Myths and Realities of Executive Pay

Cover......Page 1
Half-title......Page 3
Title......Page 5
Copyright......Page 6
Contents......Page 7
Acknowledgments......Page 13
Prologue: The Compensation Committee Meets......Page 15
Introduction: The Battle over Executive Compensation......Page 21
Executive Compensation in the U.S. Corporate Model......Page 23
The Goals of Executive Compensation......Page 24
Our Views......Page 26
1 The Myths and Realities of Pay-for-Performance......Page 28
The Realities of Pay-for-Performance......Page 29
Other Issues......Page 42
Case Studies of Pay-for-Performance......Page 43
2 Managerial Power......Page 48
Academic Response to Bebchuk and Fried......Page 50
The Realities of Managerial Power......Page 53
Camouflaged Compensation......Page 55
At-the-Money Strike Prices......Page 56
Diversifying, Hedging, and Timing......Page 58
Peer Group Data and Upward Bias......Page 59
Other Factors in Setting Pay......Page 60
Fixed Shares versus Constant-Dollar Techniques......Page 62
Conflicts of Interest......Page 64
Conclusion......Page 65
Characteristics of External Forces......Page 67
Cyclical Reforms and Unintended Consequences......Page 69
The Genesis of the Current Environment......Page 70
Securities and Exchange Commission......Page 72
Internal Revenue Service......Page 74
NYSE and NASDAQ......Page 75
Congress......Page 77
The Reformers......Page 78
Concerns with Lack of Pay-for-Performance......Page 80
Stock Incentives......Page 81
Severance and Change-in-Control Agreements......Page 82
LBO Impact......Page 84
Impact of Change-in-Control Protection......Page 86
Hedge Funds......Page 87
Media Critics and Public Figures......Page 88
What We Can Learn......Page 89
4 End of an Era: The Decline of the Stock Option......Page 91
The 1990s: The Decade of the Stock Option......Page 92
2000-2002: Turning Point......Page 95
The Decline of the Stock Option......Page 96
The Realities of Expensing......Page 97
Perceived Value......Page 99
The Case for Stock Options......Page 101
SITUATIONAL CASES......Page 102
Costs and Stock Prices......Page 103
Reducing the Expense......Page 105
5 The Future of Long-Term Incentives......Page 107
Designing an LTI Program......Page 109
SETTING PERFORMANCE GOALS AND METRICS......Page 115
Basis for Measurement......Page 118
EXTERNAL GOALS/INDEXING......Page 119
HYBRID GOALS......Page 120
Goal Setting......Page 121
Determining Share Award Sizes......Page 123
A Look to the Future......Page 125
Agency Theory and Costs......Page 127
Moral Hazard......Page 129
Driving Superior Returns......Page 130
Stock Ownership Guidelines......Page 134
Stock Holding Requirements......Page 135
Net Share Retention Requirements......Page 136
Other Mechanisms for Creating Ownership......Page 138
Management Stock Purchase Plans......Page 139
TAX IMPLICATIONS......Page 140
Finding the Right Solutions......Page 141
7 Director Compensation in the New Environment......Page 143
The Evolution of Director Compensation......Page 145
Move Away from Stock Options......Page 146
Compensating Committee Chairs and Members......Page 148
General Electric as a Reference Point......Page 150
Director Compensation Levels and Mix......Page 151
Director Share Ownership......Page 152
Stock Ownership Guidelines......Page 153
Net Share Holding Requirements......Page 154
Ownership Effectiveness......Page 155
Structuring the Optimal Director Compensation Package......Page 157
The Future of Director Compensation......Page 159
8 The Compensation Committee: Creating a Balance between Shareholders and Executives......Page 161
Legal Context......Page 162
ARE STOCK OPTIONS PERFORMANCE-BASED?......Page 164
WHAT CONSTITUTES A GOOD BOARD MEMBER?......Page 165
Foundations for Best Practices......Page 166
Creating Excellence in Corporate Governance......Page 167
Institutional and Regulatory Governance Recommendations and Mandates......Page 168
Consultant Independence......Page 170
Setting the CEO's Pay as Rigorously as Possible......Page 171
Case Study of an Internal Promotion......Page 172
Creating a Pay-for-Performance Environment......Page 174
Rule 10b5-1 Plans - Preannounced Purchases or Sales of Stock......Page 179
Best Governance Practices in Designing Annual and Long-Term Incentives......Page 181
9 Aligning All Employee Pay to Improve Corporate Performance......Page 182
ALIGNING ARCHITECTURE AND PERFORMANCE MEASURES......Page 183
Untenable Forms of Alignment......Page 184
Performance-Pay Solutions......Page 185
MERIT INCREASES......Page 187
SHORT-TERM INCENTIVES......Page 188
Employee Stock Ownership......Page 189
The Role of Stock Options......Page 190
Moving Beyond Options......Page 192
Converting to Restricted Stock......Page 194
Adjusting Stock-Based Incentives......Page 196
Alignment in Practice......Page 197
Building Better Alignment......Page 198
10 International Executive Pay Comparisons......Page 200
U.S. Competitive Advantage......Page 201
The International Executive Pay Gap......Page 203
United Kingdom......Page 205
France......Page 209
Canada......Page 212
Asia......Page 214
CHINA......Page 217
HONG KONG......Page 219
Summary......Page 222
Conclusion: The Future of Executive Compensation......Page 224
Epilogue: Back in the Boardroom......Page 229
Nonqualified Stock Options......Page 235
Incentive Stock Options......Page 238
Stock Appreciation Rights......Page 239
Restricted Stock Units......Page 242
Restricted Stock......Page 246
CalPERS......Page 249
TIAA-CREF......Page 250
Fidelity......Page 251
Union-Sponsored Funds......Page 252
THE COUNCIL OF INSTITUTIONAL INVESTORS......Page 254
INSTITUTIONAL SHAREHOLDER SERVICES......Page 256
GLASS, LEWIS & COMPANY......Page 258
NATIONAL ASSOCIATION OF CORPORATE DIRECTORS......Page 259
THE CONFERENCE BOARD......Page 260
Appendix C: Academic Articles on Pay-for-Performance and the Effectiveness of the Executive Labor Market......Page 263
2. MANAGERIAL POWER......Page 267
3. EXTERNAL PRESSURES: THE NEW CONTEXT FOR EXECUTIVE COMPENSATION......Page 268
6. EXECUTIVE STOCK OWNERSHIP: THE SOLUTION TO THE EXECUTIVE COMPENSATION CRISIS......Page 270
8. THE COMPENSATION COMMITTEE: CREATING A BALANCE BETWEEN SHAREHOLDERS AND EXECUTIVES......Page 271
10. INTERNATIONAL EXECUTIVE PAY COMPARISONS......Page 272
Index......Page 273