Sunday, May 31, 2015

What is Behind Obscene CEO Salaries?

Why are American CEOs paid such obscene amounts of money?  Most of them make over 150 times more than their average employee.  In the Washington DC area, CEO salaries are rising faster than the national average.  One CEO made $68M but his company lost $670M.  How do they get such lucrative pay packages?  Why do shareholders not control CEO salary?

Unfortunately, we, the retail investor, are part of the problem.  Corporate boards set executives pay and board members are supposed to act on behalf of shareholders.  But most board members were or are executives and it is to their advantage to have executives salaries go up.  Many board members were appointed based on recommendations from the CEO they are supposed to be supervising.  A basket full of conflicts of interest, right?

Shareholders could elect new board members who will moderate CEO salaries and make sure they are not highly paid in spite of poor performance, which is another big problem.  But the largest blocks of shares are now held by mutual funds, ETFs, and pension funds.  The mutual fund giants, Fidelity and Vanguard, do not actively vote their shares to fix the inequity in CEO pay.  They basically buy advice from a "proxy advisor" like ISS who usually tells them to do what management wants.  Management usually wants more pay for themselves independent of performance, so nothing is done about CEO pay.  The New York Times has written this up in an article.  I actually wrote to Vanguard a few years ago to complain about exactly this issue.  The reply was polite and contained their voting record (almost universal support for management) but basically said that they would continue to use proxy advisors.

So until this wicked conflict of interest circle in the corporate boards is broken, we will continue to see ridiculous pay.  You should write to your mutual fund company to complain as I did, without them, it is unlikely that the problem will be addressed.

Friday, May 29, 2015

Retiring and Managing Your Own Portfolio

The New York Times had a reasonably useful article on what happens when you manage your own portfolio of investments after you retire.  I do manage my own portfolio and was doing that for many years before retirement, so it can be done, but here are a few tips (or hacks if you like modern terminology):

  1. If you did not manage your investments before retirement, don't just start the moment you retire.  Either keep doing it through your financial advisor and/or take courses at your local college before attempting it yourself.  It can be confusing due to all the bad information out there from brokers, fast-money artists, and self-promoting "experts".
  2. Sitting at a computer every day and making trades is not investing a portfolio, it is day-trading. 
    1. Traders do investment transactions every day or week hoping to make money.  They usually fail, badly.
    2. Investors do few transactions and hope to make money over the long term.
  3. Try to keep costs low by using index ETFs and mutual funds.
  4. Keep a diversified portfolio allocated according to your risk tolerance and life situation.
  5. Beware of advice from anyone who gets a commission when you buy or sell securities, particularly securities from their own companies.  They have a potential conflict of interest between their financial success and your financial success.
    1. Brokers or mutual fund salesmen who get a fee when you buy or sell a security, may encourage you to trade in order to increase their commission.
    2. Fee based planners, who get a flat fee for their services, should not have a conflict of interest.
  6. If you do not understand or are confused or nervous about a financial decision, wait.  Consult a licensed financial planner with a good reputation and family and friends before pulling the trigger.
  7. If it sounds too good to be true, it probably is.
As always, do not believe everything you read on the Internet, including this blog.  Get advice from a competent financial advisor before making important financial decisions.

Sunday, May 24, 2015

Human Resources - Slaying the Vampire Squid

Continuing on a previous blog entry about the negative effects of modern human resource groups, what can you do about this?

Bloomberg had an interesting article about a company using the web to automate many processes handled by HR.  Unfortunately, these are the older and valuable services provided by the "Personnel Department" before it was irradiated and emerged from the depths as the vampire squid devouring creativity, productivity, and morale.  Still, cutting HR headcount is a start.

One of the HR Vampire Squids recently washed up in New Zealand (see photo).  It was likely slain by a Silicon Valley company who realized the malevolent intentions of HR, killed the beast, and dumped it in the Pacific.

Aside from the evil effects on employees, HR can derail the Kings of the Universe, Fortune 500 CEO's.  Check out this story in Fortune Magazine about one HR VP named Mary McLeod  who managed to chew up two CEOs in a short span of time.  I think she is now in the HR Hall of Fame.

So watch out for the Vampire Squid called Human Resources and make sure your universally loved CEO is aware of the dangers!

Saturday, May 23, 2015

Retiring Abroad

Continuing on the theme of where to retire, we have some friends who are considering retiring to Spain.  Neither of them are from Spain, although they both speak Spanish along with English and French.  Spain is attractive as it is warm, the food is good, there is a lot to see and do, and the cost of living is lower than the European average.  Is this a feasible alternative for people considering retirement?

