Getting paid Severance in Japan : Don't get conned

A couple of interesting Financial Times/FT Alpha articles about what people are getting as Severance in Japan when their positions get downsized.

Cautionary tail : never accept a transfer out of Japan into HK when its the season for downsizing. In HK the employment law only gives 1 week for each year of service (so for 3 years you only get 3 weeks). In Japan after 1 year, the minimum starting payout is 3 months and it would seem from these articles that longer term local employees are getting substantially more.

http://ftalphaville.ft.com/blog/2009/06/26/59211/more-hollowing-out-in-tokyo/
http://ftalphaville.ft.com/2008/06/12/13690/hollowing-out-kbc-japan-style-2/

A new twist to executive compensation : Salary as premium for a sold Put

With reference to the general theory of a firm, CEOs & senior executives' cash salary should really be seen as receiving a premium in return for the CEO/Execs selling to the company a long dated Put on their company's stock. This naked exposure could then be offset by buying long dated Puts in their competitor companies in order to create an Alpha position centred on the CEO company.

There may be a concern that a naked alpha Put would only be an incentive to minimise risk to to the downside in company stock price and as a result little upside. However, in this situation the CEO would have an incentive to improve the company's performance in order to get the Put out of the money as much as possible. Though there is a diminishing value as the Put gets longer and longer out of the money. This could be very useful for shareholders of mature companies in mature industries where realistic performance is expected to be limited at around 5%-20% alpha over their competitors. Where above this return would be a clear sign of taking on excessive rather than productive, well priced risk.

For medium to large public companies where there is an expectation of substantial growth, compensation could be made up of the CEO selling to the company a Put and the CEO buying from the company a Call. The CEO's compensation would be 100% sold Put and up to 100% bought Call to effectively give a synthetic long Futures position in the company. An alternative which be a set of bought & sold Contracts For Difference (CFDs) in order to replicate a long Futures position. With at all times offsetting with short competitor stock positions to ensure Alpha is a central incentive.

This makes it very clear that the CEO/Execs have an obligation to perform better than their peers (true nature of competition) rather than a right to walk away if he/she fails.

Executive compensation and deferred stock : why bad managers still win

Deferred compensation in company stock does not work unless it is done in a way that strips out the ups & downs of the market. Otherwise in a general bull market a bad manager will most likely still win and in a bear market a good manager will lose.

A solution to this is to have deferred compensation modified to reflect "alpha" outperformance where the executive is both long his/her company's stock and short their competitors stock. The incentive is for the executives to outperform their peers and be penalized when they don't. This approach is also appropriate for general staff. There is nothing worse for general staff morale than to see their hard earned incentives evapourate during a bear market even though they are outperforming their competitors.