Joann S. LublinWall Street Journal

February 2006Presented by: Christoph Burger

Rising complaints about excessive executive compensation

Stock options can gain value in a rising stock market, enabling executives to make money even if the companies’ earnings growth is modest

Big options grants encourage executives to seek short-term gains in companies’ share prices without creating long-term value

Increasing number of corporate boards are imposing performance targets on stock and stock options included in CEOs’ pay package

Expanded emphasis on performance targets is designed to keep executives from reaping rich rewards for reasons unrelated to leadership skills

Companies turn to a variety of performance goals to promote greater accountability Example:

Mercer’s CEO Nuti could lose 400,000 of his 650,000 options unless the company reaches an undisclosed level of cumulative net operating profits

Company tells shareholders plenty about specific hurdles that CEO John Tyson must clear in order to profit from performance-based equity award

John Tyson received 150,000 “performance shares”; how many he will keep depends on improvements in Tyson’s stock price and return on invested capital

Also, the more companies Tyson outperforms, the more shares John Tyson retains

The deal guarantees the CEO grants through the current fiscal year with a maximum annual value of nearly $2.5 million, but all must be earned through some performance measure

Performance-linked equity targets need to be meaningful, with targets an investor understands

Some executives have forfeited stock or options because companies did not hit performance targets. E.g. CEO Carp from Eastman Kodak Co.

The rising complaints about excessive executive compensation increased the number of corporate boards that imposed performance targets on stock and stock options included in CEOs’ pay packages. As a result, CEOs focus more on leadership skills and on creating long-term value.