Make the Link One of the most important issues in organizations recently has been that of executive pay. As we have already seen, executive pay is usually quite high. This activity has to do with the way it is determined. This case focuses on the chairman of the board, Mary Cohn, at Super Mega Corp, a Fortune 100 company that is looking for a new CEO. As she prepares to negotiate a pay package with the board's chosen candidate, she needs to keep in mind the various ways in which pay and performance can be linked at the executive level, and the responsibilities of the board of directors with regard to executive compensation. In this exercise, please read the mini-case and answer the questions that follow. After three years of subpar performance, Super Mega Corp, a Fortune 100 conglomerate, is hiring a new CEO. Mary Cohn, who took over as chairwoman of the board from the previous CEO, is in charge of the process and is preparing to make an offer to the leading candidate. Before she does, she wants to examine carefully the various kinds of pay-for-performance plans she can offer to the candidate. It is critical that the compensation plan for the new CEO minimizes agency risk (the risk that the individual might act in his or her own interest, rather than that of the company) to ensure that Super Mega Corp is being managed in the long term interest of the shareholders. In addition, the pension fund that owns 14% of Super Mega Corp has been very unhappy about the pay of the executive team, and its management team wants Mary to make sure that CEO pay is independently set, using incentives carefully to drive results. Some sort of balanced scorecard will probably be used to set pay. She is also determined to keep her position as chairwoman of the board. She does not want the role combined with the CEO role, as has been done in the past.
Mary's function in this case is to represent
One of the primary issues with executive pay that Super Mega Corp needs to avoid is executive pay that is
Subject to stiff taxes
Subject to the SEC caps
Strictly limited by market forces
Always high, regardless of performance
One of the primary reasons for putting significant executive compensation "at risk" in the form of incentive pay is to
Avoid shareholder concerns of contingent pay
Provide an incentive to pursue both short-term and long-term performance goals
Assert board independence and control over executive pay
Improve employee fairness perceptions at every level in the organization
Separating the role of CEO and chair of the board, as Super Mega Corp wants to do
Helps reduce pay
Is a way to assert board independence
Leads to excessive risk taking
Is required by the SEC
Mary wants to use a balanced scorecard to set pay because it
Sets pays in accordance with achieving key organizational objectives
Will keep the company out of the press
Is insisted on by pension managers
Helps equalize total compensation among executives
Mary in this case is the representative of the shareholders because she being the chainwoman of the board needs to ensure that everything is going as per the plan and the decisions being taken are by keeping in mind the interest of the shareholders.
12. Always high, regardless of performance
Executive pay needs to be based on performance and irt is better if the pay is linked to stock options which is fair and the CEO can enjoy the pay based on teh eprformance of the organization it self.
13. Improve employee fairness perceptions at every level in the organization
As conveyed the CEO needs to take responsibility of the organization's performance and this is possible if their pay is based on incentive rceived from the stocks.
14. Is a way to assert board independence
In this way the CEO and board will be independent on their operations and can conduct constructive criticism on each other.
15. Sets pays in accordance with achieving key organizational objectives
Help to define the pay based on the achievements of the organization
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