Executive Compensation Package, Stock Options

Executive compensation has been at the forefront of discussion for a long period of time. Analyzed by academics, highlighted by the media, questioned by Congress, and scrutinized by the general public, the topic warrants much debate. In the 1990’s, total executive compensation increased substantially as companies began offering stock option programs; CEO’s of S&P 500 saw an average increase of 150%.

Phenomenal growth of interest in corporate governance has emerged in recent years. The body of literature on the subject has grown markedly in response to successive waves of large corporate failures. Furthermore, there have been numerous attempts to define what constitutes ‘good corporate governance’ and to provide guidelines in order to enhance the quality of corporate governance.

Sarbanes-Oxley only indirectly addresses the problem of the inclusion of executive compensation in financial statements. Title I, Section 108 of the Act requires audits to follow generally accepted accounting practices for the preparation of corporate financial statements. It makes no judgment as to the treatment of options by corporate auditors. This leaves it to the newly created Oversight Board to determine what standards are acceptable in the treatment of options. As noted by Mr. Buffett, supra, this leaves open the loopholes created by the 1994 Securities Act. There is no requirement that corporations accurately reflect executive compensation as an expense on their financial reports. Thus, it is still possible that earnings statements by corporations remain 3-5% higher than actual corporate earnings, even with the enactment of Sarbanes-Oxley. This can become problematic, as shareholders will not have accurate information upon which they can act to ensure accountability in their Boards of Directors. C.f., In re Walt Disney Co. Derivative Litigation (where shareholders challenged compensation programs awarding astounding amounts of money to Michael Ovitz as part of a "golden parachute").

This paper looks at the opinions and issues involved within executive compensation. This is important because executive compensation is such an integral part of a company or organization’s functions. Executives are the ones tasked with making the decisions within an organization, and their pay can sometimes be linked to how well or how not well their decisions pan out. To look at these opinions, research and high quality analyses from various data sources were used. Some of these sources included the in-class textbook, “Compensation” by George Milkovich, Jerry Newman, and Barry Gerhart. While other sources used, included peer reviewed journals as preferred by the professor. All of these sources were used to show the relevance between executive compensation and compensation management as an entirety. The results are across the board; there are issues and opinions that clearly contradict each other and individuals take many different stances on the topic of executive compensation. The conclusion is that this will continue to be an ongoing and sensitive topic to discuss within organization structures and plenty more research and data will arise for individuals to gain further and deeper understanding of the complex nature of executive compensation.

The economic downfall of 2008 illustrates the impact of unbridled corporate pay structures on our economy. Securities fraud, committed as a result of incentive packages offered to executives to create quick profits, had a detrimental effect on the overall economy. As observed during the Bank and Loan bust of 1989, CEOs take greater risks when offered stock options in their compensation packages. The 2008 Financial crisis, sparked by subprime mortgage market and hedge funds, was driven by banking executives making short term risks that served detrimental to stockholders in the long run. Furthermore, many compensation packages offered Golden Parachute clauses with no claw backs to both performing and underperforming executives.

However, there have been many cases where the CEO and executive officers receive outrageous compensation even when the companies suffer. Overall, there is a wide disconnect between the incentive of the executives and the financial performance of their company, which needs to be fixed. By passing regulations and rules such as the Dodd-Frank Act, there is hope of shedding light on the connection between the company’s performance and the executives pay. Although it will provide a clear insight, it will not be able to set a strict regulated compensation or define what an executive should earn. Instead regulations will allow for more transparency for the shareholders regarding corporate governance issues such as executive pay. Along with that, it will force companies to take accountability for their actions. If they do poorly, then the executives should be paid less, and vice versa. Overall, there should be a direct alignment between executive pay and the company’s

I agree with the advisory votes provision of the Dodd-Frank Act, because it serves as a valuable means of gauging the pulse of the collective shareholders’ interests. Since executive compensation is an important tool intended to align the interests of both the corporation and the shareholders, a system of assessing the shareholders’ interests is necessary – without it, the shareholders’ interests are in many ways left to speculation. Given the varied geographical locations of the shareholders and the regulations governing their ability to interact with one another, the advisory votes mandate affords the shareholders a collective voice and provides the board of directors with valuable feedback.

The rise of the stock option is one aspect in which Handy places blame. Thirty years ago, only 2% of executives’ pay was tied to stock options and has grown to over 60% today (Handy, 2002, p. 50). The reason for stock option popularity is because it allows executives to reap financial gains sooner rather than waiting on future generations. Handy (2002) also reveals that another aspect that fuels corporate distrust is that of executive wages sometimes being 400 times that of their lowest-paid workers (p.

