Compensation at Level 3 Communications
Harvard Business School Case No. 202-084
Posted: 26 Aug 2002
Date Written: February 2002
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: Suggested Citation