november 30, 1999executive compensation connection and correlation of executive compensation to...
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November 30, 1999 Executive Compensation
Connection and Correlation of Executive
Compensation to Stockholder MetricsA Study of Four Major US
Corporations
November 30, 1999 Executive Compensation
Agenda
• Hypothesis• Research Methodology• IBM• GE• Colgate/ Palmolive• Walt Disney• Summary• Conclusion
November 30, 1999 Executive Compensation
Hypothesis
• Stock options do support investor’s interests.
November 30, 1999 Executive Compensation
Research Methodology
• Identify four companies• Gather information on CEO
compensation and financial returns• Determine if there is a positive or
negative link between the CEO compensation package and the financial returns
• Analyze the trend of the four companies
November 30, 1999 Executive Compensation
Metrics for Review
• Earnings per Share (EPS) – Net Income/# Outstanding Shares
• Return on Equity (ROE)– Net Income/Stockholder’s Equity
• Stock Price
November 30, 1999 Executive Compensation
IBM
• CEO - Lou Gerstner• Incorporated in 1911 as Computer-
Tabulating-Recording Co.• Today IBM is one of the leading
information technology company• Revenue - $81.7 billion• Net Income - $6.3 billion
November 30, 1999 Executive Compensation
IBM Executive Compensation Package
• Two main components of executive compensation package– Base salary and Cash Incentive/ Bonus– Long-term Incentive Compensation
• Three main elements drive compensation package– Competitive marketplace– Complexity of leading IBM– Gerstner performance
November 30, 1999 Executive Compensation
Lou Gerstner Compensation Contract
Year Salary Bonus Other Annual Compensation
Long-Term Compensation
Awards
Long Term Incentive Plan
Payouts
Total Compensation
1998 $1,875,000 $7,500,000 $12,384 $0 $4,145,419 $13,534,801 1997 1,500,000 4,500,000 5,081 2,200,000 2,094,018 $10,301,096 1996 1,500,000 3,270,000 5,838 600,000 2,072,567 $ 7,450,401
November 30, 1999 Executive Compensation
IBM Corporate Performance
IBM Earnings Per Share
00.20.40.60.8
1
1996 1997 1998
IBM Return on Equity
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
1996 1997 1998
November 30, 1999 Executive Compensation
General Electric
• CEO - Jack Welsh• Only original member of the Dow
Industrial Average - Since 1889• GE is a large Conglomerate• Revenue - $58,687,000,000• Net Income - $9,296,000,000
November 30, 1999 Executive Compensation
General Electric – Executive Compensation
• Two main components of executive compensation package– Base salary and Cash Incentive/ Bonus– Long-term Incentive Compensation
• Three main elements drive compensation package Aggressive Leadership Overall Global Competitive Position Preeminent quality of products and services Reinforcement of a culture of integrity and
boundaryless behavior Positioning the company for continued success
November 30, 1999 Executive Compensation
Jack Welsh’s Compensation
Year Salary Bonus Other AnnualCompensation
*
Long-TermCompensation
Awards
Long TermIncentive
Plan Payouts
TotalCompensation
1998 $2,800,000 $7,200,000 $104,944 $27,018,750 --- $37,125,6921997 2,500,000 5,500,000 69,190 --- --- $8,071,1871996 2,300,000 4,000,000 --- --- $15,105,000 $15,105,000
November 30, 1999 Executive Compensation
General Electric Corporate Performance
Return On Equity (GE)
23.00%
23.20%
23.40%
23.60%
23.80%
24.00%
1996 1997 1998
Years
ROE
Stock Price* (GE)
$0.000
$20.000
$40.000
$60.000
$80.000
$100.000
$120.000
1996 1997 1998
Year
Stock Price*
Earnings Per Share (GE)
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
1996 1997 1998
Year
EPS
November 30, 1999 Executive Compensation
Colgate/Palmolive
• CEO Reuben Mark• Founded in 1806 by William Colgate• Soap, Candles, and Starch• Operations in 70 countries and
markets its products in over 200.• World leader in Personal Care
Products
November 30, 1999 Executive Compensation
Colgate/PalmoliveCompensation Package
• Two main components of executive compensation package– Base salary and Cash Incentive/ Bonus– Long-term Incentive Compensation
• Main elements compensation package include: – Fosters profitable growth & Increased shareholder
value– Align interest of executives & shareholders.– Attract, retain, & motivate high-caliber executives.
November 30, 1999 Executive Compensation
Reuben Mark Compensation
Year Salary ($) Bonus ($) Restricted Stock
Options
Securities Underlying
options
All other Compensation
($)
Total Compensation
1998 1,200,250 2,256,084 6,999,503 153,505 $178,466 $10,789,806.00
1997 1,122,500 2,724,055 3,379,485 2,600,000 $141,305 $9,969,342.00
1996 1,021,000 1,656,302 2,416,800 0 $130,802 $5,226,900.00
November 30, 1999 Executive Compensation
Colgate/Palmolive
• Increase in Net Income by 15% ($849Million)
• Total Revenue: 9 Billion.
• Over 38,000 Employees around the world.
November 30, 1999 Executive Compensation
Colgate Palmolive Corporate Performance
Earnings Per Share
$0.00
$1.00
$2.00
$3.00
1996 1997 1998
Return On Equity
0.00%10.00%20.00%30.00%40.00%50.00%
1996 1997 1998
November 30, 1999 Executive Compensation
• #2 media company.• TV, movies, theme parks,
publishing, vacations, etc.• $23 billion in 1998 revenues.• $1.85 billion net income.• $.89/share earnings.
November 30, 1999 Executive Compensation
• Executive Compensation at Disney:– Base Salary– Performance base annual bonus
• Net Income, ROE, ROA, EPS• Stock or cash awards
– Stock options• Initial employment, promotion, renewal or
fully vested.
November 30, 1999 Executive Compensation
Michael Eisner’s Total Compensation 1996-1998 Year Salary Bonus Other Annual
Compensation* Long-Term
Compensation Awards
Long Term Incentive
Plan Payouts
Total Compensation
1998 $764,423 $5,000,000 $3,820 --- --- $5,768,243.00 1997 $750,000 $9,900,000 $3,820 --- --- $10,653,820.00 1996 $750,000 $7,900,000 $3,520 --- --- $8,653,520.00
November 30, 1999 Executive Compensation
Walt Disney
Walt Disney Company EPS
0.50.70.91.1
1994 1995 1996 1997 1998 1999(est)
Years
EP
S
Walt Disney Company ROE
0.00%5.00%
10.00%15.00%20.00%25.00%
1994 1995 1996 1997 1998
Year
% R
OE
November 30, 1999 Executive Compensation
• 1999 compensation - over $575 million.• Stock options issued in 1989. Exercised
1999.• Current stock options - no vested shares
now. 24 million unvested.• 500% increase in stock price - 1984-
1989.• Overall return is excellent.
November 30, 1999 Executive Compensation
Summary
• Evaluating executives on financial benchmarks is important.
• ROE, EPS and stock price accurately reflect executive performance.
• Stock options encourage benchmark improvement.