DW - This is an interesting article. It's actually a Q&A by the CEO of Microchip Technology, Inc. a publicly traded company

CEO deciphers compensation

by Steve Sanghi - Aug. 24, 2008 12:00 AM


Microchip Technology Inc.

Microchip Technology Inc. Chief Executive Officer Steve Sanghi offers practical help for your real-life business challenges.

Question: At a little company I worked for years ago, the
other workers resented the owner/CEO because they felt they were
inadequately paid and he kept too much of the profits to pay his
salary. As I see it, if he had put more of his profits into their
salaries, they would have become more productive and felt more valued
and would have ultimately helped the business overall and the local
community to be more prosperous.

Wouldn't the entire U.S. economy be better off if CEOs like you
voluntarily turned back a significant part of their salaries to the
lower echelon workers? The June 29 Republic said your salary was $13.5 million. Surely you wouldn't be incredibly dissatisfied with $7.25 million instead?

- Name withheld by request

Answer: The purpose of a CEO for a publicly held company is
to deliver value to the company's shareholders. Executives can be
compensated based on a flat salary or company performance, or a
combination of both.

Let's break down my $13.5 million salary, which covers the April
2006 to March 2007 period. (You can download our filings at the
Security and Exchange Commission Web site, www.sec.gov.)

You can see that my compensation mainly consisted of two elements: the performance bonus and stock-option exercises.

Performance bonus: The performance bonus depends on
quarterly and yearly performance. The targets are set by an independent
compensation committee of the board of directors.

The bonus resulted from a year of particularly good performance by
Microchip. We achieved record sales of $1.04 billion, up 12 percent
from the prior year. Our earnings per share also reached a new record,
up 16.5 percent from the prior year. Microchip also secured the No. 1
position in our key market space.

There have also been times when my bonus was zero. My investors like
large bonuses because they usually reflect strong performance, which
then typically increases the stock price. My employees like them too,
as they all participate in a bonus plan at various levels, depending on
their responsibility. When the company prospers, everyone shares in the
rewards.

Stock-option exercises: Each year, all Microchip employees
receive certain stock options, which gives them the right to buy
Microchip stock at a price on the grant day for up to 10 years in the
future. The options vest over four years before they can be exercised,
and they expire after 10 years.

In 1996 and 1997, the board of directors granted me certain stock
options to acquire Microchip stock between $6 and $8 (the stock price
at that time, split adjusted). I held on to these options for almost 10
years. If I had not exercised them, they would have become worthless at
their expiration date.

During this 10-year period, Microchip's stock went from about $7 to about
$40, up 471 percent. Microchip's market capitalization rose from about
$1.2 billion to about $8 billion. About $6.8 billion of economic value
was created for shareholders. Microchip's revenue went from $286
million to $1.04 billion. Total employees grew from 1,200 to 4,700,
creating new jobs that supported the economy and our community.
Additional tax revenues were generated as well. In fact, Microchip
outperformed all of the companies featured in the popular book Good To Great by Jim Collins.

Now, what would have happened if Microchip's stock remained flat
during this same period? In that case, my stock options would have
expired worthless. My performance bonus would have been zero. Then, my
compensation for the year would have been $548,482. Investors would
have made $6.8 billion less, and there would have been 3,500 fewer
jobs.

Determining what is fair in executive compensation can be quite
subjective. But, in my case, I would have you ask Microchip
shareholders whether they think it's fair.

The subject of executive compensation draws a curious amount of
interest. People rightfully get disgusted by the headlines caused by
bad apples like Enron and WorldCom. Just because there are a few bad
apples does not mean that everyone acts that way and is unreasonably
paid without appropriate results.

What about the compensation of sports stars, actors and singers? A
high-school graduate who has the right height and excels at dribbling a
ball can earn $20 million a year, and everyone cheers. But how is he
adding more economic value to the community than what I have described
above?

This topic is a complex one, and I plan to write about topics
related to executive pay in future columns. If you have a specific
interest, please tell me.

"Ask Steve" by writing to steve.sanghi@microchip.com.