Peterson-More: To me, if what's taking them into the eight figures is stock performance or something else that's directly linked to the success of the company, theoretically I think it's a fair, rational way to compensate people. If the person's base pay were millions of dollars while the company's performance is declining, that's a horse of a different color.
The question is, how much is this individual's (compensation) really linked to their management, and how much has been a result of the robust economy and stock market's dramatic growth?
Q: Are there any new wrinkles in the equation?
Leach: There's increased use of stock options not only at the top, but also throughout the organization. Companies are setting aside more shares for use in stock-option plans than what they previously had. Because they're going lower into the organization, we're seeing more and more employees receiving stock options.
Peterson-More: The tendency is to tie compensation with achievement of business goals. In non-profits, it's tied to achievement of goals and objectives to support the mission. About a third of non-profits have introduced incentives, in terms of bonuses or non-monetary incentives like payment for education or training. There's a lot of creativity going on.
Hughes: In general, we're requiring greater and greater performance from the executives. Some historic programs have been deemed giveaways, so we're seeing some more leading-edge vehicles, like indexed options.
An indexed option is an option to buy stock of your company, but the price you have to pay is indexed by some market rate. A normal option is typically tied to the market price on the day of grant. An indexed option says we're going to index the price you pay compared to the market. So if I tie it to the S & P; 500, for instance, the only way I get any value is if the price of my stock exceeds the return that's being perceived elsewhere. Otherwise you're just being carried along with the market.
Q: What about that? Are executives complaining about the use of these indexed options?
Jacobs: I don't know that they are. Certainly boards of directors are not. The indexed things could take a bite out, but the way we've drawn them, if (the executives) can really outperform the market, then they get a big chunk. If they don't, the options are of little value. I wouldn't say they aren't complaining, but in the final analysis, executive compensation consultants need to be responsible to the shareholders.
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