While this is always our beloved topic in the Wall Street, I've few questions to discuss. So, do leave your comments to help me understand the remuneration of a CEO.
(1) When a company hires a resource, their compensation is always budgeted. Is a CEO's compensation budgeted too? How about a distressed company which needs a turn-around?
(2) Why does the compensation of a CEO vary so much from one industry to another (stock options are always the parameter that makes a great impact, but the base pay too varies a lot)? Is it because the profit margins vary?
http://www.forbes.com/lists/2012/12/ceo-compensation-12_rank.html
In this link, while the pay structure of the CEO at #1 and #4 remains the same, both of them has a huge difference in terms of the numbers.
(3) If the candidate comes from the same industry (or from its closest competition), the package will be similar. In fact, it will be almost equal (barring the variable part). In that case, how do they determine the salary increase when they find the candidate is a fit?
(4) Do we have any idea on how the package negotiation goes with the Board of Directors? Do they negotiate with the estimated company's growth (keeping in mind the surroundings) and achievement? For example, if the CEO achieves a x% growth in 3 years, she will receive y% of her compensation (including the stock options)?
A CEO is the highest rank officer. No organization would compromise on the package when there is a fit. So, your examples and illustrations while answering my queries would be greatly appreciated.
Why do you care so much?
1) Yes, it is budgeted. It isn't like there's no CEO, then all of a sudden there is a CEO and a new expense line. If a company is in bankruptcy, the CEO compensation may need court/bondholder approval. There may often be more of an equity component, as the CEO will have significant upside if he/she can turn the biz around
2) It'll be driven by all the things you can imagine - competitive dynamics, industry growth, CEO visibility, profitability... Larry Ellison gets paid what he gets paid because he founded the Company and the value of his contributions have driven Oracle to what it is today. Does he put in effort every year that makes his annual pay "fair"? Probably not, but he's paid because of his lifetime of contributions... and because the Compensation Committee are all in his pocket and will do what he says.
3) Like any job opportunity for someone who is already employed, a company will have to offer enough additional compensation/opportunity to draw someone to move. The Board has a compensation committee and they look to peer executive compensation for guidelines.
4) We don't ever get color on the negotiation process, but you can see what the end compensation is and the long-term incentive plans, as laid out in the proxy. The specific targets / hurdles are only sometimes disclosed - this is because a multi-year growth target (of earnings, revenue, etc) may be beyond the range of guidance a company wishes to provide. The Comp package is driven by the Compensation Committee and what they see as fair compared to peers.
Some interesting CEO moves to look into: Marissa Meyer to YHOO Recent complaints over KO pay package Take a look at CEO of GRA which came out of bankruptcy KODK is a recent bankruptcy exit with a new CEO
Fuck this poster
@"grosse" Good answer! Thanks!
Do we have a Fortune 500 CEO's Offer/Appointment Letter? Sounds crazy, but just curious to see how the compensation is defined against the milestones; what are the components that total millions?
No, I've never seen an offer/appointment letter specifically available, but it's pretty well laid out in the proxy. The proxy will break down base compensation, cash bonus, stock bonus, and other non-cash comp such as life insurance or security or other benefits.
Again, rarely do you see the specific milestones because they are often material, non-public goals for the company out beyond typical 1 year guidance ranges.
But the proxy will often say something like "target bonus of 100% of salary based on achieving milestones on rev, EBITDA, EPS, which are weighted 10%, 30%, 30%, and additional 30% based on individual performance" or something to that effect.
Take a look at SEE proxy. They just revealed a cumulative FCF goal through 2016 which was incremental to what they'd previously told the street, so that got a lot of attention.
(1) One question on D&O. Almost all companies have a D&O (except Buffet's Berkshire). How do the company justify this? Do they have a tie-up with an insurance company for the severance package? Why do at all a company has such a system? Not to sound crazy, but just for my understanding. Buffet says "Why do the company pay for the Executive's mistake"? He still runs a Fortune 100 company without it.
(2) Does D&O form a part of the compensation? Is it a separate employment agreement?
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