Assignment 5: Ceo Compensation

Assignment 5: CEO Compensation

Jamal Herrera

March 17th, 2013

Performance Management- HRM 538

Instructor: Dr. Marie-Line Germain, Ph.D

1. Critique and evaluate considerations that are traditionally used to determine CEO compensation.

Evaluating executive performance is somewhat mysterious, given the lack of published literature, with approaches being best described as informal and inconsistent (Smither J. & London M., 2009). Today formal CEO appraisals are a requirement for publicly traded U.S. companies although the mandate focuses exclusively on evaluating past performance to determine compensation (Smither & London, 2009). Committees must evaluate several factors when making decisions on CEO compensation. According to the authors Lackie and Rodda, there are six considerations that have been used to determine CEO compensation which include the following: company performance, individual performance, alignment with pay decisions for other executives, market data and expected trends, external messages, and internal messages.

Company performance is based on the company’s financial and stock price performance over the last year. Performance should be measured against the business plan and pre-established goals set for incentive purposes. During the year, Compensation Committees should conduct an analysis comparing realizable1 pay with actual performance results. In any one year, grant date long-term incentive values may not align with the most recent year’s performance. But over time, the pay realizable by the CEO should line up with the value created for shareholders (Lackie & Rodda, 2012).

Company performance alone doesn’t always tell the full story of the CEO’s performance that was individual performance comes in. The questions that need to be asked are: Who personally drove those results? Was it the CEO? Was it the executive group (or individuals within that group)? The CEO should have documented performance objectives, including...