Ge Case

1. What were the components of Jeff Immelt’s compensation plan in 2002 and 2003 prior to the changes introduced in the fall of 2003?

2002 compensation

• $3 000 000 base salary

• $3 900 000 cash bonus

• $49 093 other payments

Long Term compensation:

• 525 000 restricted stock units (market value on date of grant)

• 1 000 000 stock options and SAR`s

• $6 693 300 in LTIP payouts for 2000-2002 LTIP program

• (Potential) $2 600 000 of annual retirement benefits (if retired in 2003)

• Other benefits

2. How much cash did Immelt receive in 2003? What part of that was awarded subjectively? What advantages do you think a subjective award can have over a pre-specified performance-based award scheme?

In 2003 Immelt’s cash compensation totaled $11,83mln. Detailed items are shown in the following table:

Salary $3 000 000

Bonus $4 325 000

Options and SARs exercise $4 176 576

Insurance premiums, employee savings plan, deferred compensation, etc. $ 255 164

Other payments $78 435

Total: $11 835 175

The subjective bonus (not tied to any performance indicator) of $4,32mln has made up over a third of total CEO’s payments. Moreover, taking into account that cash received from SARs and options exercise is a compensation for previous periods’ performance (Immelt held these compensation rights for 10 years before exercise), awarded subjective bonus has made up the biggest 56% part of his total 2003’s compensation.

Though, the performance-based bonuses provide better accordance between manager’s and shareholders’ interests, nevertheless, in some cases, subjective bonuses can be advantageous over performance-based payoffs.

First, when it is impossible to tie up manager’s long-term objectives to current company’s performance. As in GE example, Immelt’s efforts to build up a long-term strong growth potential (through re-organization and acquisitions) could not bring value in a full amount in current periods. Short-term options and other tools in this case can...