Two new trends in executive compensation will change the way
American business rewards its top people. One is that more emphasis
is being placed on bonuses. The other is that the use of stock
options, which had been growing rapidly for the past decade, is
beginning to be questioned.
While the inflation rate was high, many companies felt obligated
to give raises whether the executives earned them or not, to enable
them to keep up. Now that the inflation rate has slowed, a
largenumber of firms are turning to bonuses rather than raises.
Bonuses have two advantages. They're a way of rewarding
selectively, so that the executives with the best performances get
the most money; and they're a variable, not a fixed, cost, so that
they can fluctuate in accordance with the company's earnings.
One California construction company, for example, sets a gross
profit goal for each manager. If the goals are met, a mathematical
formula is employed to net the manager a bonus which may amount to as
much as 60 percent of his annual salary. An Indiana lumber yard has
moved to a semi-annual bonus to remind the employees of the incentive
Although stock options are still popular, their use may become
more limited in the future. A stock option is the right to buy a
company's stock at a set price over a period of time, usually 10
years. It benefits the executive if the stock rises, since he may
buy stock for less than the market price; then, whenever he wants,
he may sell the stock at a profit.
Justificaiton for using stock options as a form of compensation is
that it rewards performance. If an executive's efforts build the
company's value, he gets to share in its growth. The
compensationmethod became popular because it was relatively
inexpensive, needing no cash outlay. Young companies are sometimes
able to lure top people whom they otherwise couldn't afford by paying
them in stockoptions rather than money.
Critics of stock options say that they don't really reward an
executive's performance; instead, they reward his ability to play
the market. Some companies have also found that when the news gets
out that an executive has made a killing by exercising his options,
it makes for negative public relations.
Now the Financial Accounting Standards Board has "tentatively"
ruled that stock options have to be charged against earnings - a rule
which, if officially adopted next year, may make the practice too
expensive to continue.
QUESTION: For the past seven years, I've had a raise every year.
Now my company tells me they're moving to a system of giving bonuses
and stock options instead of raises. …