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Boards tie CEO Pay More tightly to Performance

Boards tie CEO Pay More tightly to Performance. Joann S. Lublin Wall Street Journal February 2006 Presented by: Christoph Burger. Issue. Rising complaints about excessive executive compensation

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Boards tie CEO Pay More tightly to Performance

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  1. Boards tie CEO Pay More tightly to Performance Joann S. Lublin Wall Street Journal February 2006 Presented by: Christoph Burger

  2. Issue • Rising complaints about excessive executive compensation • Stock options can gain value in a rising stock market, enabling executives to make money even if the companies’ earnings growth is modest • Big options grants encourage executives to seek short-term gains in companies’ share prices without creating long-term value

  3. New Approach • Increasing number of corporate boards are imposing performance targets on stock and stock options included in CEOs’ pay package • Expanded emphasis on performance targets is designed to keep executives from reaping rich rewards for reasons unrelated to leadership skills • Companies turn to a variety of performance goals to promote greater accountability • Example: Mercer’s CEO Nuti could lose 400,000 of his 650,000 options unless the company reaches an undisclosed level of cumulative net operating profits

  4. Tyson Foods Inc. • Company tells shareholders plenty about specific hurdles that CEO John Tyson must clear in order to profit from performance-based equity award • John Tyson received 150,000 “performance shares”; how many he will keep depends on improvements in Tyson’s stock price and return on invested capital • Also, the more companies Tyson outperforms, the more shares John Tyson retains

  5. Tyson Foods Inc. (cont.) • The deal guarantees the CEO grants through the current fiscal year with a maximum annual value of nearly $2.5 million, but all must be earned through some performance measure • Performance-linked equity targets need to be meaningful, with targets an investor understands • Some executives have forfeited stock or options because companies did not hit performance targets. E.g. CEO Carp from Eastman Kodak Co.

  6. Conclusion • The rising complaints about excessive executive compensation increased the number of corporate boards that imposed performance targets on stock and stock options included in CEOs’ pay packages. As a result, CEOs focus more on leadership skills and on creating long-term value.

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