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Well-structured executive compensation

September 07, 2008 | Comments: (3)

http://weblog.infoworld.com/lewis/archives/2008/09/wellstructured.html

Well-structured executive compensation

An example of well-structured executive compensation, proving that it is possible.

TAGS: Business Ethics, Leadership, Organizational Design

Dear Bob ...

There
have been a lot of egregious pay executive situations exposed during
the past few years. While your examples are entertaining ("A Labor Day dichotomy," Keep the Joint Running, 9/1/2008), the foundation isn't always as sound as it might be.

Exec
comp has at least three factors: salary, short term incentive (annual
bonus) and long term incentive. In a mid-cap (approaching large cap)
company with which I'm familiar the exec salaries were between the 25th
and 50th percentile vs similar companies. Annual bonuses ranged from
25-100% of salary and were tied to specific performance factors.
(growth, profitability, tangible, measurable stuff). The long term
incentives were all based upon stock options. The option plan included
every employee and the exec plan typically provided a significant
number of options granted each year. The vesting time ranged up to
seven years.

The execs had some great compensation for several
years as the stock grew, and grew and grew. The rest of the folks did
okay too. Entry level comp was probably $24,000. Exec comp peaked at
150 or so times that. Of that difference, as much as 95% was option
income.

What would be a better use of these funds? Stock buy
backs? Dividends? Hire more people? (There was enough cash being
generated so that any reasonable acquisition or new venture could be
funded.) And, were these high long term incentives a way of keeping
some high performance exec talent? Probably.

So, what needed to be "fixed?" Or was anything broken?

- Trying to understand the problem

Dear Trying ...

These
days, executive comp that's a "mere" 150% of entry-level comp is quite
modest. The executive compensation structure sounds quite healthy as
well, balancing short-term and long-term results and connecting
everyone to the company's success.

Sounds like a well-run
company, so from the information you've provided I'd say there's
nothing to fix, at least insofar as the compensation structure goes.

Someone
once said that the plural of "anecdote" isn't "data." Your example
proves we need a similarly pithy statement for the reverse
circumstance: The singular of "generality" isn't necessarily
"situation."

Okay, so that wasn't it. You get the idea: The
problem of excessive and unhealthy executive compensation is
widespread. It isn't, however, ubiquitous.

Thanks for reassuring
us that there are still some well-run companies out there whose boards,
and board compensation committees in particular, understand their
responsibilities and live up to them.

- Bob

Posted by Bob Lewis on September 7, 2008 05:17 AM