Page 560 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

546 The Complete Guide to Executive Compensation

11. How does one know if one’s company has been acquired or really merged with
another organization, since some companies avoid using the “A” (i.e., “acqui-
sition”) word? Do not simply pay attention to the rhetoric. Look at what is happen-
ing. Some of the key signposts include the following: Is one company’s name more
prominent than the other postmerger? Where is the corporate headquarters? Does
one company’s shareholder gain a greater portion of new shares outstanding? Which
company has more directors on the new board? How are the chairman, CEO, and
COO’s responsibilities divided? Which company provided these executives? Under a
merger, one would expect a balance in the above criteria. In an acquisition, they will
lean significantly to one side. One can also watch the stock market to see how
investors view the transaction. Whose stock went up and whose went down? Keep in
mind, however, that the acquiring company’s stock price does not always increase.
Sometimes, it is the acquired that increases.
12. What will the replacement needs be for senior executives in the next 5 to 10
years? If the company is shifting into the upper portion of a mature stage, it may have
few replacement needs other than for retirement. An emerging company, however, will
be faced with significant growth in management positions. These two situations face
significantly different needs. Merit pay will have to be adequate for most of the people,
and promotional adjustments will offset modest merit increases. Perhaps as much as
two-thirds of top executives’ salary today has come through prior promotional adjustments
(taking new jobs) and only one-third for merit (job performance). Fast trackers expect to
double their pay every 5 years—a virtual impossibility with-out significant promotional
adjustments and/or double-digit merit increases caused by a high rate of inflation.
13. Is a particular type of executive needed? A high-risk situation within the company
will need someone with special talents. It would be difficult to bring in this high risk
seeker with-out affording the opportunity to earn a very high bonus (based on degree
of success). The individual willing to accept high risk is also likely to seek high rewards;
since salary alone is unlikely to meet this expectation, the company needs some type of
performance-related payoff.
14. To what extent is it desirable to lock the executive in golden handcuffs through
restricted pay devices? While many consider this a practical solution to retaining
executives, it is necessary to understand that golden handcuffs have varying strengths.
They are most effective with the least attractive (to other companies), low-mobility
(unlikely to change jobs) executive. In other words, a forfeited value can always be
offset by another company if the executive is that good, thereby locking in only the
less-than-outstanding performers. However, one can at least make it very expensive for
the new employer to buy out all the forfeited pay.
15. What should happen if the short-term incentive formula says there are no
dollars available but there were some outstanding contributions? One view says
no bonus dollars, no payout for anyone. The countering view is that outstanding
contributors need to be rewarded; otherwise, they will leave or at least be demotivated.
One can meet this requirement by amending the formula to allow for a carry-forward
of unused money, thereby having some dollars available even if the fund that year is
zero. Another solution is to agree to have a discretionary bonus pool of a stated amount
(perhaps 5 percent to 10 percent) of target award. Alternatively, one could compete
in an entirely different manner, such as granting stock options to the outstanding
performers.