There are some decent websites out there that cover various places to live - low cost Central and South American countries, European destinations, as well as exotic locations like Thailand.  The primary draws are a lower cost of living, better weather, and a more exciting different lifestyle.  These are the pluses but of course there are some minuses or risks to consider.

Lower cost of livingHow will you handle currency fluctuations between your pension and savings currency and local currency?
Better WeatherAny nasty weather like hurricanes? Is crime an issue?
ExoticHow much exotic can you and your spouse tolerate?  Can you handle any language issues?
May attract friends and family to visitMay attract friends and family to visit
May be a good base for travel during retirementIs the health care system good and affordable?
Family and friends are a long way away
What happens in 20 years when you are less mobile or handicapped?
Can you get resident status? Is the government stable?  Are there restrictions on property ownership?

So there is a lot to consider, but for some people, it is a viable option.  Think about it and as always, consult friends and financial advisors before making the final decision.

Wednesday, May 20, 2015

Returning Home After Retirement

Heading Back to Canada

The New York Times had an interesting article that covered immigrants in the USA returning to their home countries after they retire.  One of the subjects of the article struck home - a 59 year old lady returning to Canada.  One of her reasons was the lower cost of health insurance in Canada.

Health costs are certainly a worry here in the U.S., even with Obamacare.  Health insurance is costly when you are over 50 (350 to $1200 a month for a policy) and once you qualify for Medicare at 65, there is still a monthly premium of a few hundred dollars plus copays and coinsurance.

Canada is certainly more benevolent with its single payer system with no premiums, no copays, and no coinsurance.  There are higher income and sales taxes to pay for the health insurance, but the amount you pay depends on your income and spending.

Photo credit: Flickr

Monday, May 18, 2015

Outsourcing Success and Failure

During my career, I saw a lot of successes and failures in outsourcing by large companies.  The results were often quite expensive and maybe fatal for companies.  Why, in my opinion, does outsourcing succeed or fail?

First, let's look at my experience with outsourcing:

CompanyOutsource Project and YearSuccessFailureReason
Large R&D Organization1987 - Outsource Computer Aided Design Tools (CAD)YesCAD Industry had matured and good tools were available and widely used. Coincided with move from mainframes to networked workstations.
Fortune 500 Company2000 Outsource hardware manufacturingYesManufacturing industry was maturing, processes were well standardized in the industry
Fortune 500 Company2000 - Outsource hardware prototypingYesThe Outsource Manufacturing industry was not interested in prototypes, processes not standard, large variability in needs of company across different product groups
Fortune 500 Company2000 - Outsource Information Technology (IT)YesOutsourcing basic IT (help desk, setups, running servers) was mature but company outsourced many other processes which proved costly and problematic. Internal customers did not understand the real costs and complained constantly. Outsourcing reversed and brought back in-house.
Fortune 500 Company2008 - Outsource ITYesOutsourcing basic IT (help desk, setups, running servers) was mature but company outsourced many other processes which proved costly and problematic. Lack of agreement on scope, metrics between customer and vendor. Outsourcing partly reversed and brought back in-house.
Fortune 500 Company2008 - Outsource EngineeringYesOutsourcing basic engineering services like maintenance was mature but company outsourced many other processes which proved costly and problematic. Lack of agreement on scope, metrics between customer and vendor. Resistance from existing engineering groups. Outsourcing partly reversed and brought back in-house.

What makes outsourcing successful?
  1. Outsourcing something that industry has outsourced before usually works well.  There are vendors with standard offerings, track records, processes are understood, and there are often cost savings due to volume or specialization.
  2. Scope, objectives, plan, benefits must all be well documented and agreed between the customer and vendor so there are no surprises.  If a part of the outsourcing is not clear, it will likely go badly.
  3. The internal agreement process on outsourcing needs to be managed so internal stakeholders, who are often losing jobs or power, buy into the decision.
  4. Asking an outsource vendor to do new things - go beyond their normal offering, is usually a recipe for disaster unless the vendor really wants to do it, the scope is well understood, and there are contingency plans.

Tuesday, May 12, 2015

Human Resources - Vampire Squids of Employee Productivity and Happiness

Human Resources departments in big corporations claim to help companies achieve their goals by maximizing employee performance.  Having worked in a few companies, I take the radical position that the HR department is actually an impediment to employee performance.

