Executive Compensation and Shareholder InterestEssay title: Executive Compensation and Shareholder InterestExecutive Compensation and Page 2Executive Compensation and Shareholder InterestThe compensation of the CEO (Chief Executive Officer), and other high level executives comprises a largo portion of a company’s payroll. It is often a topic of discussion between employees, owners and shareholders. Why is their compensation so high and why can it be viewed as controversial? The goal of the executives should be to maximize profits and secure the financial strength of the company. The question has been raised if some executives are looking to promote the best interest of their firms or the best interests of their own financial security. This raises the question of how to structure executive compensation to benefit both the executive, personally and professionally, as well as sustain the viability of the company.
Overview of Executive CompensationDuring the mid 1980’s executives began receiving some of the largest compensation packages ever offered. Even during the recession in the 1990’s some executive packages continued to raise In October 1992 the Securities and Exchange Commission outlined new disclosure rules requiring disclosure of executive compensation in the proxy statements (Leonard 1994). In July 2006, the SEC again amended the reporting requirements of executive compensation Among some of the changes, it provides for one number to be disclosed for total annual compensation for each executive by name along with more detailed disclosures. As stated by John W. White, Director of the SEC’s Division of Corporation Finance, “…these disclosures be made in plain English” ( “SEC Votes to Adopt Changes”, 2006, para. 1).
Executive Compensation and Page 3Type of Executive CompensationCash is not the only method by which an executive can be compensated. Option grants which includes the various stock options , is another popular methods. Executive perks like use of corporate housing, cars and jets are available as well. Retirement packages granted to executives can also be part of the employment package. Long term incentive plans base compensation on performance and are favored over the deferred compensation packages due to tax implications. This is not an all encompassing list and most executive receive a combination of the options in their employment contract.
Mutually Beneficial CompensationConcerns have been raised about executives protecting their own interests at the expense of the company. One concern is that executive pay does not have to correlate to how well the company is run (Hodges, as cited in Brush, 2005). Options backdating by executives caused a scandal to erupt and by May 24, 2006 over 25 companies were being investigated (Dolmat Connell & Partners June 2006). Backdating of stock option involves executives moving the execution date of the stock options back in time when the price was lower thereby setting the “strike price” lower than the market price, allowing greater gain to be realized when the options we exercised (Lashinsky, 2006). CEO’s also structure their employment contracts to include protection in the event of changes or restructuring of their organization. Golden parachutes are clauses for severance packages paid out to executives who lose their jobs in the event of a change of control (Boyes, 2004, pg. 242). In 2007 Robert Nardelli received approximately $210 million in cash and stock options which included a $ 20 million severance payment and $32 million in
Executive Compensation and Page 4retirement benefits. This was a direct result of his pre-employment negotiation ( Mui, 2007).These are the pitfalls of executive compensation not based on business performance. There are ways to align the goals of the executive with those of the corporation of which they are the agent. For example, a pay for performance clauses “… works because of the incentive effect that underpins the pay-for performance approach, If you design incentives for management that maximize long-term shareholder value, an executive will work harder to create wealth for shareholders” (Van Putter, 2007). Michael Eisner, former CEO of Walt Disney, received no bonus in 1999 due to his company’s
dredging strategy, and only one Retentive and Lifetime Retention (WMO) Bonus in 1983. In 1995, he was appointed by the board of directors of Dorna Capital Corp.
Michael Eisner is a former CEO of Walt Disney.
WMO Bonus is a bonus that is awarded in a series of two payouts to each of Eisner’s employees. The salary depends on his performance in a given year and the total annual compensation. The bonus does not have any relation to performance of other employees. If Eisner does well on this annual and yearly list of earnings (or, in the case of Eisner’s former wife, if he performs better than he could have performed on his own salary list), and the value of the earnings is based on these two bonus values, the annual amount awarded to him will be increased to 0% of the total earnings.
The bonuses are based on the work, the value of the earnings on current, future, or future-based awards that a certain company’s employee performs. This benefit is more in line with the performance of other employees than at the time of execution of the incentive contracts. This is the “extraordinary” value of a position. Eisner became a director of Dorna Corp., which was acquired by Disney (Dorna), under a formula that created a $7.5 billion value, and its Board of Directors (Board) voted to buy the company in 2002. An investor from the United Fruit Company purchased the same company from Disney in 2009, with the intention of making a return and being a shareholder, and being on the board of directors. A new subsequent investment was made over the following year. And it is now known that Eisner paid his full compensation for the company, which is $7.5 billion in 2009 dollars. The amount was reclassified as “retirement compensation”, and the new “future compensation” is $7.25 billion in 2012. The current value received by Eisner of $7.25 billion is based on what Eisner earned after 1997 under the formula outlined by Eisner in his 1996 letter to Smeaton to the company. With the addition of these additional “future compensation” benefits, Eisner’s net value has increased from $2.50 billion in 1996 to $34.5 billion in 2012. This is the most significant change in value since 1996.
The “extraordinary” value (or “extraordinary value” if we include the “future compensation” benefit) can be described by a number of different scenarios, ranging from a loss of earnings at the time of execution of incentives to a loss in value that (according to Eisner