NEWSWIRE - April 10, 2000
Topic: Agency Costs, Executive Compensation
Source: "Heads I Win, Tails I Win: More Companies Offer
Bonus Payments that Aren’t Tied to Performance," by Rachel
Emma Silverman, Wall Street Journal, Thursday, April 6,
2000, page R4; and "Pay for Outperforming: James Crowe, Chief of
Level 3 Communications, Makes the Case for Linking Stock Options
to Market-Beating Gains," by Joann S. Lublin, Wall Street
Journal, Thursday, April 6, 2000, page R8.
Synopsis of Article: These articles, appearing in a
special section on Executive Pay, provide an opportunity to
discuss some of the theory and practice of pay for performance
contracts. The first article discusses the current practice at
many companies of providing guaranteed bonuses to many executives,
independent of performance. The second article presents an
interview with a CEO on the topic of indexed executive stock
options. Alfred Rappaport has argued for indexed executive stock
options in his article, "New Thinking on How to Link Executive Pay
with Performance," published in the Harvard Business
Review. These articles can be linked to a discussion of agency
issues between managers and shareholders and how executive
compensation contracts may be used to reduce agency costs.
Questions:
- How can executive compensation contracts be used to reduce
potential agency problems between managers and shareholders?
- Why have many firms recently paid managers guaranteed
bonuses that do not depend on performance? Is this good
for shareholders?
- Even if guaranteed bonuses are necessary, what other measures
might be taken to link pay to performance?
- A criticism raised in the first article is that compensation
based on stock price does not reward an executive if Wall
Street undervalues a businesses share price. How might executive
stock options be modified to address this concern?
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