As indictments and jury trials humble the reputations - and
fortunes - of former WorldCom chief Bernard Ebbers and other once
high-flying chief executives, a quiet change is taking place in CEO
The scandals have done little to restrain hikes in executive
salaries and bonuses. But corporate America seems to be adjusting by
raising expectations for those paid handsomely - and not just
expectations for the bottom line. Instead, corporate boards are
redefining performance to include a host of factors from ethical
behavior in the corner office to satisfaction of employees on the
Social performance, in other words, is starting to hit the
business world's biggest wallets.
"One has to set not only financial goals, but also goals for how
we're going to do our business and what kind of business we're going
to do," says Pearl Meyer, a compensation consultant in New York.
"We're giving people an opportunity to earn a stake in the business
with good performance [in a range of areas]. I think you're going to
get a better-run business over the long-term this way, rather than
by hyping the price of a stock every day."
The idea: to shape leadership - and perhaps even mold moral
character at the top - by customizing performance-based packages,
Five years ago, such nonfinancial considerations would have
received no more than lip service, says Tom Wilson, an executive-
pay strategist in Concord, Mass. "Now, nonfinancial measures are
getting more people's attention because those are the leading
indicators of financial performance. If your customers are
satisfied, your employees are satisfied, and you're implementing
different projects, you're going to produce financial results."
In his consulting firm's 2004 survey of 26 mid-size and large New
England companies, 30 to 40 percent of performance-based bonuses had
a link to nonfinancial factors, such as project results, customer
satisfaction, or personal goals.
Performance-based bonuses made a splash in the 1990s as
shareholders and directors aimed to rein in what were then
skyrocketing market-driven packages. Since then, such incentives
have been a mainstay of compensation packages, although critics
charge that high-level compensation has continued to soar,
especially through stock options.
But now, even stock packages come with additional strings
attached. Instead of lavishing stock options on executives and lower-
level employees alike, companies including Microsoft and Citigroup
are cutting back on options as a perk of employment.
For chief executives, the trend is instead to award equity that
is tied to company performance, says Diane Doubleday, a senior
executive compensation consultant for Mercer Human Resource
Consulting in San Francisco.
One example: to award restricted shares that vest only when the
company reaches specified financial or operational goals.
"Eighteen months ago, I would have said, 'This is kind of cutting-
edge. These companies that are moving in this direction are really
market leaders,' " Ms. Doubleday says. "Eighteen months from now,
the companies that aren't doing this are going to be really standing
out as market laggards, if you will. So it's going to become the
norm, and the companies that are not responding in some way to this
are going to have to be explaining [why] to their shareholders."
On the surface, shareholders might find little reassurance in a
trend that still enables chief executives to earn in many cases
upwards of $10 million per year. In the last fiscal year, CEO
bonuses alone jumped 28 percent to a median of $640,000, according
to a sample of 233 companies analyzed by the Investor Responsibility
Research Center in Washington, D.C. When stock options, restricted
shares, and other sources are factored into the mix, median
compensation packages approached $2. …