Sometimes a post I write sticks with me for awhile and grows (festers? ferments?). This has been the case with my post yesterday on, well, motivational inertia. Efficient markets depend on more than just perfect information. They require actors able to actually process that information. The assumption that actors are rational (i.e. that they understand the information and price it accurately) is a rather huge leap to be making, in some circumstances. Like this one:
Urgently in need of cash, Sinister moved to shift some short term compensation (bonuses) towards longer term non-cash sensitive compensation (deferred bonuses, stock and/or phantom options). The upside was out of all proportion to the short term compensation that would be sacrificed. For example, in exchange for voluntarily forgoing a half-year bonus on June 30th this year, employees would be contractually guaranteed 120% of that bonus at calander year-end plus 100% of any year-end bonus they were due plus some amount of stock and/or phantom options. Coupled with this plan was the caution that if not enough people adopted the plan there might not be any year-end bonus at all (as more layoffs would likely be in the works). Maybe I'm dense, but that looks to me like a 20% IRR over the 6 month period just on the bonus piece, and with a reduction in risk to future cashflows.
Not one employee took the option.
This entire analysis begs the question, "What the hell is Sinister paying bonuses for given the flagging performance of the firm," which I can only answer with a shrug of my shoulders and the glib comment "I wasn't here for the transaction." Others I ask seem to generally answer with long, run-on sentences which invariably include the phrase: "contractually assured non-discretionary bonus plan." I've given up asking why that wasn't axed on day one after the purchase or the seller wasn't obliged to cash it out.
As if all this this wasn't enough, several employees circulated actively after the plan's unveiling attempting to dissuade anyone at all from taking the option. Why? What possible explanation could there be for that kind of behavior? It's not a unionized labor force. What could possibly cause anyone to think this a zero sum game between employees? The only zero sum aspect is the obvious loss to the firm of 20% of the bonus pool for people who opt in.
Is there some subtle externality that I am not aware of that is pushing up the risk component of a 6 month, interest bearing bonus deferral? Is a contractual credibility of the company so low that the beta on a 6 month loan is 3500 basis points over LIBOR? Maybe there's a bigger bankruptcy risk than I know about. Or, as I have come to believe, are Sinister's employees just totally unable to price these things? Is it a corporate culture thing? Did the previous owners just inspire such ire that any action by the firm was met with immediate and organized resistance just for the sake of "sticking it to the man?" If so, perhaps a complete churn of the workforce is warranted. (Or we should milk all we can out of Sinister and leave the charred, smoking wreckage to wither and die).
See, I hate that I have started to think this way, but I'm running out of charitable explanations (and charitable thoughts).