Has Pay for Performance Gone Awry? Views from a Corporate Governance Forum

Abstract

Some of the most controversial governance-related issues that have arisen in recent years involve executive and employee compensation. Investors, the press, and the public have expressed concern over (1) escalating executive pay packages and (2) the growing use of stock options. This article discusses the issues raised by participants at a Corporate Governance Forum, Executive Compensation, Stock Options, and the Role of the Board of Directors, hosted by the TIAA-CREF Institute on April 5, 2001. The Forum brought together a diverse group, including corporate officers and directors, academic and other researchers, compensation consultants, corporate human resources personnel, institutional investors, regulators, and other practitioners, and provided an opportunity for an open exchange of views among groups that do not often meet together. Participants discussed current trends in compensation practice, the accounting for stock-based compensation, the appropriate use of stock options and alternatives to standard at-the-money options. They also reviewed and debated the role of shareholders in approving compensation plans, and the importance of the board of directors and board compensation committee in determining compensation policy.

The article attempts to provide an overview of the comments and observations of both panel members and the audience. The article first provides a primer on stock options and related compensation issues, then generally follows the order of the conference sessions: (1) Executive Compensation and Executive Stock Options, (2) the General Use of Stock Options and Dilution Issues, and (3) the Role of the Board of Directors and the Compensation Committee. Necessarily, there is some overlap within each of the three broad topics. This article is not a transcript of the Forum, a comprehensive background on compensation programs, or a statement of best practices as it relates to compensation policies. Rather, the goal is simply to share some of the insights and information presented at the conference with a broader audience.

Note: This is a description of the paper and not the actual abstract.

Keywords: Governance; Compensation; Stock options; Boards of directors

JEL Classification: G32, J33