Page 526 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

512 The Complete Guide to Executive Compensation

Compound Number
Increase in of Units
Shareholder Value

20% or more 2,000,000
19 1,900,000
18 1,800,000
17 1,700,000
16 1,600,000
15 1,500,000
14 1,400,000
13 1,300,000
12 1,200,000
11 1,100,000
10 1,000,000
9 750,000
8 500,000
7 250,000
6 or less 0

Table 8-89. Number of units set by performance
may be appropriate using one of the option pricing models. If settlement is in cash, then
variable accounting will apply.
Variable Number of Units and Variable Price per Unit. This variation is illustrated in
Table 8-90.
Thus, if the compound increase in shareholder value was 17 percent and the compound
increase in ROE was 14 percent, the recipient would receive 1,700,000 units valued at $1.40
each, or $2,380,000.
Conversely, a performance-share plan could be converted into a performance-unit plan,
using the number of shares in Table 8-54 (again valued at $100 a share). The result is seen in
Table 8-91.
Because performance-share-plan costs have two variables (level of performance
achieved and price of stock at time of payout), the performance-unit plan quickly followed
the performance-share plan in the early 1970s, following the issuance of APB 25.
Performance-unit plans only have one variable—performance. Price of company stock is
not a factor. Under FAS 123R this is a liability award with fair value accrued over the
period of the plan and finalized on settlement date.
Performance-Percentage Plans. Another variation is the performance-percentage plan.
Here, rather than express the payout in cash or in units, the payout is typically expressed as
a percentage of salary, although it could be of salary-plus-annual-incentive. An example is
illustrated in Table 8-92.
Barring a desire to change the relationship of the long-term plan to salary (or salary-plus-
annual-incentives if included in the formula), there is no need to change the percentages
annually. When salary is increased, the long-term payout will bear a constant relationship.