A blog about business and economics.

July 23 2014 1:27 PM

This Infuriating Graph Proves That CEO Pay-for-Performance Is a Sham

CEOs are supposed to be paid for their performance, which is why the rest of us mortals are supposed to be comfortable with their astronomical compensation packages. Chief executives are made rich for making their shareholders rich, the argument goes. What’s so wrong with that?

But it doesn’t always work that way in practice, as Bloomberg Businessweek illustrates in this bookmark-worthy graphic. Using data from executive compensation firm Equilar, it ranks the pay of 200 highly compensated CEOs and plots it against their company’s stock performance. The resulting pattern is almost completely random, as if someone fired bird shot at a wall. “The comparison makes it look as if there is zero relationship between pay and performance,” note writers Eric Chemi and Ariana Giorgi. (Bold is theirs. Check out the Businessweek post for an interactive version of the chart.)

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As Danielle Kurtzleben at Vox notes, many economists have studied the question of whether CEOs are actually paid based on their successes and reached different conclusions. Critics have argued that clubby corporate boards, often made up of former executives, simply fail to police CEO pay. A 2008 paper by Xavier Gabaix and Augustin Landier concluded that the entire “six-fold increase of U.S. CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large companies during that period.” In 2009, however, researchers from Purdue and the University of Utah found that companies in the top 10 percent of CEO pay tend to underperform the stock market—giant pay packages correlated with worse performance. And some have found that CEOs basically benefit from dumb luck; for instance, oil executives are paid more when crude prices jump. Equilar’s own research, meanwhile, shows that linking CEO pay to certain metrics, like earnings-per-share based on generally accepted accounting principles, leads to better stock performance than others do.

In short, sometimes CEOs are paid for the value they add. Businessweek has given us another reminder that sometimes—upsettingly often, in fact—they're not.

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July 23 2014 1:14 PM

Chrysler Recalls Vehicles for Ignition Switch Defect

Ignition switch defects are back, but this time at Chrysler instead of General Motors. Chrysler said on Tuesday that it would recall an undisclosed number of older Jeep Commander and Jeep Grand Cherokee SUVs "out of an abundance of caution" to investigate their ignition switch performance. The company estimated that the total vehicles affected could total up to 792,000 worldwide.

The concern for Chrysler, as with GM, is that unexpected impact on the keychain—a driver jiggling it by accident or the car hitting a bump on the road—could slide the ignition out of the "on" position and cause the vehicle to stall suddenly and the airbags to be disabled. But unlike GM, whose ignition switch troubles have been linked to at least 13 deaths and 54 crashes, Chrysler said it knows of only one reported accident and no related injuries from its own defect.

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This isn't the first time that Chrysler has issued a recall for ignition switch–related problems. In 2011, it recalled nearly 200,000 minivans for a defect that led to stalling, and earlier this month it expanded that to 700,000 additional vehicles. So why hasn't Chrysler taken the same heat as GM? "Perhaps Chrysler was more willing to do the recalls," says Clarence Ditlow, executive director of the Center for Auto Safety. "Chrysler already did one recall on the ignition switch and did it voluntarily three years ago. It's not like they've been sitting on it for 10 years like GM." The most obvious explanation, of course, is that there haven't yet been any deaths associated with the Chrysler recalls. 

July 22 2014 7:32 PM

If Apple Products Were Their Own Companies, They’d Be as Big as ...

Apple's earnings, as expected, were a bit boring today. The company isn't debuting any major new products until later in 2014, so investors had to make do with news that the company hauled in a slightly larger boatload of cash than it did this time last year, mostly thanks to growing iPhone sales. Total revenue rose 6 percent to a gaudy $37.43 billion.  

Some argue that, without a big new hit, Apple risks turning into just another tech dinosaur. But lumbering or not, sometimes it's worth reflecting on what an enormous beast the company Steve Jobs built truly is. Last year, Eric Chemi of Bloomberg Businessweek pointed out the amazing fact that Apple's iPhone sales alone were larger than the revenues at 474 of the companies in the S&P 500 stock index. So I thought I'd ask: If Apple's product lines were their own companies now, which corporations would they stack up against?

