What are your thoughts on executive compensation?
One of the ways we align management interest together with shareholder interest is using ESOP.
However not all personnel play a direct role in creating value in their business unit and company and offering options may not be an (perceived)incentive to them.
How would you structure compensation in order to achieve optimal incentives for this category of employees using the tools in the arsenal?(e.g stock options, restricted stock, SARs & ESPPs)
No thoughts on this matter as HR would be best to answer this.
Is your CEO worth his (her) pay? The Pricing and Valuing of Top Managers! (Originally Posted: 05/20/2015)
It is the time of the year when stories about CEO compensation are the news of the day, and investors and onlookers alike get to ask whether a CEO can really be worth tens or even hundreds of millions of dollars, in annual compensation. Before I join the crowd, it behooves me to list my biases to start, because it will allow you to make a judgment on whether I am letting these biases color my conclusions. First, I believe that in some companies, CEOs not only add very little in value to the company but may actively be value destroyers, and that in many companies, what CEOs get paid is out of sync with the value that is created by them. Second, before you put me in the economic populist camp, I also believe the only group that should have a role in deciding how much a CEO gets paid in a publicly traded company is its stockholders, and that politicians, regulators and societal nannies should not get involved. Third, if you, as a stockholder, are disconcerted by the disconnect between CEO pay at your company, and CEO value added, you should be cheering on activist investors and pushing for more power to stockholders, rather than less.
CEO Compensation: The Landscape
- The early returns suggest that CEOs were paid more this year than they were last year, with collective pay increasing about 12.1% at the largest companies.
- The portion of that compensation that was in cash increased to 37% from 35% in the prior year, with the bulk of the the remaining coming from stock grants (31%) and options (23%); pension gains (6%) and perks (2%) rounded out the rest.
- The highest paid CEO in 2014 was Nick Woodman, CEO of GoPro, who was granted 4.5 million restricted stock units, valued at $284.5 million.
Both the New York Times and the Wall Street Journal have visual links, where you can compare CEO pay across sectors, at least for larger companies, though the data is still from 2013.While there has been much talk about the ratio of CEO pay to that of an average employee, and that ratio has indisputably jumped over the last three decades, I found this ratio of how much a CEO gets paid, relative to the next highest paid employee in the company, for S&P 500 companies, using 2012-2014 data to be a more useful statistic.
Determinants of CEO Pay
Not only is CEO pay high, but it varies across time and across companies. There are three broad theories, not mutually exclusive, as to why you see that variance.
There is little new or original that I am adding to the discussion. There is a market for CEOs that sets compensation levels, but the prices that emerge from this market may have little correlation with performance and have more to do with mood, momentum and celebrity status. If you add to that the fact that directors seem to either have no interest or no understanding of the value of stock-based compensation grants, you have the makings of a perfect storm.
I took the spreadsheet for a spin, using Microsoft as my example, partly because Satya Nadella, Microsoft's CEO, topped the list of highest paid CEOs last year and partly because I have been a stockholder in Microsoft since this post in 2013. If you assume that all that Mr. Nadella can do is slow the slide in margins, he will be able to add $7.74 billion in value to the company (about 2.25% of the company's value), translating into annual compensation of $670 million a year. While I do not agree with everything that Mr. Nadella has done over the last year at Microsoft, I think that he has done enough for me as a stockholder that I don't begrudge him his $84 million pay package. I believe that Microsoft's board will have to monitor revenue growth and margins to see if he continues delivering, but this analysis indicates how dangerous it is to conclude that a CEO is being paid too much, just because he or she has a large pay package. Using this framework, we can make judgments on the types of companies that CEOs are most likely to make a difference, in good or bad ways.
The End Game
Even in a world where disclosure is complete and shareholders are empowered, I recognize that giving shareholders the power to challenge and change management at public companies does not mean that they will use that power often or wisely. Just as voters in a democracy get the government that they deserve, shareholders in companies get the CEOs (and CEO pay packages) that they deserve. Paraphrasing Shakespeare, shareholders who complain loudly and often about CEO excesses should recognize that "the fault is not in their stars but in themselves", have to stop looking to others to make things right and start voting with their shares rather than their feet.
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very insightful .. SB'ed. It is surprising how many big firms have the same person as the chairman of the board & CEO.. One would think it would be illegal by now. I suppose corporate governance still has some more ground to cover..
What are your thoughts on executive compensation consulting firms? Do they add any real value?
I work for one. Very minimal real value add.
Great write up, Professor. Interesting analysis, I'm curious to see where the conversion around CEO pay will head in the future.
Only people with skin in the game who have some basic understanding of the peculiarities of a given organization should comment, be concerned with or bitch about a given organisation's CEO comp. Armchair critics should be very politely invited to fornicate themselves with a loaded blunderbuss.
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