1. Case report on executive compensation (50%) (1000 words limit)
a) (i) What are the main reasons for linking managerial pay to firm performance? (ii)Describe and explain the main
theoretical principles for executive compensation.
b) Consider a publicly listed company in the UK or in the US of your own choice. Suppose that the board has asked
you to write a short report on the design of a new compensation package to the top executive. Your report
should have the following structure:
- Introduction: less than 1 page description of company such as market situation, product line, historical background
including stock price, financial situation, description of current top executive such as his background and length of
tenure.
- A discussion/analysis of compensation package. The analysis should conclude in specific recommendations with
respect to: level of total pay, strength of incentives, options (what type? which exercise price?), bonuses (made
conditional on what?), stocks, subjective performance indicators that might be included in pay package (indicators
that could be difficult to quantify), benchmarking/indexing vis-à-vis other companies Ukassignment
The analysis can assume that the CEO currently is on a salary contract (i.e., I do not want a discussion of the existing
pay package). The conclusion should, however, briefly describe the existing pay package and discuss how your
recommendations differ from the actual pay package in place.
You are encouraged to relate the analysis to strategic features of the company such as product market conditions
(e.g., are there close competitors? Who? How will the pay package relate?) and financial conditions (e.g., could there
be a free cash flow problem?). To the extent possible, you are also encouraged to relate your analysis to the outside
options for the CEO (his labor market opportunities). Good luck!
Note: You are encouraged to work in teams consisting of 2 persons when collecting the data for part 1 (teams
consisting of more than 2 persons will receive a lower grade).
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