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First, about the iPhone. Apple moved 35.2 million of the devices this quarter, generating $19.75 billion in sales—a sum larger than Amazon's last reported quarterly revenue. It's also (as Derek Thompson has noted) more than the revenues at Coca-Cola and McDonald's combined. Stack Google and eBay on top of one another, and they barely beat out the little hand-computer. (To be clear, since not every company has reported earnings from April through June yet, I'm using their most recent public results.)

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Sales of iPads might be declining slightly, but at almost $5.9 billion they're still a massive business in their own right, generating more revenue than Facebook, Twitter, Yahoo, Groupon, and Tesla combined. That said, those five companies would slightly outweigh Mac computers, which garnered a mere $5.5 billion in sales.

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Other fun comparisons: Apple's hardware accessories business (think headphones), generated $1.3 billion, larger than Chipotle's $1.05 billion top line. Weighing in at $4.5 billion, Apple's iTunes, software, and services businesses are a little larger than eBay. And while sales of the dowdy old iPod line may be dwindling, the $442 million Apple made off it this quarter is still 77 percent larger Twitter's $250 million quarterly revenue.

July 22 2014 5:54 PM

If You’re Cheap, It’s a Great Time to Be a Vegetarian

If you've ever wanted to try the whole vegetarian thing, now is the time, as the Wall Street Journal pointed out earlier today. Meat prices continued to rise in June and drastically outpaced other types of food. While grocery prices on the whole were essentially flat last month, the index for meats, poultry, fish, and eggs spiked 7.5 percent. The biggest increases came in pork products: Pork chops jumped 14.3 percent while bacon, breakfast sausage, and related food stuffs climbed 12.2 percent. Beef and veal prices rose 10.4 percent from May.

Soaring meat prices are, of course, nothing new. As we've written before, a deadly pig virus is decimating the pork supply and the domestic cattle herd is the smallest it's been since 1951. Ongoing conflict in Ukraine—a major exporter of corn and wheat—has left farmers facing higher feed prices for what livestock they do have. Only poultry has not been terribly affected, with prices up a modest 1.5 percent since last month. Then again, that could change if fertility problems recently discovered in fat roosters seriously disrupt the supply of chickens raised for slaughter.

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Back in the produce aisle, the cost of fruits and vegetables rose moderately—up 3 percent—while the price of processed fruits and vegetables actually declined by 0.3 percent. Dairy was a little more expensive, adding 3.9 percent overall and more in subsets such as cheese and milk. Which is all to say that the truly cost-conscious shopper might not just want to try the vegetarian route right now, but even test out eating vegan. The only real financial danger there is citrus fruits, which gained a whopping 12.2 percent month over month.

July 22 2014 4:12 PM

This New Plane Seat Looks Horrifying. It’s Also a Great Idea.

At first glance, it would seem that Airbus is busy conjuring new ways to torment coach-class airline passengers. The aircraft manufacturer recently filed a patent application that would further reduce the amount of space between seats on an airplane, allowing airlines to cram more passengers than ever into economy class. The new “seating device,” which looks like a cross between a bicycle seat and an office chair, is mercifully designed for use in short-haul flights; as the Los Angeles Times pointed out, “it has no tray table, no headrest, and very little legroom.” Brian Fung of the Washington Post jokingly described it as a “medieval torture device.” Many commenters expressed similar revulsion, swapping horror stories from various flights gone wrong.

But not everything about the Airbus proposal is bad. In its patent application, Airbus helpfully acknowledges that “it is no longer possible to further reduce the seating width, particularly in economy class.” In other words, your terrible seatmate digging his elbow into your ribcage will not be enabled to dig any harder by his new bicycle seat. But passenger width isn’t the only conundrum that airlines face today. Airbus also addresses the pesky issue of legroom, stating, “it is difficult to further reduce [the] distance between the seats because of the increase in the average size of the passengers.” Tall people, that means you.