I am not referring to the useful functions that predate the transformation of the "Personnel Department" into the "Human Resources Department".  Making sure everyone gets paid, that benefits are decent, everyone has a badge and employee number, that interviews with candidates are organized, these are all useful things that were done by the Personnel Department.  When the metamorphosis into Human Resources occurred in the late 70's, what emerged was not a benevolent butterfly, but an employee-sapping vampire monster.

Let's look at some of the soul-destroying hallmarks of modern HR:

  1. The company wide performance review system.  Does anyone like getting a performance review?  Research says no.  Does anyone like giving a performance review?  Research says no.  Is there any research to show that employee performance improves due to performance reviews?  Not that I know of.
  2. Changing the performance review system - this happens every 2 to 3 years.  We need a wider score range for performance, we need a narrower range, we need to rank people, we should not rank people, we need to use numbers, letters are better, we need to do reviews every 3 months and on and on.  Inevitably, the change would come after objectives and budgets were set for the year so everyone would complain that they started the year set up in the old system, then they were judged unfairly in the new system.
  3. The Employee Satisfaction Survey, now rebranded as the Employee Engagement Survey.  We filled these out anonymously and then our managers were forced to discuss them with us.  Did people feel comfortable speaking up and discussing the results?  Not in my 35+ years of doing these surveys.  Were there any substantial improvements due to the surveys?  No, unless you count adding decafeinated tea to the break room as a big productivity gain
  4. The new and improved job grading system and corresponding pay system.  Every company where I worked changed their system every few years - increase the number of job categories, reduce the number, name them, number them, rank them, change your title, tighten the salary range, change the way you move from one category to another, grade the person, no-grade the job, and on and on.  This always drove morale into the toilet and resulted in unhappy people complaining that they were unfairly moved from the "Senior Engineer" category to the "Technical Staff II" category and they are forced to put "Technical Staff II" on their new business cards or office door and it is demeaning
  5. Career planning.  Do companies really care about your career or do they just care about how well you are working now?  Be honest, they don't care about your future, you could leave tomorrow or they could decide to outsource your function, so why does it matter to them that you, the junior engineer, want to be a VP some day?  And careers depend as much on luck as skill and planning, so most employees are confused about career planning.  Can you even plan a career, or is it just a series of decisions you make over your work life and your advancement depends more on luck?  HR stepped in and "solved the problem" by getting into career planning, sticking it into the performance review, spending big money on outside courses taught by HR consultants, and collecting statistics to put into powerpoint charts to show the senior execs.  For example, the chart deck always has a big statement: "Our employees want to advance in rank and responsibility" - no kidding!, you HR folks are geniuses!, let's do some career planning!

So, in spite of the fact that the HR department and its evil schemes are an entrenched part of modern corporations, this author says, let's get rid of all that and get back to the basics of the old Personnel Department Model.  It will cost less, more work will get done, and employees will be happier.

Photo credit: Flickr

The 4% Retirement Withdrawal Rule

The New York Times has a good article on the old rule of thumb that you should spend about 4% of your assets per year in retirement.  This rule, invented by an engineer I might add, actually turns out to be a pretty good guideline for spending in retirement.

Our spending follows this pattern and our assets have stayed approximately constant over about 17 months of retirement.  This is primarily due to the performance of the stock market.  We don't directly use the 4% rule, it just turns out that our retirement plan showed us that we should spend about 4%.

If you want to check your spending plan for retirement against a more complex model, I still recommend using the Vanguard Monte Carlo tool, that I covered in this blog post.

Saturday, May 9, 2015

The U.S. Patchwork of Ineffective Laws and Systems

Having just completed my US income taxes and dealing with Social Security and Obamacare, I would like to make an observation on dealing with US government regulations and laws.  The world's greatest superpower in history does not run its government properly.

If your life follows a normal arc: born in USA, schooled in USA, maybe joined the military, married your high school sweetheart, worked, had children, retired around 65,  you are fine.  You will never be trapped in a bureaucratic nightmare trying to figure out form 1116 (AMT), get health insurance, social security, or medicare.  If you do not fall into this standard life story, things get complicated fast.

This year, the tax system introduced 5 possible new forms if you have a bank account or investment outside the USA.  Good luck figuring out which ones are required, as the IRS is so underfunded that the telephone wait is minimum 30 minutes, and then you get someone who is as confused as you.  So in trying to catch the billionaire tax dodger, all they have done is ensnare anyone with a foreign past in red tape.  The world's most complicated income tax is getting more complex.

