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
8 - The Compensation Committee: Creating a Balance between Shareholders and Executives
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
To attract a successful incumbent CEO from another company, you've got to give him a good incentive. You couldn't expect James McNerney to leave [the CEO position at] 3M if we weren't going to make him whole [as the new Boeing CEO].
John Biggs, director, Boeing, and former president, TIAA–CREFDespite the efforts of compensation committee members to be scientific, there is tremendous variation in CEO pay. Much of this can be explained by differences in tenure, industry, and company size and performance. But substantial variation – up to 50 percent in some instances – is not explained by any conventional objective metrics. Cynics attribute this variation to cronyism or the randomness of executive pay. We attribute it to the highly subjective nature of CEO compensation and, in a shareholder-friendly sense, to the judgment, fine-tuning, care, and deliberation – for example, factoring in differences in business strategy and culture – that go into these pay decisions.
Other elements contribute to the difficulty of the task. Compensation committees historically have dealt piecemeal with management recommendations that came in – bonuses and salary increases in January, stock options in March, SERP enhancements in September – with no tally sheet that added it all up. Although pay-for-performance has clearly increased, the linkage could have been clearer. And finally, CEO contracts and severance plans (especially after a change of control, with the associated gross-up payments) were considered necessary merely for the company to be competitive.
- Type
- Chapter
- Information
- Myths and Realities of Executive Pay , pp. 141 - 161Publisher: Cambridge University PressPrint publication year: 2007