Book contents
- Frontmatter
- Contents
- Acknowledgments
- Prologue: The Compensation Committee Meets
- Introduction: The Battle over Executive Compensation
- 1 The Myths and Realities of Pay-for-Performance
- 2 Managerial Power
- 3 External Pressures: The New Context for Executive Compensation
- 4 End of an Era: The Decline of the Stock Option
- 5 The Future of Long-Term Incentives
- 6 Executive Stock Ownership: The Solution to the Executive Compensation Crisis
- 7 Director Compensation in the New Environment
- 8 The Compensation Committee: Creating a Balance between Shareholders and Executives
- 9 Aligning All Employee Pay to Improve Corporate Performance
- 10 International Executive Pay Comparisons
- Conclusion: The Future of Executive Compensation
- Epilogue: Back in the Boardroom
- Appendix A Legal and Regulatory Requirements for Executive Compensation Plans
- Appendix B Summary of the Regulatory and Institutional Mandates and Recommendations
- Appendix C Academic Articles on Pay-for-Performance and the Effectiveness of the Executive Labor Market
- Notes
- Index
5 - The Future of Long-Term Incentives
Published online by Cambridge University Press: 31 July 2009
- Frontmatter
- Contents
- Acknowledgments
- Prologue: The Compensation Committee Meets
- Introduction: The Battle over Executive Compensation
- 1 The Myths and Realities of Pay-for-Performance
- 2 Managerial Power
- 3 External Pressures: The New Context for Executive Compensation
- 4 End of an Era: The Decline of the Stock Option
- 5 The Future of Long-Term Incentives
- 6 Executive Stock Ownership: The Solution to the Executive Compensation Crisis
- 7 Director Compensation in the New Environment
- 8 The Compensation Committee: Creating a Balance between Shareholders and Executives
- 9 Aligning All Employee Pay to Improve Corporate Performance
- 10 International Executive Pay Comparisons
- Conclusion: The Future of Executive Compensation
- Epilogue: Back in the Boardroom
- Appendix A Legal and Regulatory Requirements for Executive Compensation Plans
- Appendix B Summary of the Regulatory and Institutional Mandates and Recommendations
- Appendix C Academic Articles on Pay-for-Performance and the Effectiveness of the Executive Labor Market
- Notes
- Index
Summary
You can't reward value added unless you can measure it. Since you get what you reward, and reward what you measure, you get what you measure. Make sure you're measuring the right thing.
Richard A. Brealey and Stewart C. Myers, Principles of Corporate FinanceIn this new era of stock option expensing, companies are moving to a portfolio of long-term incentive vehicles. Now that companies must expense options like every other form of compensation, the goal is to maximize value delivery, both real and perceived, for a given level of expense. This changed paradigm can be seen in Figure 5.1. The transformation to a portfolio approach is well under way. From 2002 to 2004, among approximately 1,000 companies, the Black–Scholes value of stock option awards for CEOs fell by 24 percent (see Figure 5.2). While this is a big decline even in a flat stock market, the fact that the share price for the vast majority of these companies shot up during the same period makes it even more meaningful. Some of the decline in value simply reflects a more aggressive management of Black–Scholes assumptions to reduce expense, but most of it reflects the dramatic drop – 30 percent – in the number of options awarded to these CEOs. In the same period, CEOs' restricted stock and long-term performance plan values increased by 46 percent and 51 percent, respectively – a major realignment of the delivery of long-term incentive values.
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- Myths and Realities of Executive Pay , pp. 87 - 106Publisher: Cambridge University PressPrint publication year: 2007