Question

In the reading this week, you have learned about the different approaches that organizations may use...

In the reading this week, you have learned about the different approaches that organizations may use in order to align management compensation with financial performance including the advantages and disadvantages of such compensation structures.

In this assignment, you will compare and contrast two organizations that have management compensation plans tied to organizational performance. You will essentially compare and analyze one company that you believe has been successful using this approach and evaluate another company that you believe has failed or exhibited poor results.

Key points of reference when completing this assignment will likely include:

  • Annual Reports: Remember that all companies with publicly-traded securities in the U.S. are required to file their annual reports (Form 10-K) with the SEC. These can be retrieved at any time from the SEC website: sec.gov (Links to an external site.). The Annual Report will include the company’s comparative consolidated financial statements when you can use the assess trends in operational performance and financial position. The reports will also include management’s discussion and analysis (MD&A) as well as the footnotes to the financial statements. The footnotes will typically provide the details of any share-based compensation reported in the financial statements.
  • Proxy Statements: Public companies will also file their Proxy Statements (labeled DEF 14A) with the SEC. The proxy statement will typically provide extensive details on corporate governance including director and executive compensation policies.

Requirement:

Select one company that you believe has been successful in using this type of plan. You may define “success” using a number of quantitative and qualitative metrics including but not limited to profitability, sales growth, market share, market performance, analyst expectations, consumer reputation/perception, etc. Just be sure to provide support for your position.

Select one company that you believe has been unsuccessful or exhibited poor performance using a management compensation plan. Again, success can be defined in a number of ways, and it’s entirely up to you how you define it as long as you provide scholarly support for your position.

Prepare a paper addressing the following key elements:

  • Brief overview of each company and why you selected them for your analysis.
  • For the company that you have defined as successful, explain the company’s structure or policies for management compensation and explain how it promotes a positive culture and aligns the goals of management with those of other stakeholders.
  • For the company that you have defined as unsuccessful, explain the company’s management compensation plans or policies and offer suggestions for improvement.
  • Include at least two scholarly references, outside of the textbook.

Homework Answers

Answer #1

We can consider the Company Microsoft.

Their Proxy Statement includes estimates, projections, statements relating to business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the Proxy Summary and Part 2 – “Named Executive Officer Compensation.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. They describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors,” “Quantitative and Qualitative Disclosures about Market Risk,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our Forms 10-K and 10-Q. They undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

In fiscal year 2019, we continued to achieve strong business results, focusing on enabling the success and earning the trust of our customers. We expanded our offerings and accelerated innovation to capture the opportunities that the era of intelligent cloud and intelligent edge is creating for our customers. We continue to improve our position as a trusted partner to our customers, accelerating their digital transformations through our key cloud, productivity tools, and artificial intelligence assets.

Total Shareholders return (Graphically)

(through 30th june 2019)

Total shareholder return includes reinvestment of dividends.

Total Cash Returned to Shareholders

(in billions)

Their mission to empower every person and every organization on the planet to achieve more is ambitious, and they cannot fulfill it with a narrow or short-term focus. Their adoption of leading governance practices fosters our sustained business success over the long term. Strong corporate governance, informed by participation from our shareholders, is essential to achieving our mission. During fiscal year 2019, independent members of our Board and members of management conducted outreach to a cross-section of shareholders owning over 49% of our shares and provided shareholder feedback to the Board.

Strategy

Led by the CEO, the Senior Leadership Team (“SLT”) drives Microsoft’s strategy and operations and works to develop and execute business strategy, foster their desired culture, create innovative products, establish accountability, and control risk. The SLT also aligns our structure, operations, people, policies, and compliance efforts to our mission and strategy.

Overseeing management’s development and execution of the Company’s strategy is one of their Board’s primary responsibilities. The Board works closely with the SLT to respond to a dynamically changing business environment. The SLT and other leaders from across the Company provide business and strategy updates to our Board quarterly, and the Board participates in an annual strategy retreat with the SLT and other leaders. At meetings throughout the year, the Board also assesses the strategic alignment of the Company’s budget and capital plan and strategic acquisition and integration process. For large acquisitions such as LinkedIn and GitHub, the Board engages management on a broad range of considerations, such as due diligence findings, valuation, and integration planning.

Risk

Microsoft’s Corporate Governance Guidelines at https://aka.ms/policiesandguidelines describe their Board’s risk oversight roles. The Board and the Audit Committee assess whether management has an appropriate framework to manage risks and whether that framework is operating effectively. On a regular basis, the Board and its committees engage with management on risk as part of broad strategic and operational discussions which encompass interrelated risks, as well as on a risk-by-risk basis. The Board executes its oversight responsibility directly and through its committees, who regularly report back to the Board. For information on specific areas of risk oversight, each committee has a charter describing its specific responsibilities which can be found on our website at https://aka.ms/boardcommittees. The Board exercises direct oversight of strategic risks to the Company and other risk areas not delegated to one of its committees. We believe that the Board’s leadership structure, including its independent chair, supermajority of independent directors, and allocation of oversight responsibilities to appropriate committees, provides effective board-level risk oversight.

Beginning with fiscal year 2015, their Compensation Committee and Board of Directors charted a course to transform their executive pay program to include significant performance attributes.

Their multi-year effort to transform our executive pay program is grounded in a compensation philosophy aimed at achieving strong alignment between their long-term strategic goals and their shareholders’ interests. They actively engaged with their shareholders by seeking their input about features they valued as we evolved the program design.

Their Compensation Committee and Board recognized it would be premature to move to business metric-based pay before Mr. Nadella established, and the Board concurred with, his vision for the Company and the strategy that would embody that vision. As a result, performance-based pay elements were added in fiscal year 2016 once our new strategy was set. In fiscal year 2017, they implemented significant changes that increased the portion of pay that is performance-based and the portion of incentive pay that is quantitatively determined using pre-established metrics. For fiscal years 2018 and 2019, they continued the program with few changes.

They believe their focus on strategic goals, strengthening trust, and driving a strong culture have been critical to Microsoft’s success.

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