Executive Compensation Dilemmas

1
Executive Compensation Dilemmas

• Lecture 5

2
Shareholder dilemmas

• Do all shareholders want the same thing?
• How much emphasis should be placed on short term
  results?
• How much on long term results?
• How should performance be judged in good vs. bad
  times and vs. peers?
• What are the best metrics for the short-term?
  Best metrics for the long-term?

3
Shareholder dilemmas

• What should the link be between long term value
  growth and long term incentive awards?
• Pay systems that link the CEOs pay with that of
  other strategic officers?
• Right targets at the right level?
• Disclosures?

4
Executive Pay is Ok

• The job of being a senior manager in a public
  company is a demanding one
• It requires the ability to take risk while
  producing consistently higher returns
• What is excessive pay?
• Only limited amount talent is available to
  produce the market results required
• Pay plans were shareholder approved

5
Executive Pay Is Not Ok

• Pay is excessive and does not reflect the
  interests of shareholders
• Executive pay is symptomatic of the ills
  affecting boards-lack of independence
• Executive pay is not fully disclosed and is not
  tied to performance-President Bush
• Why should fail executives have a soft landing?
• Executive pay is creating a pay equity problem in
  the country

6
Dilemmas of Outside Consultants

• Consultants were either used optionally and/or
  hired by management
• Outside consultants were used to benchmark
  compensation at peer firms
• Packages typically included four components
• Analysis today is vigorously reviewed

7
Dilemmas

• How do you compensate someone who is doing very,
  very well in a distressing situation?
• What do we do when the vision and strategy
  doesnt produce the intended performance?
• How do we deal with the interest of short-term
  vs. long-term shareholders?
• What do you when todays compensation is dwarfed
  by the characteristic of the stock market?

8
What do directors think?Boardroom Briefing
Winter 2005

• CEO compensation levels accurately reflect
  performance vs.. stated goals-56
• My firm has a comprehensive and easily understood
  method for computing executive compensation-49
• CEO and exec pay is tied directly to sustaining
  and increasing shareholder value-57
• CEO and exec pay is line with the industry-69

9
What do directors think?Boardroom Briefing 2005

• Re-scale to reduce the difference between the
  highest and lowest paid
• More board involvement with the top 50 executives
• Tie senior compensation packages to diluted per
  share income
• Limit the CEOs ability to sell a significant
  percentage of their holdings over a period of
  years

10
What do directors think?Boardroom Briefing
Winter 2005

• Look at pay packages as a whole and not just the
  pieces and the review the total that might occur
  under different outcomes.
• Have a strict performance driven culture. Ensure
  that every package meet the smell test.
• Dont pay rewards for meager results.

11
Where are we headed?

• More focus on the internal scale
• Tying pay to strategy and performance
• Distinguishing between metrics for the short term
  vs. long term
• Examining all aspects of pay and perks
• More disclosures and scrutiny of soft landings