1. You serve as an outside director for the Supplies, a multi-billion dollar enterprise. You have
been assigned to the Compensation Committee, which is being formed in response to outside
pressure from shareholders. You note the following. First, activist organizations like CALPERS
have a strong bias towards using options as an incentive compensation for management. Second,
there are a number of scandals involving the use of options for compensation. Please discuss the
policy arguments for aligning the compensation for the top-level executives to the future
performance of the company, and reconcile if possible the two items noted above.
2. You are head of a committee that is evaluating whether your firm should change its state of
incorporation. Currently, you are incorporated in a state that does not have much protection from
takeovers, and the state you are evaluating has very strong anti-takeover laws. These laws make
it very difficult for the company to be taken over by other companies. You are finding that many
of your investors are strongly opposed to the move, while the CEO and upper management seem
in favor. What can explain these two opposing positions?
Solution
The policy arguments for aligning the compensation for the top - level executives to the future
performance of the company by way of stock options are as follows:
1. It gives a sense of ownership to the employees.
2. If the business is doing well, it will reflect in the share price and thus lead to profits and
financial gains for the employees.
3. Generally stocks have a minimum vesting period and this leads to lower attrition as employees
hold on till the options can be exercised, otherwise there will be loss of profit.
4. It helps the companee in avoiding direct payment of cash for compensation and the employee
is also satisfied by the profits or the scope of profits from the options.
5. To avoid manupulation, strict adherance is rquired in not granting stock options back dated so
as to avoid any employee making gains before a stock has appreciated.
2. The CEO and upper management is of the view to change the state of incorporation so that
their position and company is secured and not asy to overtake. Their objective is to keep the
company safe and keep theor rights. Changing the state of icorporation, gives them a comfort
that under any circumstances, there cannot be a hostile takeover also and the mangement will
still be in there hands.
The investors on the other hand, want to achieve maximum appreciatin on their investment and
hence, if in the future a better management is looking to take over the company, the investors
would we willing for that decision..
1. You serve as an outside director for the Supplies, a multi-billio.pdf
1. 1. You serve as an outside director for the Supplies, a multi-billion dollar enterprise. You have
been assigned to the Compensation Committee, which is being formed in response to outside
pressure from shareholders. You note the following. First, activist organizations like CALPERS
have a strong bias towards using options as an incentive compensation for management. Second,
there are a number of scandals involving the use of options for compensation. Please discuss the
policy arguments for aligning the compensation for the top-level executives to the future
performance of the company, and reconcile if possible the two items noted above.
2. You are head of a committee that is evaluating whether your firm should change its state of
incorporation. Currently, you are incorporated in a state that does not have much protection from
takeovers, and the state you are evaluating has very strong anti-takeover laws. These laws make
it very difficult for the company to be taken over by other companies. You are finding that many
of your investors are strongly opposed to the move, while the CEO and upper management seem
in favor. What can explain these two opposing positions?
Solution
The policy arguments for aligning the compensation for the top - level executives to the future
performance of the company by way of stock options are as follows:
1. It gives a sense of ownership to the employees.
2. If the business is doing well, it will reflect in the share price and thus lead to profits and
financial gains for the employees.
3. Generally stocks have a minimum vesting period and this leads to lower attrition as employees
hold on till the options can be exercised, otherwise there will be loss of profit.
4. It helps the companee in avoiding direct payment of cash for compensation and the employee
is also satisfied by the profits or the scope of profits from the options.
5. To avoid manupulation, strict adherance is rquired in not granting stock options back dated so
as to avoid any employee making gains before a stock has appreciated.
2. The CEO and upper management is of the view to change the state of incorporation so that
their position and company is secured and not asy to overtake. Their objective is to keep the
company safe and keep theor rights. Changing the state of icorporation, gives them a comfort
that under any circumstances, there cannot be a hostile takeover also and the mangement will
still be in there hands.
The investors on the other hand, want to achieve maximum appreciatin on their investment and
hence, if in the future a better management is looking to take over the company, the investors
would we willing for that decision.