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Current seating configurations are particularly painful for long-legged individuals, who shockingly don’t quite fit into a space designed to provide the bare minimum wriggle room possible for a person of average leg length. Even if you do fit, chances are the passenger in front of you will fully recline into the already-bruised flesh of your knees, igniting a murderous rage. At 6’4’’, I speak from experience: Shorter people have it easy when it comes to some forms of mass transit. What exactly are taller individuals (in this case meaning anyone above the average U.S. male height of 5’9’’) supposed to do with their knees? Put them in overhead bins? For many of us, the only answer is shelling out extra cash for exit-row or economy-plus seats, which are harder to come by.

Even in an exit-row seat, the foam-and-metal slabs we are accustomed to today are horrible: a 31-inch seat-pitch (a normal allotment for a seated person, butt-to-knee) is an insult to the vertically gifted passenger. In contrast, Airbus’ new seating “makes it possible to raise the seating further by comparison with the aircraft seats with a parallelepipedal seating.” Parallelepipedal refers to the three-dimensional parallelogram of despair in which today’s economy class passengers are confined. (It’s also satisfying to say aloud.) In turn, the patent explains how the height-adjustable seat “enables each passenger to adapt the seating height to his or her morphology, and this avoids providing an excessive necessary distance for passengers of large size by avoiding having them seated too low.” Much as bicycle seats and office chairs may be adjusted for height, seating that allows for height adjustment might spare tall passengers the indignity of clown-car situations.

And parallelepipedal seating isn’t exactly good for anyone’s posture, anyway. A flat rectangle of foam may look comfier than a saddle seat, but it does a number on your lower back. While the new seating looks Spartan, it simply provides support where it is most needed: the lumbar region. Similarly, the “motorcycle-saddle” style seat better supports the buttocks, even swiveling to provide rotational mobility in the lower back.

In order to reassure anxious travelers desperately clinging to what little space they have, a company spokeswoman emphasized the conceptual nature of the patent. A patent merely establishes the idea as Airbus’ intellectual property: something to build upon, tinker with, and improve before eventual implementation. (Seatbelts, for example, are probably a necessary step.) The new seats aren’t perfect, but they’re on the right path. And for the airlines, fitting more economy-class passengers on each flight helps keep prices down while still protecting the significant revenue stream from business and first-class tickets. For those of us who happen to be tall, the simple concept of a height-adjustable seat offers sweet relief in the skies.

July 22 2014 2:04 PM

Why Comcast Sees Losing 144,000 Cable Subscribers as a Win

Comcast rose modestly this morning after reporting better-than-expected results for the second quarter. It was a pleasant about-face for the cable operator, which spent the past week taking flack for what might have been the worst customer service call of all time. Net income beat analysts' forecasts at nearly $2 billion, and Comcast also added 203,000 users to its high-speed Internet service in Q2, more than the 161,000 additions that analysts expected.

More interesting is this line from Comcast's quarterly report: "Video Customer Net Losses Declined to 144,000; The Best Second Quarter Result in Six Years." Best second-quarter result in six years? Comcast must have seen some pretty brutal second quarters. To some extent, that's seasonal: Comcast customers include students who cancel their TV subscriptions at the end of a school year and summer vacationers who terminate their service before hitting the road.

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At the same time, households cutting the cord on cable services is an industrywide problem. The number of Americans paying for TV through cable, satellite, or fiber services slid by more than 250,000 in 2013, according to data from research firm SNL Kagan. Though people have seen this coming for quite some time, the pay-TV industry had never suffered a quarterly subscriber decline before 2010.

Comcast might have lost 144,000 cable customers this time around, but that was better than the 162,000 it dropped a year ago, and followed two consecutive quarters of actually growing its TV subscribers. From Comcast's perspective, stemming the flow in the latest quarter might be enough of a win. Maybe those horrid policies it has for "retention" specialists are doing the trick after all.

July 22 2014 12:27 PM

The Ruling That Would Gut Obamacare Is an Amazing Advertisement for Obamacare

The fate of the Affordable Care Act is once again in question, now that a federal appeals court in Washington, D.C., has ruled that the government can’t subsidize private coverage for residents in states that refused to set up their own insurance exchanges. Without those subsidies, the law pretty much falls apart. Slate will have a bunch of coverage on the decision today (here's Dave Weigel), but for the time being, it's worth pointing out a glaring irony about this whole lawsuit: It’s actually an amazing advertisement for Obamacare.

