Question

CEO compensation, including stock and option awards, can be found in the company's Annual Proxy statements which are issued by the corporation before the annual shareholder's meeting. Another source of CEO compensation is in Salary.com. Pick a public corporation that you are interested in and go to its Investor relations website and look up the most recent proxy. About ¾ of the way through the proxy is a schedule showing how much the executive management earned. How much did the CEO make in salary, stock awards, options and other compensation? What is in the other compensation? What do you think of the total compensation for this CEO?

please help me understand this

Answer 1

Company boards, at least in principle, try to use compensation contracts to align executives' actions with company success.

The idea is that CEO performance provides value to the organization. "Pay for performance" is the mantra most companies use when explaining their compensation plans.

Cash/Base Salaries

CEOs often receive base salaries well over $1 million. In other words, the CEO is rewarded substantially when the company does well.

However, the CEO is also rewarded when the company performs poorly. On their own, large base salaries offer little incentive for executives to work harder and make smart decisions.

Bonuses

Beware of bonuses. In many cases, an annual bonus is nothing more than a base salary in disguise. A CEO with a $1 million salary may also receive a $700,000 bonus. If any of that bonus, say $500,000, does not vary with performance, then the CEO's salary is really $1.5 million.

A CEO with a $1 million salary may also receive a $700,000 bonus. If any of that bonus, say $500,000, does not vary with performance, then the CEO's salary is really $1.5 million.

Bonuses that vary with performance are another matter. CEOs who know they'll be rewarded for performance

do tend to perform at a higher level because they have an incentive to work hard.

Stock Options

Companies trumpet stock options as one way to link executives' financial interests with shareholders' interests. However, options are also have flawed as a form of compensation.

In fact, with options, risk can be badly skewed. When shares go up in value, executives can make a fortune from options. But when share prices fall, investors lose out while executives are no worse off.

Indeed, some companies let executives swap old option shares for new, lower-priced shares when the company's shares fall in value.

Stock Ownership

Academic studies find that common stock ownership is the most important performance driver.

CEOs can truly have their interests tied with shareholders when they own shares, not options.

Ideally, that involves giving executives bonuses on the condition they use the money to buy shares. Let's face it, top executives act more like owners when they have a stake in the business.

Finding the Numbers

You can find information on a company's compensation program in its regulatory filings.

Form DEF 14A, filed with the Securities and Exchange Commission (SEC), provides summary tables of compensation for a company's CEO and other of its highest-paid executives.

When evaluating the base salary and annual bonus, investors like to see companies award a bigger chunk of compensation

as a bonus rather than base salary. The DEF 14A should offer an explanation of how the bonus is determined and what form the reward takes, whether cash, options or shares.