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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
3. The strategic significance of policies can vary.
a) At one extreme are such policies as travel reimbursement procedures, which are
b) Exhibit 10.10, Strategy in Action, provides an interesting example of how the link
c) At the other extreme are organization wide policies that are virtually functional
gross revenue in local advertising.
4. Policies can be externally imposed or internally derived.
a) Policies regarding equal employment practices are often developed in compliance
5. Regardless of the origin, formality, and nature of policies, the key point to bear in mind is
that they can play an important role in strategy implementation.
a) Communicating specific policies will help overcome resistance to strategic change,
6. Policies empower people to act.
a) Compensation, at least theoretically, rewards their action.
b) The last decade has seen many firms realize that the link between compensation,
c) The recognition of this uncertainty has brought about increased recognition of the
V. Bonus Compensation Plans
A. Major Plan Types
1. Company shareholders typically view that the goal of a bonus compensation plan is to
motivate executives and key employees to achieve maximization of shareholder wealth.
a) Because shareholders are both owners and investors of the firm, they desire a
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
(1) Because they are absentee landlords, shareholders expect their board of
b) However, the goal of shareholder wealth maximization is not the only goal that
executives may pursue.
(1) Alternatively, executives may choose actions that increase their personal
(2) Therefore, an executive compensation plan that contains a bonus component
(3) The success of bonus compensation as an incentive hinges on a proper match
2. Stock Options
a) A common measure of shareholder wealth creation is appreciation of company
stock price.
(1) Therefore, a popular form of bonus compensation is stock options.
(2) Stock options have typically represented more than 50 percent of a chief
executive officer’s average pay package.
b) Stock options were the source of extraordinary wealth creation for executives,
managers, and rank-and-file employees in the technology boom of the last decade.
(1) Behind using options as compensation incentives was the notion that they
were essentially free.
(2) Although they dilute shareholders’ equity when they’re exercised, taking the
c) Restricted stock has the advantage of offering employees more certainty, even if
there is less potential for a big win.
(1) It also means shareholders don’t have to worry about massive dilution after
employees exercise big stock gains, as happened in the 1990s.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
(2) Another advantage is that grants of restricted stock are much easier to value
than options because restricted stock is equivalent to a stock transfer at the
market price.
d) Research suggests that stock option plans lack the benefits of plans that include true
stock ownership.
(1) Stock option plans provide unlimited upside potential for executives, but
(2) Because of the tremendous advantages to the executive of stock price
(3) Thus, supporters of stock ownership plans argue that direct ownership instills
e) Options may have been overused and indeed abused in the last two last bull
(1) Companies that spread ownership throughout a large portion of their
(2) If options seemed for a time to be the route that enriched CEOs, employees,
(3) Whatever the exact mix, they are likely to be more closely tied to achieving
3. Restricted Stock
a) A restricted stock plan is designed to provide benefits of direct executive stock
ownership.
(1) In a typical restricted stock plan, an executive is given a specific number of
company stock shares.
b) In addition to being contingent on a vesting period, restricted stock plans may also
require the achievement of predetermined performance goals.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
c) If the restricted stock plan lacks performance goal provisions, the executive needs
(1) Performance provisions make sure executives are not compensated without
achieving some level of shareholder wealth creation.
(2) Like stock options, restricted stock plans offer no downside risk to executives
4. Golden Handcuffs
a) The rationale behind plans that defer compensation forms the basis for another type
of executive compensation called golden handcuffs.
(1) Golden handcuffs refer to either a restricted stock plan, where the stock
b) Many boards consider their executives’ skills and talents to be their firm’s most
valuable assets.
(1) These “assets” create and sustain the professional relationships that generate
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
c) Firms may turn to golden handcuffs if they believe stability of management is
d) Deferred compensation is worrisome to some executives.
(1) In cases where the compensation is payable when the executives are retired
5. Golden Parachutes
a) Golden parachutes are a form of bonus compensation that guarantees a substantial
b) The popularity of golden parachutes grew with the increased popularity of
objective look at takeover offers.
(2) The executives could decide which move was in the best interests of the
shareholders, having been personally protected in the event of a merger.
tens of millions of dollars.
c) By design, golden parachutes benefit top executives whether or not there is
evidence that value is created for shareholders.
(1) In fact, research has suggested that since high-performing firms are rarely
6. Cash
a) Executive bonus compensation plans that focus on accounting measures of
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
(1) This type of plan is most usually associated with the payment of periodic
(quarterly or annual) cash bonuses.
(2) Market factors beyond the control of management, such as pending legislation,
b) Traditional accounting measures, such as net income, earnings per share, return on
c) Critics argue that because of inherent flaws in accounting systems, basing
(1) Return on equity estimates, for example, are skewed by inflation distortions
B. Matching Bonus Plans and Corporate Goals
1. Exhibit 10.12, Compensation Plan Selection Matrix, provides a summary of the five
types of executive bonus compensation plans.
a) The figure includes a brief description, a rationale for implementation, and the
2. Exhibit 10.12 matches a company’s strategic goal with the most likely compensation
plan.
a) On the vertical axis are common strategic goals.
3. Researchers emphasize that fundamental to these relationships is the importance of
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
b) To help motivate an executive to pursue goals of a certain risk-return level, the
4. The links we show between bonus compensation plans and strategic goals were derived
from the results of prior research.
a) The basic principle underlying Exhibit 10.12 is that different types of bonus
b) Although every strategy option has probably been linked to each compensation plan
at some time, experience shows that there may be scenarios where a plan type best
fits a strategy option.
5. Once the firm has identified strategic goals that will best serve shareholders’ interests, an
Global Strategist, provides an example.