Introduction to Executive Compensation (eBook)

Cover 1
Copyright Page 6
Contents 8
Acknowledgments 18
PART I: An Introduction 19
Chapter 1. Introduction 21
I. Introduction and Overview 21
II. Owner–Manager Conflict: Agency Theory 23
III. Other Theories Explaining and Influencing Executive Compensation 25
IV. External Influences on the Compensation Package 26
V. Sources of Data on Executive Compensation 27
Appendix 1.1. Item 402 of SEC Regulation S–K 29
Chapter 2. Overview of the Compensation Package 53
I. Introduction 53
II. Compensation Package 53
III. Usage of Major Components of Compensation 59
IV. Relative Importance of Components of a Compensation Package 63
V. Magnitude of Compensation Package 67
VI. Relative Pay of CEOs to Other Top Executives 71
VII. Summary 74
Appendix 2.1. An Introduction to Option Pricing Models 75
Chapter 3. An Introduction to Designing the Executive Compensation Contract 77
I. Introduction 77
II. Making the Offer Attractive 77
III. Providing the Proper Incentives 79
IV. Designing the Contract to Retain the Executive 84
V. Minimize Costs to the Corporation 87
VI. Summary 89
PART II: The Components of the Compensation Package 91
Chapter 4. Salary 93
I. Introduction 93
II. Incentives 97
III. Affect on Willingness to Take Risks 98
IV. How Much? 99
V. Equity Issues 101
VI. Political Costs 102
VII. Financial Consequences 103
VIII. Summary 106
Appendix 4.1 107
Chapter 5. Bonuses: Short- and Long-Term 109
I. Introduction 109
II. Incentives 115
III. Effectiveness of Bonus Plans 120
IV. Political Costs 121
V. Financial Consequences 124
VI. Summary 129
Appendix 5.1. Bonus Formula from Contract Between David A. Stonecipher and Jeffersonpilot Corporation Dated September 15, 1997 131
Appendix 5.2. Lucent Technologies Inc. 1996 Long Term Incentive Program 133
Chapter 6. Stock Grants and Options 149
I. Introduction 149
II. Incentives 157
III. Costs 162
IV. Incentive Effect Versus Dilutive Effect 168
V. Effectiveness of Stock-Based Compensation 169
VI. Macro–Market Effects 170
VII. Alternatives 174
VIII. Financial Consequences 175
IX. Political Costs 179
X. Summary 181
Appendix 6.1. Nonqualified Stock Option Award Agreement Under the 1989 Stock Incentive Plan 183
Appendix 6.2. Restricted Stock Award Agreement Under the 1989 Stock Incentive Plan 186
Appendix 6.3. §422 Incentive Stock Options 190
Chapter 7. Deferred Compensation 193
I. Introduction 193
II. Funding Limitations 198
III. Incentives 199
IV. Political Costs 202
V. Financial Consequences 203
VI. Summary 205
Appendix 7.1. Executive Pension Benefits from General Motors Proxy Statement Filed April 20, 1999 206
Appendix 7.2. Senior Officer Excess Benefit Agreement 209
PART III: Related Issues 219
Chapter 8. Ownership of the Corporation 221
I. Introduction 221
II. The Affect of Executive Ownership on Incentives 225
III. The Effect of Executive Ownership on Executive Compensation 231
IV. The Effect of Director’s Ownership on Executive Compensation 233
V. The Effect of Large Shareholders and Institutional Ownership on Executive Compensation 233
VI. Summary 236
Chapter 9. Corporate Governance 237
I. Introduction 237
II. Director Compensation 240
III. The Effect of the Board of Directors on CEO Compensation 246
IV. The Effect of the Board of Directors on CEO Turnover 253
V. Examples of Strong and Weak Boards 253
VI. An Interesting Response 255
VII. Summary 256
Appendix 9.1. Excerpt on Board of Directors from General Electric Proxy Statement Filed With the Securities and Exchange Commission March 13, 2000 258
Appendix 9.2. Excerpt on Board of Directors from Walt Disney Proxy Statement Filed With the Securities and Exchange Commission January 5, 2000 268
PART IV: Considerations in Designing the Executive Compensation Package 277
Chapter 10. Is Executive Compensation Really That High? 279
I. Introduction 279
II. The Relationship Between Executive Compensation and Firm Performance 290
III. The Politics of Executive Compensation 293
IV. The Effect of the Political Process on Executive Compensation 294
V. International Comparisons 295
VI. Comparisons to Other Occupations 300
VII. Summary 302
Appendix 10.1. Selection of Bills Introduced, but not Passed, With the Potential to Affect Amounts, Deductibility or Disclosure of Compensation 304
Appendix 10.2. Resolutions Introduced to Limit Executive Compensation 305
Appendix 10.3. Laws that Restrict Executive Compensation 305
Chapter 11. The Effect of Corporate and Executive Characteristics on Designing an Optimal Compensation Contract 307
I. Introduction 307
II. Goals 310
III. The Effect of Corporate Characteristics on the Optimal Contract 310
IV. The Effect of Executive Characteristics on the Optimal Compensation Contract 319
V. The Effect of Joint Characteristics on the Optimal Contract 324
VI. Summary 326
Chapter 12. Designing a Compensation Contract 329
I. Introduction 329
II. Salary 329
III. Bonus 332
IV. Stock Compensation 340
V. Deferred Compensation 350
VI. Benefits 352
VII. Summary 353
PART V: Conclusion 357
Chapter 13. Recent Trends and Their Implications for the Future of Executive Compensation 359
I. Recent Trends 359
II. The Future 360
III. Conclusions 367
Glossary 369
References 377
Index 393