The Obamacare website, even at this late date, regularly gives me strange errors and kicks me out of the system.  I have never completed an application due to the errors and need to "verify my identity".  When you call them up, they suggest more futile actions on the website instead of solving the problem.  I gave up and am using an insurance broker to get health insurance.

Social Security and Medicare are so complicated that there are multiple books you can buy to help you figure out which options to choose, when to choose them, what to do if you go back to work, etc etc.  The online system and phone service can only handle the most routine inquiries and you must go to a Social Security office to handle anything unusual.  Our local office (15 miles away) opens at 9am and by then, the lineup is long enough that it takes 1 hour in line standing up to get a number and then about 2 to 4 hours to be served at the counter, and then if they cannot help you, there may be a further 1 to 4 hour wait for a specialist.  There is a 2 month wait for an appointment.  This is awful for the senior citizens who need help.

Why does the world's superpower have such poor government services?  It is hard for me to know but I suspect:

  • There is animosity towards government in general, so funding is not allocated to provide proper information systems and tools to handle 330M+ citizens
  • The pay scales for civil servants are quite low compared to Canada, so it is hard to attract talented people.  The civil servants in the USA try very hard, and I do commend them, but they are underpaid compared to their commercial counterparts.
  • The focus right now is on homeland security (defense, police, etc.) so social services get low priority.
  • There is a lack of practicality in the lawmakers.  Laws are created that are complicated, unenforceable, and hard to understand.  There seems to be no interest in going back and fixing old laws and regulations to make things efficient and effective.

Friday, May 8, 2015

Saving on Car Insurance

If you live in the USA, you are bombarded with TV and radio commercials for car insurance.  Flo, the Geico Lizard, the General, and the Elephant are always plugging their company's products.  I hate most of the commercials, but I digress.

Recently, I bought a new little commuter car.  Previously, I noticed my Allstate car insurance was pricey, but I was afraid of switching, since I had our home and a big umbrella liability policy with them.  For the new car, I did go to the Progressive website and get a quote, $200 for 6 months coverage (the most coverage you could buy).  I then called Allstate who quoted around $600 for the same coverage.  We tried to get Allstate down, but only by about $50.  I then inquired whether my Umbrella policy would cover me if I went with Progressive for this second car, assuming I got the maximum coverage from Progressive.  The answer was "yes" (grudgingly).

So I went with Progressive and am saving about $800 a year.  Unfortunately this may encourage them to run more of those annoying commercials.

Friday, May 1, 2015

Stress Level of a Self-Employed Consultant

One of the things I have learned working as a self employed consultant for the government is that it is less stressful than my last full time job as an engineering executive. This is partly due to my semi-retired status but also due to the nature of the job of a self-employed consultant.

What makes it less stressful for me?

  1. No one is working for me.  So no worries about their well being, no performance reviews, no requirement to assign work, etc. 
  2. Few corporate processes and procedures other than the health and safety stuff that your customer might require you to follow. No employee satisfaction surveys, no HR forms, no training on the new pay and benefits system, no requests to join the Save-The-Whale committee. 
  3. Little work during my personal time. I get paid by the hour and if I work after hours, I charge for it. Hence, I don't get much work after I have done my 8 hours.
  4. Less politics.  Don't have to worry about being promoted.  No one sees me as a threat. Have to get along with customer-employer but not much else in the way of politicking. 
  5. Little pressure to perform at above a satisfactory level.  As a full time employee, you are incented to work as hard and as well as you can by the rewards of bonuses, special awards (employee-of-the-month), higher raises, and promotions.  A self employed consultant just gets paid an hourly rate.  You cannot perform poorly, or your contract will be terminated, but there are no incentives to go above-and-beyond the call of duty.
  6. Less travel as customers usually don't want to send you to trade shows or meetings unless it is really necessary.
  7. Fewer meetings as the customer wants you to concentrate on your work and will not send you to a meeting that is not directly applicable to your project.
  8. Less worry about meeting big company objectives.  The nature of the relationship is that a consultant does what they are contracted to do and can be let go after the project is done or at anytime for the convenience of the customer.  Hence, you don't have as much commitment to the customer's business and are not as stressed about meeting big company objectives.
It is a surprise to experience a lower stress job like this, but as I said, it is partly the nature of the job and partly the nature of being semi-retired and not needing to work.  Some of my consultant colleagues are under more stress as they are younger and have children at home and really need to have a reliable source of income.  Consulting like this is not a reliable source of income and does not give you the satisfaction of advancing your career, these are disadvantages for people in a different situation.