Page 147 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 4. The Stakeholders 133

prolonged periods of modest growth. However, no one is very interested in stock options
of any type during prolonged bear markets, although one could argue that they would be
very useful if given shortly before the market reversed and the bulls resumed control.
Shareholders also like it when companies buy back their stock, because as it reduces the
number of shares in the marketplace, thereby, it is hoped, proportionately increasing the
stock price.
Conversely, shareholders do not like it when the company uses unissued stock for acqui-
sitions, because it increases the number of shares in the marketplace, thereby depressing the
stock price. For the same reason, they do not like insiders selling their shares of stock. And
they do not like plans that pay out based on internal financial goals (ignoring shareholder
value). Nor do they like restricted stock awards not tied to performance. Obviously, they do
not like repricing stock options at a lower price than originally granted. Nor do they like stock
option reloads (replacing exercised grants with new stock options). They are also not in favor
of omnibus plans, which permit multiple uses of stock without describing what will be used
when, nor of evergreen plans, which automatically replace stock used with new deposits to
the plan.
Some look to the following warning signs to indicate excessive executive pay: inter-
locking directors (especially on compensation committee), CEO friends on board and key
committees, and directors on more than several boards (thereby minimizing the time spent
on any one).
In determining whether shareholder approval is needed, check the requirements of the
stock exchange (in order to list shares), the state of incorporation, the IRS (for statutory
plans), or the SEC (in accord with the sale of securities).

THE CUSTOMERS

Customers are looking for low prices, high quality, immediate availability, and outstanding
services. Until rather recently, customers have played no direct part in the issue of executive
compensation nor shown much interest, as seen in Table 4-13. However, their decisions to
buy or not to buy a company’s product or service do affect the company’s profitability, which
in turn affects annual incentive awards and long-term stock plans.

Incentives
Time Period Salary Benefits Perks Short Term Long Term
1900–1924 Low Low Low Low Low

1925–1949 Low Low Low Low Low
1950–1974 Low Low Low Low Low

1975–1999 Low Low Low Moderate Low
2000–Present Low Low Low Moderate Low

Table 4-13. Customer interest in executive compensation