522 Making Key Strategic Decisions
structure a compensation plan for the CEO that will reward that kind of be-
havior. For example, the CEO might have a multiyear contract that provides as-
surance of employment during the high-risk phase, as well as a long-term stock
option plan. At the other extreme, a mature company might be interested in
moderate growth but steady dividends. The compensation committee might
then structure a plan weighted heavily toward a fixed salary, reviewed annu-
ally, with only modest incentive features.
There are many types of compensation arrangements: base salary re-
viewed annually, base salary plus annual discretionary bonus, base salary
with bonus based on a formula, stock option plans, performance share plans,
and multiyear incentive plans. Benefits play an important part in CEO com-
pensation arrangements, especially retirement programs. Each plan has its
own motivational features, and the compensation committee attempts to
structure a plan that provides the motivation for the CEO that the board
wants to generate.
Compensation Reviews
In addition to deciding the CEO’s compensation, the committee also deter-
mines compensation for the other senior executives—that is, corporate officers
and others whose salary is above a stated level. The review process usually
takes place at a meeting that brings together the compensation committee, the
CEO, and the staff officer concerned with compensation and personnel
policies.
At this meeting the CEO describes the compensation history of, and
makes a recommendation for, each executive. Usually, a few of the recommen-
dations are discussed, and a few changes may be made. For the most part, how-
ever, the committee accepts the CEO’s recommendations. Nevertheless, the
review process is important. It enables the compensation committee to be sure
that the CEO is following sensible guidelines and consistent policies and is not
playing favorites. It also serves to remind the CEO that recommendations to
the committee must be justified.
Board Remuneration
The compensation committee also recommends compensation arrangements
for the board members. Obviously, this is a delicate matter because the board
is disbursing company funds (actually shareholder funds) to its members.
Directors’ compensation is disclosed on the annual proxy statement. Most
companies would like to see their directors “respectably” compensated and,
while compensation usually is not the compelling reason for holding a director-
ship, directors want to feel that they are being compensated on a competitive
basis. On the other hand, most directors want to feel that their compensation is
not excessive and that they will never be criticized for compensating them-
selves improperly.