Well-structured executive compensation

Dear Bob …

There have been a lot of egregious pay executive situations exposed during the past few years. While your examples are entertaining (“A Labor Day dichotomy,” Keep the Joint Running, 9/1/2008), the foundation isn’t always as sound as it might be.

Exec comp has at least three factors: salary, short term incentive (annual bonus) and long term incentive. In a mid-cap (approaching large cap) company with which I’m familiar the exec salaries were between the 25th and 50th percentile vs similar companies. Annual bonuses ranged from 25-100% of salary and were tied to specific performance factors. (growth, profitability, tangible, measurable stuff). The long term incentives were all based upon stock options. The option plan included every employee and the exec plan typically provided a significant number of options granted each year. The vesting time ranged up to seven years.

The execs had some great compensation for several years as the stock grew, and grew and grew. The rest of the folks did okay too. Entry level comp was probably $24,000. Exec comp peaked at 150 or so times that. Of that difference, as much as 95% was option income.

What would be a better use of these funds? Stock buy backs? Dividends? Hire more people? (There was enough cash being generated so that any reasonable acquisition or new venture could be funded.) And, were these high long term incentives a way of keeping some high performance exec talent? Probably.

So, what needed to be “fixed?” Or was anything broken?

– Trying to understand the problem

Dear Trying …

These days, executive comp that’s a “mere” 150% of entry-level comp is quite modest. The executive compensation structure sounds quite healthy as well, balancing short-term and long-term results and connecting everyone to the company’s success.

Sounds like a well-run company, so from the information you’ve provided I’d say there’s nothing to fix, at least insofar as the compensation structure goes.

Someone once said that the plural of “anecdote” isn’t “data.” Your example proves we need a similarly pithy statement for the reverse circumstance: The singular of “generality” isn’t necessarily “situation.”

Okay, so that wasn’t it. You get the idea: The problem of excessive and unhealthy executive compensation is widespread. It isn’t, however, ubiquitous.

Thanks for reassuring us that there are still some well-run companies out there whose boards, and board compensation committees in particular, understand their responsibilities and live up to them.

– Bob