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Boards tie CEO Pay More tightly to Performance

Rising complaints on executive compensation led to more boards imposing stock performance targets in CEOs' pay packages. This shift promotes greater accountability and long-term value creation over short-term gains. Examples from Mercer and Tyson Foods highlight how tying compensation to meaningful performance metrics encourages leadership skills. Executives may forfeit stocks or options if targets are not met, emphasizing the importance of aligning pay with performance for shareholders' interests. This article delves into the evolution of executive compensation practices, emphasizing the need for CEOs to focus on sustainable value creation for companies.

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Boards tie CEO Pay More tightly to Performance

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  1. Boards tie CEO Pay More tightly to Performance Joann S. Lublin Wall Street Journal February 2006 Presented by: Christoph Burger

  2. Issue • Rising complaints about excessive executive compensation • Stock options can gain value in a rising stock market, enabling executives to make money even if the companies’ earnings growth is modest • Big options grants encourage executives to seek short-term gains in companies’ share prices without creating long-term value

  3. New Approach • Increasing number of corporate boards are imposing performance targets on stock and stock options included in CEOs’ pay package • Expanded emphasis on performance targets is designed to keep executives from reaping rich rewards for reasons unrelated to leadership skills • Companies turn to a variety of performance goals to promote greater accountability • Example: Mercer’s CEO Nuti could lose 400,000 of his 650,000 options unless the company reaches an undisclosed level of cumulative net operating profits

  4. Tyson Foods Inc. • Company tells shareholders plenty about specific hurdles that CEO John Tyson must clear in order to profit from performance-based equity award • John Tyson received 150,000 “performance shares”; how many he will keep depends on improvements in Tyson’s stock price and return on invested capital • Also, the more companies Tyson outperforms, the more shares John Tyson retains

  5. Tyson Foods Inc. (cont.) • The deal guarantees the CEO grants through the current fiscal year with a maximum annual value of nearly $2.5 million, but all must be earned through some performance measure • Performance-linked equity targets need to be meaningful, with targets an investor understands • Some executives have forfeited stock or options because companies did not hit performance targets. E.g. CEO Carp from Eastman Kodak Co.

  6. Conclusion • The rising complaints about excessive executive compensation increased the number of corporate boards that imposed performance targets on stock and stock options included in CEOs’ pay packages. As a result, CEOs focus more on leadership skills and on creating long-term value.

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