Compensation at Level 3 Communications

Harvard Business School Case No. 202-084

Posted: 26 Aug 2002

See all articles by Lisa K. Meulbroek

Lisa K. Meulbroek

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: February 2002

Abstract

SYNOPSIS: The compensation committee of Level 3 Communications will soon meet to re-evaluate the indexed executive stock option plan used to compensate its top managers and other employees. This review takes place within the context of a troubled telecommunications industry; like many firms in that industry, Level 3 has seen its stock price drop by more than 50% over the previous year.

TEACHING OBJECTIVES: The purpose of this case is to explore the desirability and structure of relative-performance-based compensation, specifically focusing on the indexed option plan adopted at Level 3 Communications. The case is taught in the second-year MBA-level corporate finance course as part of a module focused on compensation. Alternatively, it could be taught in a financial engineering class by narrowing its focus to emphasize the valuation and structure of the financial instrument, a "levered" indexed option, used to implement the plan.

Keywords: Executive compensation, indexed options, relative-performance-based compensation

JEL Classification: G13, J33, G30

Suggested Citation

Meulbroek, Lisa K., Compensation at Level 3 Communications (February 2002). Harvard Business School Case No. 202-084. Available at SSRN: https://ssrn.com/abstract=316596

Lisa K. Meulbroek (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
909-607-7363 (Phone)

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