November 30, 1999Executive Compensation Connection and Correlation of Executive Compensation to Stockholder Metrics A Study of Four Major US Corporations

November 30, 1999 Executive Compensation

Connection and Correlation of Executive

Compensation to Stockholder MetricsA Study of Four Major US

Corporations


Agenda

• Hypothesis• Research Methodology• IBM• GE• Colgate/ Palmolive• Walt Disney• Summary• Conclusion


Hypothesis

• Stock options do support investor’s interests.


Research Methodology

• Identify four companies• Gather information on CEO

compensation and financial returns• Determine if there is a positive or

negative link between the CEO compensation package and the financial returns

• Analyze the trend of the four companies


Metrics for Review

• Earnings per Share (EPS) – Net Income/# Outstanding Shares

• Return on Equity (ROE)– Net Income/Stockholder’s Equity

• Stock Price


IBM

• CEO - Lou Gerstner• Incorporated in 1911 as Computer-

Tabulating-Recording Co.• Today IBM is one of the leading

information technology company• Revenue - $81.7 billion• Net Income - $6.3 billion


IBM Executive Compensation Package

• Two main components of executive compensation package– Base salary and Cash Incentive/ Bonus– Long-term Incentive Compensation

• Three main elements drive compensation package– Competitive marketplace– Complexity of leading IBM– Gerstner performance


Lou Gerstner Compensation Contract

Year Salary Bonus Other Annual Compensation

Long-Term Compensation

Awards

Long Term Incentive Plan

Payouts

Total Compensation

1998 $1,875,000 $7,500,000 $12,384 $0 $4,145,419 $13,534,801 1997 1,500,000 4,500,000 5,081 2,200,000 2,094,018 $10,301,096 1996 1,500,000 3,270,000 5,838 600,000 2,072,567 $ 7,450,401


IBM Corporate Performance

IBM Earnings Per Share

00.20.40.60.8

1

1996 1997 1998

IBM Return on Equity

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

1996 1997 1998


General Electric

• CEO - Jack Welsh• Only original member of the Dow

Industrial Average - Since 1889• GE is a large Conglomerate• Revenue - $58,687,000,000• Net Income - $9,296,000,000


General Electric – Executive Compensation


• Three main elements drive compensation package Aggressive Leadership Overall Global Competitive Position Preeminent quality of products and services Reinforcement of a culture of integrity and

boundaryless behavior Positioning the company for continued success


Jack Welsh’s Compensation

Year Salary Bonus Other AnnualCompensation

*

Long-TermCompensation

Awards

Long TermIncentive

Plan Payouts

TotalCompensation

1998 $2,800,000 $7,200,000 $104,944 $27,018,750 --- $37,125,6921997 2,500,000 5,500,000 69,190 --- --- $8,071,1871996 2,300,000 4,000,000 --- --- $15,105,000 $15,105,000


General Electric Corporate Performance

Return On Equity (GE)

23.00%

23.20%

23.40%

23.60%

23.80%

24.00%

1996 1997 1998

Years

ROE

Stock Price* (GE)

$0.000

$20.000

$40.000

$60.000

$80.000

$100.000

$120.000

1996 1997 1998

Year

Stock Price*

Earnings Per Share (GE)

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

1996 1997 1998

Year

EPS


Colgate/Palmolive

• CEO Reuben Mark• Founded in 1806 by William Colgate• Soap, Candles, and Starch• Operations in 70 countries and

markets its products in over 200.• World leader in Personal Care

Products


Colgate/PalmoliveCompensation Package


• Main elements compensation package include: – Fosters profitable growth & Increased shareholder

value– Align interest of executives & shareholders.– Attract, retain, & motivate high-caliber executives.


Reuben Mark Compensation

Year Salary ($) Bonus ($) Restricted Stock

Options

Securities Underlying

options

All other Compensation

($)

Total Compensation

1998 1,200,250 2,256,084 6,999,503 153,505 $178,466 $10,789,806.00

1997 1,122,500 2,724,055 3,379,485 2,600,000 $141,305 $9,969,342.00

1996 1,021,000 1,656,302 2,416,800 0 $130,802 $5,226,900.00


Colgate/Palmolive

• Increase in Net Income by 15% ($849Million)

• Total Revenue: 9 Billion.

• Over 38,000 Employees around the world.


Colgate Palmolive Corporate Performance

Earnings Per Share

$0.00

$1.00

$2.00

$3.00

1996 1997 1998

Return On Equity

0.00%10.00%20.00%30.00%40.00%50.00%

1996 1997 1998


• #2 media company.• TV, movies, theme parks,

publishing, vacations, etc.• $23 billion in 1998 revenues.• $1.85 billion net income.• $.89/share earnings.


• Executive Compensation at Disney:– Base Salary– Performance base annual bonus

• Net Income, ROE, ROA, EPS• Stock or cash awards

– Stock options• Initial employment, promotion, renewal or

fully vested.


Michael Eisner’s Total Compensation 1996-1998 Year Salary Bonus Other Annual

Compensation* Long-Term

Compensation Awards

Long Term Incentive

Plan Payouts

Total Compensation

1998 $764,423 $5,000,000 $3,820 --- --- $5,768,243.00 1997 $750,000 $9,900,000 $3,820 --- --- $10,653,820.00 1996 $750,000 $7,900,000 $3,520 --- --- $8,653,520.00


Walt Disney

Walt Disney Company EPS

0.50.70.91.1

1994 1995 1996 1997 1998 1999(est)

Years

EP

S

Walt Disney Company ROE

0.00%5.00%

10.00%15.00%20.00%25.00%

1994 1995 1996 1997 1998

Year

% R

OE



• 1999 compensation - over $575 million.• Stock options issued in 1989. Exercised

1999.• Current stock options - no vested shares

now. 24 million unvested.• 500% increase in stock price - 1984-

1989.• Overall return is excellent.


Summary

• Evaluating executives on financial benchmarks is important.

• ROE, EPS and stock price accurately reflect executive performance.

• Stock options encourage benchmark improvement.


Conclusion

• Stock Options work.• Pay for performance benefits

investors.• Long term investors should

applaud stock options.• Continuation and expansion of

stock options should

Documents

November 30, 1999Executive Compensation Connection and Correlation of Executive Compensation to Stockholder Metrics A Study of Four Major US Corporations