Reference no: EM132280849

Answer this question: If you were a director (or someone else in a position to determine compensation policy), how would you try to establish a link between pay and performance? For a public company, would you use market-based data such as the company's stock price? Choose an industry - perhaps the one in which your company operates. What performance metrics might be appropriate for companies in that industry?

Do peer review: Recent data indicate that about 14% of CEOs at S&P 500 companies are replaced in a typical year (this is referred to as CEO turnover). This implies that a CEO is running the company for about seven years. Related questions:

1. what does this imply about a short- or long-term focus by managers?

2. should the compensation package of long-term CEOs differ from that of newly-hired CEOs? If so, in what way(s)?
Peer's answer:

1. This implies that long term focus seems to be working pretty well since 7 years is a significant amount of time for a CEO to run a company. This shows that not too many companies are focused on short-term incentives that would allow the CEO to be highly rewarded after just a year or so of work.

2. Yes, the packages should be very different. Newly-hired CEOs should be compensated with more preferred shares that do not vest for at least 5 years and stock options that need to see healthy growth in order to be in the money. If you give a newly-hired CEO just options, they will be more likely to shift their focus to raising the stock price.

If you give them shares that vest in just a year or so, they will not be thinking about the company's plans 5 years ahead; instead they'll just be planning through their vesting date. Long-term CEOs should be paid more in cash bonuses that is based on hitting certain targets (sales, YoY revenue growth, etc.). Shares and options that don't vest for long periods of time may not motivate the CEO as much if they're anticipating retiring soon.