This Approach Deserves More Research

By Schuster, Michael | People & Strategy, June 2008 | Go to article overview

This Approach Deserves More Research


Schuster, Michael, People & Strategy


Mr. Zimmerman is to be congratulated for his thought-provoking contribution to executive pay. He offers a novel way of evaluating the overall compensation of America's corporate leadership. As no one paper or theory is going to settle this complex issue, several aspects of his analysis--both good and bad--are worth considering.

Several salient points raised deserve to be underscored:

1. The focus on the executive team rather than just the CEO suggests a fruitful area of investigation. Although the press is subsumed with the sensationalism of some executive pay packages, thoughtful students of this subject may find consideration of the compensation of the leadership team an interesting area for consideration and research.

2. Executive team turnover deserves more attention than it is commonly given by the critics. Zimmerman rightly points out that the costs of severance for poor performance or inadequate cultural fit, as well as the cost of acquisition of talent, are significant. We would like to hear more of his thoughts in solving for that.

3. Director compensation should be tied to executive stability, according to Zimmerman. We agree; however, if there are long-term incentives to improve executive continuity, they must be paid out only when continuity equals business performance.

4. Zimmerman demonstrates the greater contribution of performance units/shares as providing enhanced incentive value in his sample. Performance units are shares of stock delivered to executives when corporate goals are achieved, such as earnings per share. Zimmerman contrasts this with stock options, wherein the executive has the right to purchase (exercise) the company's stock at the granted price by a defined expiration date. When stock prices increase in value, options add to executive wealth; declines make options worthless. Thus, performance shares are more valuable. More importantly, from my perspective, because performance units can be used when targets are achieved, they potentially can be deployed to enhance the effectiveness of a balanced scorecard by allowing metrics (e. …

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