Much of the case rests on the complaints of one David Klemencic, a West Virginia man who says he doesn’t want to buy health insurance, and that were it not for the government's generous subsidies, he wouldn't have to. Below is how the court describes his predicament:

The district court determined that at least one of the appellants, David Klemencic, has standing. Klemencic resides in West Virginia, a state that did not establish its own Exchange, and expects to earn approximately $20,000 this year. He avers that he does not wish to purchase health insurance and that, but for federal credits, he would be exempt from the individual mandate because the unsubsidized cost of coverage would exceed eight percent of his income. The availability of credits on West Virginia’s federal Exchange therefore confronts Klemencic with a choice he’d rather avoid: purchase health insurance at a subsidized cost of less than $21 per year or pay a somewhat greater tax penalty.
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Let’s spell that out: This lawsuit has been brought by a man who, thanks to Obamacare’s subsidies, could purchase health insurance for $21 per year. That's about the cost of a 750 of Jack Daniel’s or a hardcover novel. I guess you can't accuse Klemencic of putting self-interest ahead of his principles.

July 22 2014 10:35 AM

Seoul Is Taking a Hard Line on Uber. Will Other Cities Follow?

So far, Uber has been unfazed in the face of opposition. When local regulators moved to ban it—starting in its origin city, San Francisco—the ride-sharing company turned a deaf ear and pushed ahead anyway. When thousands of taxi drivers choked streets across Europe to protest it, Uber responded by purchasing full-page ads in evening papers and offering steep discounts to customers in European cities. And when governments painted it as operating illegally, Uber retorted that such accusations were a last-ditch effort to protect a stagnant establishment industry.

But now Uber is facing a roadblock it might not want to ignore. On Monday, the Seoul city government said it would seek a ban on Uber and that the ride-sharing service was illegal under South Korean law. "Uber is charging customers while avoiding the regulatory process, which creates unfair competition for taxi drivers," the Seoul city council said in a statement.

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Uber's response was typically self-assured: "Comments like these show Seoul is in danger of remaining trapped in the past and getting left behind by the global 'sharing economy' movement."

Seoul didn't stop there, though, nor does it seem interested in getting "left behind." Come December, the city said, it plans to launch an app that will provide similar functions to Uber for official taxis—geotracking data, driver info, and a ratings system. Seoul isn't trying to halt Uber. Instead, it's trying to eliminate the need for it.

Ever since Uber announced its staggering $17 billion valuation in early June, people have been asking the same question: Is Uber actually worth that much? No one can really know, as Will Oremus explained in Slate. And in part, that's because no one has the answer to an even more fundamental question: How big can Uber get?

In a piece for Wired earlier this month, Marcus Wohlsen outlined Uber's "brilliant strategy to make itself too big to ban." Uber's current business strategy, he argued, is textbook Silicon Valley: Grow first, worry about profits later. Uber CEO Travis Kalanick has taken drastic steps to reduce passenger fares and undercut the taxi industry, even when that means losing money on every ride. It's the story of Amazon, Wohlsen argues, retold through the transportation sector:

A startup led by a brash, charismatic CEO catches a creaky old industry unaware. It grows quickly, and its popularity explodes as its brand becomes nearly synonymous with the disruptive service it’s offering. Amazon grew—and is still growing— because it’s not afraid to lose money. Low prices and free shipping deals eat away at profitability, but they also keep customers coming back.

Every other time a city has challenged Uber, Kalanick has plowed ahead, because he knows that even if regulators don't want the service, tons of consumers do. Uber's potential market, as Matt Yglesias wrote in June, is much bigger than the existing world taxi market. It's the people who normally wouldn't take a cab but decide that Uber is more affordable, convenient, or comfortable. It's the folks who decide to call Uber on vacation instead of renting a car for a few days. And ultimately, it's the individuals and families who opt to rely on Uber and public transit instead of purchasing a car.

