Punishing Talent for Fun and Profit Part II
The Economist introduces (subscription required) what is, to my way of thinking, a bit of rationality into the executive pay debate with particular emphasis on Exxon's former CEO, Lee Raymond. It is amusing to me that this particular pay package has attracted so much ire, particularly in the face of much larger and disproportionate packages recently disclosed. (HealthSouth UnitedHealth and Yahoo, for instance). I suspect that the current hostile climate towards "big oil" represents a good bit of the rationale. Says the Economist:
What is more, he has a point. Exxon earned more in profit last year—over $36 billion—than any company has ever done before. True, Mr Raymond has had the good fortune to work in an industry that has benefited from the soaring oil price. But even allowing for that, Exxon under Mr Raymond has enjoyed a remarkable record of using its capital to earn high profits—one reason why it has easily outperformed most other large oil companies in terms of total shareholder returns.
And it is the shareholders, after all, who pay Mr Raymond—and who have done well out of Exxon themselves. The real executive compensation scandals are those cases when bosses do well, while their shareholders do not.
It has always been my view that whining about executive pay is akin to whining about professional athlete pay. After all, if the seats are filled....
Oil is taking a hit all over at the moment. Trial balloons involving a "windfall profits" tax are floating around in such numbers one wonders if we might be in the midst of an inaugural ball or something. These talks of "windfall" tax are, I believe, even more absurd. I guess the treasury is feeling the pinch now that a penny costs 1.4 cents to make. Using this tax as some kind of spiked club to pressure oil firms to "lower prices" is equally daft. "Let's tax our way to lower prices." Excellent. Where do I sign up for that plan?
wind-fall
'win(d)-"fol
1 : something (as a tree or fruit) blown down by the wind
2 : an unexpected, unearned, or sudden gain or advantage
To call the "good fortunes" of oil firms a "windfall," an "unexpected, unearned, or sudden gain or advantage" is a bit silly. "Sudden," perhaps. It seems, however, that everyone has forgotten that oil is a rather intensely capital expenditure dependent business. To give you an idea, Exxon reported $10.3 billion in depreciation and amortization along with $13.8 billion in capital expenditures (nearly 40% of net income) in 2005.
That substantial risks, including notoriously difficult to price political risks, plague strategic decision making in the business with serious uncertainty is just "part of the job." Oil assets are primarily on non-US soil and often the political systems in the states in which they reside are crippled for having been dependent on an "extraction model" for so long. If all you need to do is call in foreign firms to suck magic fluid, ore or gems from the ground to give you 20%-50% of your GDP, then you never really need to develop your own economy, you are never dependent on your own citizens for substantial contributions to GDP and you, therefore, can fairly easily avoid the expense of developing their social freedoms, forming sophisticated institutions and the political systems to support them. No surprise, then, that developed oilfields tend to reside in areas with a limited connection to free market systems. (Venezuela and the Russian Republic are the most notable if not isolated examples of capricious extra-legal interference with oil businesses of late).
Aren't we supposed to reward firms that take substantial risks, develop capacity and are are wise enough to have it waiting in spades as demand thickens? And why is it that the same voices I hear today calling for punitive taxes on these firms have, over the last 3 years, been shouting at top of breath to alert consumers that an oil shortage and "peak oil" is just around the corner. Is it any wonder that hype seems to be driving oil price far more aggressively than anything like reserves, currently at something like an 8 year high, would suggest?
Well, what if the oil supply nay-sayers are correct? What if Iran halts oil contracts to the West? (Wouldn't be the first time). What if peak oil is around the corner? Well, do we want to appropriate a large portion of the funds, 40% of which would presumably be earmarked for continued exploration right when the theory has it that oil is going to get dramatically harder and more expensive to find? I love the message. "Don't succeed too well. We'll take it from you." Genius at work. Perhaps the U.S. isn't so different than Venezuela after all?
