The Board of Directors 521related to the CEO’s and this, therefore, is the single most important compen-
sation decision the board must make.
In most instances this decision is not easy. Most CEOs are ambitious and
competitive, and compensation is their report card. Since proxy statements dis-
close the compensation of all CEOs of public companies, each CEO is able to
see just where he or she stands in relation to others. Virtually every CEO would
like to stand higher on that list.
Compensation committees consider three principal factors. The CEO’s
compensation should: (1) be related to performance, (2) be competitive, and
(3) provide motivation. Compensation includes not only salary but also
perquisites and, in most companies, long-term incentive arrangements, such as
stock options or performance-share plans. These plans, however, are far from
perfect, and compensation committees constantly struggle to find new
arrangements or formulas in an effort to relate compensation more closely
to performance.
Performance
The CEO’s compensation should be related to performance. Superior perfor-
mance should be rewarded with high compensation, while poor performance,
if it does not warrant dismissal, should at least result in decreases or minimal
increases in compensation.
There is justification for the claim that in some companies top-executive
compensation continues to climb without regard to performance. The problem
is complex. In theory, the CEO should be rewarded for increasing the share-
owner ’s wealth over the long term. Although this is a splendid generalization,
the criterion is hard to measure, especially on a year-to-year basis.
Competitive Range
Compensation committees look at the CEO’s compensation relative to that of
competitors. They can be sure that their CEO has this information and is likely
to be unhappy if the compensation is perceived as unfair or not competitive.
There are many sources for salary information. They include proxy state-
ments from similar organizations and published surveys. Some consulting orga-
nizations specialize in executive compensation; they provide data and advice
on these matters. In the end and with all of the information at hand, the com-
mittee makes its judgment as to where in the competitive spectrum they want
the CEO’s compensation to fall.
Motivation
Compensation committees ask themselves, How can we structure a compensa-
tion package that motivates the CEO to do what the board expects? If the
company has a plan to move aggressively and take unusual risks in the near
term, with the possibility of significant long-term payoff, the committee can