Page 131 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 4. The Stakeholders 117

Why weren’t the number of options scaled back? The answer is simple. Executive pay
experts were justifying large grants based on the practice of others. And very few executives
stepped up and stated that it was wrong to continue a lavish grant policy that would further
widen a pay gap with others in the organization. Many convinced themselves they were worth
the millions being showered on them, looking to proxies of other companies to see if
even more could be justified. The need for an appropriate pay package was replaced by an
executive greed justification, a sense of entitlement.
Greed is fed by the above-described “inappropriate behavior”. Believing in their own
infallibility has led some executives to put themselves above all other stakeholders, when in
reality they should be last. Their compensation should be based on how well the employees,
the customers, the community, the suppliers, and the shareholders fare.

Individual Preferences on Pay
Although on the surface perceived value and after-tax value seem to correlate closely, some ana-
lysts advance the hypothesis that recipients assign a higher value to deferrals and noncash forms
of payment than to other forms of pay. Such a valuation would presumably be lessened during
inflationary periods. While it is important to consider executive preferences in developing a pay
package, such preferences might not be optimally appropriate. For example, many companies
persisted with qualified stock options for their highest-paid people long after the net cost/net
value analysis had relegated these options to a secondary position. In part, this was due to the
fact that executives wanted qualified options in order to convert the entire gain to capital gains
rather than ordinary income. The statutory limits on their successor, the incentive stock option
(ISO), went a long way toward solving this issue. Another example is that many executives place
a low value on stock options when the market is depressed and listless. Many financial analysts
would counter that such times are precisely when options are attractive and should be used to
benefit from a subsequent rally.
There are many problems in considering individual preferences, in particular, develop-
ing the appropriate possibilities, determining after-tax cost and value for each executive,
avoiding IRS problems of constructive receipt, and maintaining the necessary records.
(Constructive receipt was reviewed in Chapter 3 and will be discussed later in this chapter.)
In addition, as suggested earlier, the executive’s perception may be misplaced, and it will be
necessary to subsequently do a little hand holding.

The Executive Stakeholder: Summary
Ideally, the entire compensation program is designed, developed, and administered in a
manner that will motivate the executive to work harder, faster, and smarter. It is therefore
important to examine the program to determine the extent to which this is true and, just as
important, whether the executives perceive that it is designed in this manner.
Although many executives believe they are worth every penny of the hundreds of
thousands of dollars they are paid, not everyone shares this view. The dissidents range from
shareholders to lawmakers. With multimillion-dollar-plus compensation packages becoming
more common (even below the CEO level), public resentment may initiate confiscatory tax
rates for the super-paid. In some cases, executive pay looks like a seven-digit telephone
number with an area code! Can a country code add-on be far away?
Compensation should reward executives for taking appropriate business risks.
Professional managers do not have the same motivation as owner-managers. Many will agree