Until now, the biggest challenge Uber has seen to its long-term vision is Lyft, a ride-sharing service similar to UberX that is rolling out across the country. Seoul poses a different kind of threat. Instead of simply resisting Uber's advances, it might keep Uber out while also giving its people the parts of Uber's service that they most want. Of course, a government-run app wouldn't necessarily provide the competition that a private company like Uber could offer. But it's a start.

And if cities around the world start following Seoul's lead, Uber could lose what might be its biggest weapon—the perception that regulators are the bad guys, and that resisting them is the only way to give the public the transportation options it deserves.

July 21 2014 1:48 PM

Google May Make New York City Pay Phones Actually Useful

Instead of bulldozing its pay phone booths, New York City wants to outfit them as free Wi-Fi hot spots. It's an idea that was first tossed around by the Bloomberg administration in 2012 as a way of turning the city's thousands of largely unused phone booths into something of general use. Two years later, Mayor Bill de Blasio has rekindled interest in the plan and outlined an ambitious vision for transforming the outdated technology into "one of the largest free Wi-Fi networks in the country."

Rather than divide the hot spots up piecemeal, the city is looking for a single firm or partnership to run the entire system. Now Bloomberg reports that Google might be looking to get in on the action. According to documents from the New York City Department of Information Technology and Telecommunications, Google attended an informational meeting in May about the project. Cisco, IBM, and Samsung were also present.

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Google's interest in the city's phone-booth Wi-Fi, as Bloomberg points out, fits with the Internet giant's larger efforts to bring fast and efficient connectivity to various regions of the world. Google Loon, perhaps its best-known venture in this arena, is an ambitious effort to create "Internet for everyone" (and perhaps to collect the kind of data only heard of in science fiction) using huge balloons that float in the stratosphere. Google Fiber, another such project, is bringing ultra-high-speed Internet to a handful of cities and metro areas across the U.S.

New York expects whomever wins the proposal to pay it a minimum annual compensation of $17.5 million or 50 percent of gross revenues, whichever is greater. The selected provider will not be allowed to charge for Wi-Fi but will be able to attach fees to traditional phone service (excepting 911 and 311 calls). Most of the money generated would come from advertisers, who love seeing their billboards plastered along streets and sidewalks at eye level for passersby.

At any rate, the important point is that this proposal has sat around for so long that people feared it might never happen. But with tech firms like Google showing interest, it just might get off the ground after all.

July 21 2014 1:36 PM

Is Congress Guilty of Mansplaining to Janet Yellen?

While I was off on vacation last week, the Huffington Post put up a brief video titled, “Congress Fawned Over Bernanke, But It Mansplains to Janet Yellen, the First Woman Fed Chair.” The clip juxtaposes Bernanke’s fairly cozy final briefing before the House Financial Services Committee—Chairman Jeb Hensarling, a Texas Republican, called him “one of the most able public servants I have ever met”—with some of the snide treatment Yellen received last Wednesday. Much of it consists of Rep. Bill Huizenga of Michigan, who in a past life ran a family gravel-making business, talking over her and implying that she hasn’t read enough about the pros and cons of rule-based monetary policy. Nothing quite like watching a congressional backbencher half-coherently lecture America’s most powerful woman, eh Bill?

I do think that Yellen’s term atop the Fed is going to be an interesting experiment in gender politics. While there are somewhat substantive reasons why Republicans may dislike her more than they did Bernanke—she’s arguably more vocal about the central bank’s role in combating unemployment, which grates on the conservatives who would prefer the central bank to focus monomaniacally on minimizing inflation—she’s largely continued his policy approach. If Congress consistently treats Yellen with less respect than her predecessor, it’s going to look like sexism at work

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(Worth noting: Huizenga’s attempts to score points off Bernanke seem to have been far less aggressive. Then again, the man is serving only his second term. He may just be learning that condescension is a good way to fake fluency in economics.)

That said, some of what’s going on in the video is just garden variety grandstanding, which contrary to what the clip implies, Bernanke was subjected to regularly. Here, for instance, is Rep. Keith Rothfus during Bernanke’s last testimony trying to get the Fed chair to admit that quantitative easing is just reckless money printing (shockingly, Bernanke thought differently).

Sometimes, a blow-hard politician is just a blow-hard politician.

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