1. Executive Compensation Dilemmas Lecture 5

2. Shareholder dilemmas Do all shareholders want the same thing? How much emphasis should be placed on short term results? How much on long term results? How should performance be judged in good vs. bad times and vs. peers? What are the best metrics for the short- term? Best metrics for the long-term?

3. Shareholder dilemmas What should the link be between long term value growth and long term incentive awards? Pay systems that link the CEO’s pay with that of other strategic officers? Right targets at the right level? Disclosures?

4. Executive Pay is Ok The job of being a senior manager in a public company is a demanding one It requires the ability to take risk while producing consistently higher returns What is “excessive” pay? Only limited amount talent is available to produce the market results required Pay plans were shareholder approved

5. Executive Pay Is Not Ok Pay is excessive and does not reflect the interests of shareholders Executive pay is symptomatic of the ills affecting boards-lack of independence Executive pay is not fully disclosed and is not tied to performance-President Bush Why should fail executives have a soft landing? Executive pay is creating a pay equity problem in the country

6. Dilemmas of Outside Consultants Consultants were either used optionally and/or hired by management Outside consultants were used to benchmark compensation at peer firms Packages typically included four components Analysis today is vigorously reviewed

7. Dilemmas How do you compensate someone who is doing very, very well in a distressing situation? What do we do when the vision and strategy doesn’t produce the intended performance? How do we deal with the interest of short-term vs. long-term shareholders? What do you when today’s compensation is dwarfed by the characteristic of the stock market?

8. What do directors think? Boardroom Briefing Winter 2005 CEO compensation levels accurately reflect performance vs.. stated goals-56% My firm has a comprehensive and easily understood method for computing executive compensation-49% CEO and exec pay is tied directly to sustaining and increasing shareholder value-57% CEO and exec pay is line with the industry-69%

9. What do directors think? Boardroom Briefing 2005 Re-scale to reduce the difference between the highest and lowest paid More board involvement with the top 50 executives Tie senior compensation packages to diluted per share income Limit the CEO’s ability to sell a significant percentage of their holdings over a period of years

10. What do directors think? Boardroom Briefing Winter 2005 Look at pay packages as a whole and not just the pieces and the review the total that might occur under different outcomes. Have a strict performance driven culture. Ensure that every package meet the smell test. Don’t pay rewards for meager results.

11. Where are we headed? More focus on the internal scale Tying pay to strategy and performance Distinguishing between metrics for the short term vs. long term Examining all aspects of pay and perks More disclosures and scrutiny of soft landings