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Compensation policies (2)

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  • 1. Compensation PoliciesJ. Falge, D. Hamacher, L. Sturges, M. Van Veen
  • 2. Agenda Introduction + problem statement Overview of executive compensation  Equity based compensation Empirical evidence BMW Case Shell Case Summary and Conclusion
  • 3. General OverviewGeneral overview•Created in 2001 by 3undergraduate students•1400 employees worldwide•Operating on 3 different continentsin 8 different countries•Market leader
  • 4. Income Statement 2007 2008 2009 2010 2011 2012Reveneues Sales Revenue 20.000.000 19.000.000 17.500.000 23.500.000 26.000.000 32.000.000 Service Revenue 400.000 230.000 240.000 500.000 600.000 800.000 Total Revenue 20.400.000 19.230.000 17.740.000 24.000.000 26.600.000 32.800.000Expenses Advertising 2.000.000 2.000.000 2.500.000 2.500.000 2.500.000 3.000.000 COGS 11.000.000 8.000.000 7.000.000 10.500.000 12.000.000 13.500.000 Depreciation 150.000 190.000 250.000 130.000 180.000 200.000 Furniture&equipment 300.000 300.000 400.000 400.000 400.000 500.000 Insurance 125.000 125.000 125.000 150.000 150.000 150.000 Office Supplies 12.000 9.000 8.000 12.000 14.000 18.000 Rent 240.000 240.000 240.000 480.000 480.000 480.000 Research 1.500.000 1.000.000 1.000.000 1.500.000 1.500.000 2.000.000 Salaries 4.000.000 3.800.000 3.500.000 4.250.000 5.000.000 5.200.000 Travel 500.000 500.000 300.000 800.000 900.000 1.200.000 Total Expense 19.827.000 16.164.000 15.323.000 20.722.000 23.124.000 26.248.000 Net Income 573.000 3.066.000 2.417.000 3.278.000 3.476.000 6.552.000
  • 5. Problem statement Is there an optimal compensationpackage and what would it be in our case?
  • 6. Overview of executive compensation •Base of Salary compensation •Fixed •Based on firm/personal Bonus performance •Non-equity •Based on reported firm Equity performance •Shares/Stock options
  • 7. SalaryPro ConIncreases loyalty No incentive to maximize shareholder valueEasy to forecast Tax restrictions (USA)Less pressure Usually minor part ofLowers unhealthy packagecompetition
  • 8. BonusPros ConsEncourages competition Discourages collaboration & teamworkMaximizes profits Focuses too much on measuring profitsClear measurable Short-term orientedobjectives Only as good as objectives set
  • 9. EquityPro Con
  • 10. Empirical findingsExecutives compensation and incentivesBy Core, J.E., Guay, W.R., and, Larcker, D.F. (2003) Managers holding stocks and options lowers monitoring costs Gives managers incentives to maximize shareholder value. Multiple firm characteristics needed to construct prediction of expected level of equity incentives
  • 11. Empirical findingsPerformance pay and top-managementincentiveBy Jensen, M. C., and Murphy, K.J. (1990) Examines the value of equity-based compensationwhen shareholder wealth increases Estimated compensation: 3.25$ for 1000$ change Conclusion: relatively small sensitivity
  • 12. Empirical findingsAre CEOs really paid like bureaucrats?By Hall, B.J., and Liebman, J. (1998) CEO wealth often changes by millions of dollars for atypical change in firm value Strong and positive relation between performance andCEO pay Caused by equity-based compensation
  • 13. Empirical findingsCEO incentives and earnings managementBy Bergstresser, D., and Philippon, T. (2006) Stock-based compensation leads to earningsmanagement  More incentivized CEO  higher level of earnings management Significant amount of option exercises and share sales inperiods of high earnings management
  • 14. Empirical findingsFlights of fancy: corporate jets, CEO perquisitesand inferior shareholder returnsBy Yermack, D. (2006) Disclosed personal use of company aircraft by CEOs isassociated with significant underperformance: Use of corporate jets leads to an underperformance of the market benchmarks by 4% At announcement, stock drops by an average of 1,1%
  • 15. BMW Case Executive bonuses linked to assembly line workers Pressure from society and shareholders Award upper and lower employees by same formula Goal: fair and transparent compensationCould this be a new trend in compensation policy? Source: Bloomberg Businessweek
  • 16. Shell Case „Shell‘s numeration policy firmly links executive compensation with theperformance of the company, and the 2011 outcomes reflect what was a positive year for the company“ Source: Bloomberg
  • 17. Shell CaseIncreased Gross Profit +24.8 %Increased net income +53.6 %Increased EPS from 6.59 to 9.94Outperformed FTSE by 23% Source: Shell annual Report
  • 18. Shell Case Bonus, 3.5 Long-term incentive, 6.5 Base salary, 1.55 Source: Bloomberg
  • 19. Shell CaseDo you think the compensation package is adequate?
  • 20. Shell Case Responsible for over 200 oil spills in 2011 Systemetic contamination of 1000 Km² in the Niger delta Worst pollution in Nigerias history Increasing oil priceDo you still think his Compensation is adequate? Source: Bloomberg
  • 21. Shell Case Increases Oil spills Doubles his salary Source: Meme generator
  • 22. Compensation for our company High or low base salary? Long or short –term incentives? Personal benefits? Pay-performance compensation?
  • 23. Conclusion Salary Bonuses Equity-based compensation Find perfect mix to allign intrest Decrease Principal-agency conflict
  • 24. References Bloomberg Businessweek retrieved 18.03.2012 from http://www.businessweek.com/globalbiz/content/oct2009 /gb20091027_769351.htm Shell annual Report retieved 18.03.2012 from http://www.shell.com/home/content/investor/financial_inf ormation/annual_reports_and_publications/ Bloomberg retrieved 18.03.2012 from http://www.bloomberg.com/news/2012-03-15/shell-ceo- voser-s-compensation-more-than-doubles-on-awards.html
  • 25. Questions?