Problem statement Is there an optimal compensationpackage and what would it be in our case?
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
SalaryPro ConIncreases loyalty No incentive to maximize shareholder valueEasy to forecast Tax restrictions (USA)Less pressure Usually minor part ofLowers unhealthy packagecompetition
BonusPros ConsEncourages competition Discourages collaboration & teamworkMaximizes profits Focuses too much on measuring profitsClear measurable Short-term orientedobjectives Only as good as objectives set
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
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
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
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
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%
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
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
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
Shell Case Bonus, 3.5 Long-term incentive, 6.5 Base salary, 1.55 Source: Bloomberg
Shell CaseDo you think the compensation package is adequate?
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
Shell Case Increases Oil spills Doubles his salary Source: Meme generator
Compensation for our company High or low base salary? Long or short –term incentives? Personal benefits? Pay-performance compensation?