I think the stock option compensation plan is not a bad idea when it comes to paying a corporation's board of director members. The board of director members pay option plays a vital role in the success of an organization. I think that theses board members need to be paid based on the company's financial profitability and the economic growth they help provide to the business. If the board members are paid a set wage there is no need for them to strive to excel the standard because their pay is already set in stone. If businesses compensate their board members according to the increased stock sales in the firm the board members must perform well to receive the pay they deserve. Board members have normally been compensated a yearly salary

In his words “Capitalism is also about the factories, the customers, the employees, the government, and the innovation and the hard work of the people who make the products and build the companies.” It seemed that Auhll was a believer in long-term shareholder value creation approach of stakeholder theory, but Auhll’s controversial actions spoke louder than his words. It turned out that, Auhll’s apparent long-term shareholder-value creation focus was contradicting with some of his own behavior. Auhll’s total compensation package was made up of base salary and performance bonus; where percentage of his base salary pay was increasing year by year and the bonus percentage was shrinking; especially during the years Circon struggled through the poor performance and the US Surgical’s(USS) hostile takeover attempt as depicted in the ‘compensation Summary appendix1’. Also, according to the case exhibit(4) footnote on page 21 of the case “Auhll’s was the member of his own compensation committee,” which was creating ‘conflict of interest’ and was against the core corporate governance guideline. Based on this, we can conclude that Auhll’s financial incentives were detached from stockholders best interests and CEO didn’t seem to have a strong long-term incentive. As shown in the exhibit 1-c of the case(p. 17), the HCMP product index was

In terms of Dodd-Frank’s effects on corporate governance, the first question is “does say on pay undermine the duties of the board of directors?” The only answer is, “not if the company’s Board of Directors is effective.” This legislation forces accountability for the board of directors to ensure that its compensation packages are based on measureable facts which truly tie into the performance of the company. The Citigroup CEO Compensation pushback by shareholders serves as an example where it was rejected in 2011. Upon further inspection by the shareholders, the CEO’s large compensation package had nothing to do with the performance of the company and would not provide the shareholders any true value.

It was reasonable for a CEO’s compensation to increase as the company expanded and became a larger entity, and the newly-granted shares and increasing stock options further aligned the CEO’s personal interests with those of the company and shareholders. In this sense, the second compensation package was also well-structured and not excessive. Seeing Sunbeam’s revenue rising and stock price climbing steeply upwards, Sunbeam’s shareholders and directors were fully convinced by Dunlap’s leadership, so they might perceive the increase in compensation amount necessary to retain and better motivate Dunlap to enhance the company’s value. Nonetheless, they neglected the fact that the increased portion of the equity-based compensation also further motivated the CEO’s dangerous behaviors pertaining to improper earnings management.

Stock options compensation may also lead to the market being deeply suspicious of the corporation. When top executives are paid in stock options compensation, they get huge compensation packages which are hidden away from public scrutiny. Furthermore, stock options also dilute shareholders. Management may also manipulate the market before the stock options grant date to get a better deal for themselves which would lead to excess volatility. Thus, having stock options compensation may lead to distrust

Many years ago stock options were rarely used as incidental benefits for top executives. Nowadays, compensating employee whit stock options has become an increasingly common practice. Before the year 1996, only the intrinsic value method was used to record these transactions. This method distorted the issuer’s reported financial condition and results of operations, which could lead to inappropriate decisions taken by investors. Followed by the increased use of employee stock options and the surrounding controversy of its recording method, on the year 1996 the fair value method was introduced to be used as an alternative to the intrinsic method and on 2004 the intrinsic value method was completely discontinued. The Fair value method

I agree that for the companies or executive the advantages surpass the disadvantage on stock option compensation package grant tied to company performance, however for average or lower level employees who are in the mercy of the key executive’s business decisions. Employee stock option provide advantages to companies such as ability to attract highly motivated and entrepreneurial executives and the capacity to hire and fulfill incentive without draining earnings or company’s equity or spending cash. Obviously, employee stock option benefit companies at it provides tax benefit and no accounting cost, while encourages executives to act in shareholder’s interest and risk taking or aggressive business decision for substantial return and favorable stock price. However, the risk cause by executives manipulating stock price and making wrongful investment decision can’t be ignored as well, as executives could manipulate stock price through fraudulent earnings to deceive investors and the market, then when stock price is at peak, executives exercise their stocks option leaving the company stocks underwater, which I do think what happen with Cendant Corp.