Ethical choices in design and

administration of executive
compensation programs

BY:
PriyankaGupta 25
Deepti Raja 310
AbhimanyuSharma 350
Diane Dupuy Denus
Diane Vandamme
Astrid
Topics under discussion
 Rationale behind the dilemma:
The Ethical Frameworks
 Ethics: Moral judgements of what is right and what
is wrong

 Basic Question here:
What is unethical???
Is thinking about personal good over
others’ good ethical? Eg. Enron,
Executive retention bonuses
Is it possible/ right to choose between
multiple considering obligations all
morally right? Eg. Watkins in Enron
What is unethical when differences
arise between the action and
intention of the decision makers? Eg.
CEO making promises

 Basic
 Ethical dilemma


 Determining the scope of the executive position

 Annual merit increase

 Salary VS Goodwill


 Proposals
•
 Appropriate base salary

 Salary Increases

 Bonuses
Cash awards paid to excutives for
reaching established goals.

Usually,their amount is established as

a percentage of the executives’
salary

Dependant upon the

achievement of
specific criteria
 Bonuses:
Ethical dilemnas
1.Determination of annual performance
targets

2.Design of performance payouts plans

and level at which they are set.

3.Smoothing bonus payouts through the

mechanism: big weight to non-
financial factors when financial
performance is low, and the
opposite.
4.
 Bonuses:
Proposals to improvement
1.Compensation committee must determine if the
bonus criteria is appropriate (not too low,
realistic or truestretch) & align its
compensation recommendations with a good
target level of performance (upon advice from
the finance/audit committee)
2.Ensure fairness and equity in the establishment of
bonus payout ranges : more challenging goal
leads to higher level of risk for the executives
regarding to bonus compensation
3.Weights applied to financial and non-financial
factors should be applied regularly and
predictably, to avoid weakening the desired
relationship between performance and reward.
 Long Term Incentives
LTIare awarded to encourage the
achievement of goals that extend
beyond a single fiscal year

Consistof restricted stock, stock

options or a combination of both.

Some companies use cash based

performance plan.
 Long Term Incentives:
Ethical Dilemma
 The compensation of the CEO and other
people in the organization have huge
difference in the salary.
 Stock option and stock awards make up
the largest segment of CEO package.
 Thus, most compensation experts
attribute growing disparity to this factor
, which is a component of LTI
 It also raises the “ market level “ used in
targeting executive compensation
 Other ethical dilemmas
 How much total compensation is
appropriate for executives compared
to other organizational members?
 If the market comparisons are
appropriate component of job
evaluation process for establishing
compensation of other jobs within
the organization , why should they
not be appropriate for establishing
levels of executive compensation?
 Contd…
Has the responsibility held by
executives grown at a significant
faster rte than other employees of
the organization?
Does pay increase based on
externalities rather than corporate
performance?
Is valuation of stock options right?
Is the timings of stock option awards
to executives right??
 Long Term Incentives:
Proposals for improvement
 Stocks and option grants could be
indexed relative to the performance
of the institutions.
 Hence, performance becomes more
relative than absolute.
 Use restricted stocks, rather than
options as a long term incentive
 Ensuring the options are valued as
correctly as possible using most
robust valuation techniques. Eg:
Black scholes
 SERPs
Supplementary EmployeeRetirement
Plans
 Restriction of retirement qualified plans :
benefits are capped at a certain level of
income

 To overcome this problem: Supplemental
Executive Retirement Plan (SERP)

 Two kinds of SERP: 1)Restoration plans
 2)ERISA excess
plans higher pensionable
returns for executives
because of additional
features
 SERPs:
Ethical dilemnas
 Retirement benefits are proportionally in
excess of what is available to employees
under qualified plans.
 1) based on a higher percentage of
pay
 2)based on a more favorable period for
determination of average final pay


 Additional forms of compensation which do

not exist in qualified retirement plan

 SERPs:
Proposals for improvement

 Use excess plans that only extend types of
retirement benefits provided under
qualified planssuppression of additional
forms of compensation

 Use the same compensation elements as
used in company’s qualified plans: same
time line…



Thank you
