Page 382 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

368 The Complete Guide to Executive Compensation

more years ago are generating excessive amounts today is that corporate growth has outdated
them. This is especially true for deductible plans.
Shareholder Protection Plans. Shareholder protection plans are formula-driven plans that
ensure the shareholder that no monies will be paid to executives until certain financial
targets have been met. Many companies adopted these plans years ago and have not modi-
fied them. Where these formulas are used, they often begin with a percentage of profits
(either pretax or after tax) and proceed to make some consideration for shareholder equity or
provide for a dividend of a minimum amount. Examples are shown in Table 7-19.

1. 12 1 /2 percent of consolidated net income less 6 percent of the average common stock equity less
the amount of current dividends for the year.
2. 10 percent of net income after deducting 5 percent of average capital in business.
3. 6 percent of profits after taxes that are in excess of 6 percent of capital.
4. 8 percent of the first $5 million net income plus 10 percent of the next $5 million plus 1 percent
of the remainder after net income has been reduced by the larger of (a) 6 percent of average net
capital or (b) dividends on preferred stock plus $2.50 per share of common stock.
5. 6 percent of net earnings before taxes and percentage compensation or 8 percent of earnings
after taxes and percentage compensation.
6. 6 percent of net earnings before taxes, after deducting 10 percent of capital employed.
7. 10 percent of the excess after dividend requirements of preferred stock plus 5 1/2 percent of
the total stated value of common stock plus 5 1/2 percent of the surplus.
8. 12 1/2 percent of the amount by which net income exceeds 6 percent of stockholders’ equity.
9. 15 percent of net income (plus minority interest in net income less variable compensation and
interest on long-term debt) less 7 percent of invested capital.
10. 20 percent of bonus net income (net income less 6 percent of capital stock and surplus for
current and preceding years plus provision for the bonus fund).
11. The amount by which net earnings before taxes plus 10 percent of invested capital exceed
$10 million.
12. 12 percent of net earnings after deducting 6 percent of net capital.
13. 3 percent of the amount by which net income exceeds 6 percent of capital investment.
14. 2 1/2 percent of the total combined salaries of plan participants multiplied by the percentage
points that consolidated income exceeds 35 percent of capital employed—to a maximum of
35 percent of total combined salaries of plan participants.
15. 3 percent of the first $15 million net income plus 5 percent of net income exceeding $15 million.
16. 6 percent of net income, maximum equal to 25 percent of aggregate paid dividends on
common stock.
17. 6 percent of the amount by which consolidated pretax earnings exceed 10 percent of
shareholder’s equity.
18. 6 percent of net income in excess of 6 percent of return on equity (ROE).

Table 7-19. Shareholder protection formulas

The formula should articulate the basic objectives of the company. Is there a minimum
rate to be provided for shareholder return? Is there a minimum increase (dollar or percent-
age) in earnings before any bonus can be paid? The minimum-increase-in-earnings approach
promotes identification with the shareholder but does so at the risk of allowing tax policy to