Page 562 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

548 The Complete Guide to Executive Compensation

Amounts in excess of this amount would be returned to the company while the CEO
was still employed.
3. How does one select a peer group of companies for purposes of determining
competitive pay and relative company performance? The basis for selection is that
executives could leave to go to a selected company. Therefore the peer group should
consist of direct competitors, companies from the same or similar industries, those in
the same business sector, those in the same geographic area, and those companies that
have either taken or provided executives in the past two years. The same list should be
used for both pay and performance comparisons.
4. How does one determine the appropriate pay percentile in the peer group? Is
it the same for each pay element? It is logical that the pay percentile be the same
for company performance and executive pay. If company performance is in the
65th percentile, it is logical to assume CEO pay should be in the 65th percentile for
the same companies. But that does not mean all pay elements would be in the same
percentile. For example, a company with a strong pay-for-performance philosophy
might set salary at the 50th percentile, annual incentives at the 65th percentile, and
long-term incentives at the 75th percentile.
5. What will be the basis for judging performance? Internal measurements could
be based on budgeted targets, absolute standards, and/or strategic milestones.
External measurements could be based on total shareholder return and/or a designated
performance measurement versus an appropriate peer group of companies.
6. Which is more important, internal or external equity? External equity should be
the basis for setting pay structures where such data is available, and internal equity the
basis for positioning the other jobs within the organization. This sequence is based on
the fact that unless pay is competitve the company runs the risk of losing executives to
other companies.
7. Should there be a limit on the difference between CEO and worker pay?
Recognize that there are a number of ways in which to define the numerator and
denominator. The gap is better addressed by determining what limits, if any, the
company wishes to put on the components of executive pay—a matter discussed
earlier. That said, it is appropriate to calculate the multiple over a period of years and
be prepared to explain (and justify) it to inquiring employees and shareholders.
8. Is stock ownership important? If not, cash plans are fine. But if stock ownership
is important, then executives must be rewarded in stock and encouraged or required
to retain all or a significant portion of stock acquired. Chapter 8, on long-term incen-
tives, discussed a number of ways to measure stock retention. A combination of
absolute number of shares and stock value as a percentage of annual pay might be the
appropriate answer.
9. How will individuals in other countries be treated? Logic suggests that if all top
executives are to be rewarded for corporate success, this means including company
executives working outside of the United States in the corporate plan. Given different
laws, it will be necessary to be flexible in plan design to meet the overall objectives. For
example, cash stock appreciation rights (SARs) would be appropriate instead of stock
options or SARs settled in stock in countries that prohibit payment in foreign stock.
10. How does one determine the respective emphasis of short- versus long-term
incentives at a given level in the organization? Long-term incentives should have
the greatest relative weighting at the CEO level and the lowest weight at the entry