Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN: 9781337902571
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
Question
Chapter 1, Problem 12Q
Summary Introduction

To determine: The factors that the committee must consider while setting the CEO’s compensation. Whether the compensation must be of dollar or stock or both. The way to measure the performance. The actions of Person X if he is the vice president of some other company.

Introduction:

Compensation Package: The compensation package of the manager should be attractive which inspire them to perform actively. If the compensation package is good, the manager will focus on the maximization of stockholders value. The compensation package should be fair.

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Suppose you were a member of Company X’s board of directors and chairman of the company’s compensation committee. What factors should your committee consider when setting the CEO’s compensation? Should the compensation consist of a dollar salary, stock options that depend on the firm’s performance, or a mix of the two?               3.If “performance” is to be considered, how should it be measured? Think of both theoretical and practical (that is, measurement)         considerations.
Suppose you were a member of Company A’s board of directors and chairperson of the company’s compensation committee. What factors should your committee consider when setting the CEO’s compensation? Should the compensation consist of a dollar salary, stock options that depend on the firm’s performance, or a mix of the two? If “performance” is to be considered, how should it be measured? Think of both theoretical and practical (that is, measurement) considerations. If you were also a vice president of Company A, might your actions be different than if you were the CEO of some other company?
Suppose you were a member of Company X’s board of directors and chairpersonof the company’s compensation committee. What factors should your committeeconsider when setting the CEO’s compensation? Should the compensation consistof a dollar salary, stock options that depend on the firm’s performance, or a mixof the two? If “performance” is to be considered, how should it be measured?Think of both theoretical and practical (that is, measurement) considerations. Ifyou were also a vice president of Company X, might your actions be differentthan if you were the CEO of some other company?
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  • If a company’s board of directors wants management to maximize shareholder’s wealth, should the CEO’s compensation be set as a fixed amount, or should the compensation depend on how well the firm performs? If it is based on performance, how should performance be measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?
    If a company’s board of directors wants management to  maximize shareholder wealth, should the CEO’s compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm performs? If it is to be based on performance, how should performance is measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?
    Chief executive officer compensation can be a material amount andis often scrutinized by regulators, analysts, competitors, and investors. For CEOs of publiclytraded companies, compensation can consist of salary, bonus, stock option grants, or otherstock awards that can be restricted in terms of how long the officers and directors arerequired to hold the stock. The Proxy Statement for the 2012 Annual Meeting for GoldmanSachs reports the following values for 2011 compensation of the chairman and CEO.1. Salary of $2,000,0002. Bonus of $3,000,0003. Restricted Stock Units with a grant date fair value of $10,710,073. The grant date fairvalue is determined based on the closing price-per-share of the common stock onthe NYSE on the date of the grant and includes a 15% liquidity discount to reflectthe transfer restrictions on the common stock.a. Provide at least one audit procedure the auditor would perform to test the chairmanand CEO’s salary. What audit objective is satisfied with this audit…
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