July 1, 2008
The Murky Crystal Ball: Reconsidering Executive Pay Design
As of the market close on June 23rd, 40.3% of the Fortune 500 companies’ executive and employee stock options were out of the money by an average – 34.5%. It also appears that many of their incentive plans – especially long term – are also underwater.
Looking ahead into my murky crystal ball, I am increasingly concerned that our current system of executive compensation is designed for an expanding economy, increasing profits and a climbing stock market, rather than businesses in difficult competitive shape relative to global competitors, a floundering market and a profit squeeze.
Absent the rosy world to which we have grown accustomed, can we continue to pay the same level of “target compensation” tied to modestly rising base salaries for lower levels of expected/target performance?
On the other hand, can we force feed performance targets that may be unrealistic in view of current business conditions and thereby bring pay (and morale/motivation) down relative to results produced? Clearly, substantive consideration of the issues involved is needed.
– Pearl Meyer, Steven Hall & Ptrs.