Executive Decision - March/April 2008 - (Page 34)

cover story seeking to discipline that whole process. If you have a compensation committee that believes that the CEO and other high-level officers are entitled to a nice payday even though the company has not been performing well, you will find shareholder groups that are going to apply some discipline to that process.” Pay for Performance The rise in the levels of transparency, disclosure and the increased shareholder attention on executive compensation has given increased emphasis to the pay-for-performance concept. However, it’s really nothing new, according to Dye, Kaplan and Lorsch. “Companies have had pay-for-performance plans in place years before the SEC put into effect its new requirements,” says Dye. “The new disclosure rules bring it into clearer focus and have caused compensation committees in public companies to look more closely on how they structure pay for performance.” Kaplan points out there has always been pay for performance. “When you have options, you have huge pay for performance,” he says. “When the stock goes up, you want the executive to make more money and when the stock goes down you want him or her to make less money. If you look at the relationship between what an executive takes home you can see their reward for the company’s performance is very strong.” Lorsch agrees. “Companies have always tried to connect pay for executives based on performance. It’s a standard business practice,” he says. “You have to ask yourself what we mean by performance. It all starts with the performance guidelines—what are you shooting for? Turnaround companies would base goals on cost reductions or market share while growth companies would be more concerned about earnings and profits.” Kaplan adds that pay for performance needs some of its own guidelines. “You want to make sure the executive holds on to his/her stock. If you give them options, you want to make sure they don’t exercise them until they have left the company,” he says. “If you give somebody options and they can sell them in two years and the stock goes up, maybe they don’t care what happens in year three.” The compensation package that American Express Co. negotiated with CEO Kenneth I. Chenault provides a blueprint for a modern pay-forperformance compensation program. His performance is to be measured over six years in order to focus on the big picture instead of the short term. Options give him control over a staggering 2.75 million shares of stock, but utilizing them will force him to: (1) Achieve earnings growth of no less than 15% per year on average; (2) achieve revenue growth of at least 10% per year; (3) achieve a Jay W. Lorsch Professor Steven Kaplan Professor University of Chicago Harvard University 34 EXECUTIVE DECISION I execdecision.com http://execdecision.com

Table of Contents Feed for the Digital Edition of Executive Decision - March/April 2008

Executive Decision - March/April 2008 Contents Index of Advertisers Contributing Editors From the Editor's Desk Publisher's Note You Be the Judge - Unionization Thought Leader - Pitney Bowes Management - Flying High for Long-Term Results Strategies - Sovereign Wealth Funds Cover Story - In Whom Do We Trust? The Movement for Greater Accountability & Disclosure Finance/Legal - The New Boycott Model Green At Work - Transforming for Sustainability Technology - Embracing Risk Leadership - Executive Reputation Management The Global Village - China Moves to Curb Prices Economic Profile - California Gold Rush Transformations - I Can See Clearly Now, The Brain Is Gone Marketing - Effectively Using Market Research The Bottom Line - Brands: A Shrinking Advantage or Shifting Advantage? Pulse - Pandemic: Not If But When SPECIAL SECTION - Living On the Green: Luxury Golf Destinations

Executive Decision - March/April 2008

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