Ceo Compensation at Sunbeam

Introduction

This memorandum analyzes the Sunbeam board’s employment decisions and evaluates the company’s compensation package. I begin my analysis with Sunbeam’s mission and goals in Sunbeam’s business environment. I then explain Sunbeam’s incentive structure, followed by the two compensation packages. Last, I discuss how the Sunbeam board’s actions and governance influence the firm’s overall performance.

Sunbeam’s Goals

Sunbeam’s board hired Albert Dunlap in 1996, hoping he would raise shareholder value as he did at Scott Paper. Dunlap’s ultimate goal was to maximize wealth for the company’s shareholders. Dunlap claimed, “I have always believed that if you focus on maximizing shareholder value, you will have the very best people, the very best products and the very best facilities.” The Sunbeam board and Dunlap reached an agreement on the firm’s mission to maximize shareholder value.

Evaluation of 1996-1997 Compensation Package

Dunlap’s philosophy aligned management compensation with company performance. Dunlap took no bonus, but he received a substantial stock option and award package. The restricted stock award component was to vest in two years, meaning that Dunlap’s compensation would be closely linked to the company’s stock performance. Sunbeam’s performance-based incentives brought greater motivation to the CEO to increase the firm’s stock value. The package could also affect the firm’s value negatively because it might lead the CEO to only concentrate on the firm’s performance within the two-year period before the managers’ options vest. Generally speaking, the first compensation package was slightly excessive, but it linked the CEO’s and stockholders’ goals.

Evaluation of 1998 Compensation Package

The second compensation package offered to Dunlap had the following major components: salary, stocks, and options. The 1998 package contained a larger guaranteed salary than the first package. Unlike the first compensation package, the second...