Ethical Choices In Design And Administration Of Executive Comp Plans

Ethical choices in design and administration of executive compensation programs

BY: PriyankaGupta 25 Deepti Raja 310 AbhimanyuSharma 350 Diane Dupuy Denus Diane Vandamme Astrid

Topics under discussion

Rationale behind the dilemma: The Ethical Frameworks 

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Ethics: Moral judgements of what is right and what is wrong

Basic Question here: What is unethical??? Is thinking about personal good over others’ good ethical? Eg. Enron, Executive retention bonuses Is it possible/ right to choose between multiple considering obligations all morally right? Eg. Watkins in Enron What is unethical when differences arise between the action and intention of the decision makers? Eg. CEO making promises 

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Basic 

Ethical dilemma

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 Determining the scope of the executive position  Annual merit increase  Salary VS Goodwill 

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Proposals •  Appropriate base salary  Salary Increases

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Bonuses Cash

awards paid to excutives for reaching established goals.

Usually,

their amount is established as a percentage of the executives’ salary

Dependant

upon the achievement of specific criteria

Bonuses: Ethical dilemnas 1.Determination of annual performance targets 2.Design of performance payouts plans and level at which they are set. 3.Smoothing bonus payouts through the mechanism: big weight to nonfinancial factors when financial performance is low, and the opposite. 4.

Bonuses: Proposals to improvement

1.Compensation committee must determine if the bonus criteria is appropriate (not too low, realistic or truestretch) & align its compensation recommendations with a good target level of performance (upon advice from the finance/audit committee) 2.Ensure fairness and equity in the establishment of bonus payout ranges : more challenging goal leads to higher level of risk for the executives regarding to bonus compensation 3.Weights applied to financial and non-financial factors should be applied regularly and predictably, to avoid weakening the desired relationship between performance and reward.

Long Term Incentives LTI

are awarded to encourage the achievement of goals that extend beyond a single fiscal year

Consist

of restricted stock, stock options or a combination of both.

Some

companies use cash based performance plan.

Long Term Incentives: Ethical Dilemma  The compensation of the CEO and other people in the organization have huge difference in the salary.  Stock option and stock awards make up the largest segment of CEO package.  Thus, most compensation experts attribute growing disparity to this factor , which is a component of LTI  It also raises the “ market level “ used in targeting executive compensation

Other ethical dilemmas  How much total compensation is appropriate for executives compared to other organizational members?  If the market comparisons are appropriate component of job evaluation process for establishing compensation of other jobs within the organization , why should they not be appropriate for establishing levels of executive compensation?

Contd… Has

the responsibility held by executives grown at a significant faster rte than other employees of the organization? Does pay increase based on externalities rather than corporate performance? Is valuation of stock options right? Is the timings of stock option awards to executives right??

Long Term Incentives: Proposals for improvement  Stocks and option grants could be indexed relative to the performance of the institutions.  Hence, performance becomes more relative than absolute.  Use restricted stocks, rather than options as a long term incentive  Ensuring the options are valued as correctly as possible using most robust valuation techniques. Eg: Black scholes

SERPs Supplementary EmployeeRetirement Plans 

Restriction of retirement qualified plans : benefits are capped at a certain level of income

  To

overcome this problem: Supplemental Executive Retirement Plan (SERP)

  Two 

kinds of SERP: 1)Restoration plans 2)ERISA excess plans higher pensionable returns for executives because of additional features

SERPs: Ethical dilemnas  Retirement

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benefits are proportionally in excess of what is available to employees under qualified plans. 1) based on a higher percentage of pay 2)based on a more favorable period for determination of average final pay

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 Additional

forms of compensation which do not exist in qualified retirement plan

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SERPs: Proposals for improvement   Use

excess plans that only extend types of retirement benefits provided under qualified planssuppression of additional forms of compensation

  Use

the same compensation elements as used in company’s qualified plans: same time line…

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Thank you

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