NYU finance prof, has an excellent article in today's WSJ about executive pay. Yermack has been critical in the past of executive compensation - he wrote a very interesting article about the uses and abuses of corporate jets.


His article today makes a simple and often overlooked point. You have to include the value of past stock and option grants when figuring out how execs are compensated. You cannot just focus on this year's salary.

Many executives lost massive amounts of personal wealth when their company stock prices collapsed. No one feels bad for them as this is true pay for performance. Shareholders lost money and so did they.

Overall Yermack concludes that CEO compensation contracts work pretty well and the current witch hunt, which might be good for the media and some political careers, really won't make things better.

Finance Salaries

From Craig Newmark. An article saying that many Harvard grads go into finance because that's where the $$ are.

http://newmarksdoor.typepad.com/mainblog/2008/07/dept-of-no-surp.html


The article discusses whether we are seeing a "finance bubble" - I doubt it, but I am sure that finance jobs are not going to be quite as plentiful and high paying in the near term.

Lure of City money too strong for young

Sometimes you just have to shake your head and wonder...this article in the Guardian quotes the Bank of England Governor and states that:

The governor of the Bank of England issued a stern rebuke to the City today, saying that too many of Britain's most talented young people are being lured into financial careers by the huge bonuses on offer.

What???? You'd think that the boss of the Bank of England would have some basic notion of supply and demand in labor (or labour) markets.

Executive compensation schemes

There is no doubt that you have to be smart to be a CEO. In fact, according to the WSJ, you have to be a math wiz just to understand a CEO's bonus compensation.

For example, for Adobe the bonus formula is:

"Target Bonus x Unit Multiplier x Individual Results."

But then comes the definition of unit multiplier. Adobe says it is:

Derived from aggregating the target bonus of all participants in the Executive Bonus Plan multiplied by the funding level determined under the funding matrix, and allocating a portion of the funding level to each business or functional unit of Adobe based on that unit's relative contribution to Adobe's success, and then dividing the allocated funding level by the aggregate target bonuses of participants working within each such unit.

(source WSJ)

Before this era of "transparency" I bet bonuses were just decided in a smoke filled room. Now that companies are expected to reveal their methods, they are opting to make the method as opaque as possible.