Myths and realities of executive pay

Prologue: the compensation committee meets

Introduction: the battle over executive compensation

Executive compensation in the U.S. corporate model

The goals of executive compensation

Our approach

The myths and realities of pay for performance

The realities of pay for performance

Other issues

Case studies

The myth of managerial power

Academic response to Bebchuk and Fried

The realities of managerial power

Camouflaged compensation

At-the-money strike prices

Repricings and reloads

Diversifying, hedging and timing

Peer group data and upward bias

Other factors in setting pay

Fixed shares vs. constant dollar techniques

Conflicts of interest

External pressures: the new context for executive compensation

Characteristics of external forces

Cyclical reforms and unintended consequences

The genesis of the current environment

The regulators

Securities and Exchange Commission

Financial Accounting Standards Board

Internal Revenue Service

NYSE and NASDAQ

Congress

The reformers

Institutional investor perspectives

Concerns with lack of pay for performance

Stock incentives

Performance metrics

Severance and change-in-control agreements

The financial activists

LBO impact

Impact of change-in-control protection

Hedge funds

Media critics and public figures

What we can learn

End of an era: the decline of the stock option

The 1990s: the decade of the stock option

2000

2002: a turning point

The decline of the stock option

The realities of expensing

Perceived value

The case for stock options

Costs and stock prices

Reducing the expense

The future of long-term incentives

Factors influencing LTI design

Designing a LTI program

Setting performance goals and metrics

Basis for measurement

Goal setting

Determining share award sizes

A look to the future

Executive stock ownership: the solution to the executive compensation crisis

Agency theory and costs

Moral hazard

Driving superior returns

Stock ownership guidelines

Stock holding requirements

Net share retention requirements

Other mechanisms for creating ownership

Management stock purchase plans

Finding the right solutions

Director compensation in the new environment

The evolution of director compensation

Move away from stock options

Activity-based compensation

Compensating committee chairs and members

General electric as a reference point

Director compensation levels and mix

Director share ownership

Stock ownership guidelines

Net share holding requirements

Ownership effectiveness

Structuring the optimal director compensation package

The future of director compensation

The compensation committee: creating a balance between shareholders and executives

Legal context

Right from wrong?

Foundations for best practices

Creating excellence in corporate governance

Institutional and regulatory governance recommendations and mandates

Consultant independence

Setting the CEO's pay as rigorously as possible

Case study of an internal promotion

Creating a pay-for-performance environment

Rule 10b5

1 plans

preannounced purchases or sales of stock

Best governance practices in designing annual and long-term incentives

Aligning all employee pay to improve corporate performance

Elements of alignment

Untenable forms of alignment

Performance pay solutions

Employee stock ownership

The role of stock options

Moving beyond options

Converting to restricted stock

Adjusting stock-based incentives

Alignment in practice

Building better alignment

International executive pay comparisons

U.S. competitive advantage

The international executive pay gap

United Kingdom

France

Canada

Asia

In summary

Conclusion: the future of executive compensation

Epilogue: back in the boardroom

Acknowledgements

Appendix A Legal and regulatory requirement for executive compensation plans

Nonqualified stock options

Incentive stock options

Stock appreciation rights

Restricted stock units

Restricted stock

Appendix B Summary of the regulatory and institutional mandates and recommendations

Calpers

TIAA-CREF

Fidelity

Vanguard

Union-sponsored funds

Other organizations

The Council of Institutional Investors

Institutional Shareholder Services

Glass, Lewis & Company

National Association of Corporate Directors

The conference board

Appendix C Academic articles on pay for performance and the executive labor market

Index

Endnotes.