SIGN OF TIMES: GE CHIEF IMMELTT O GET STOCK—
NOT OPTIONS For General Electric Co. chief Jeffrey Immelt, stock-option grants—those wealth generators of the 1990s—will be a thing of the past.
In another move to reshape its executive-compensation and corporate governance policies, General Electric said yesterday it no longer would grant its chairman and chief executive either stock options or restricted stock. Instead, it will tie the majority of his pay to a new type of stock award that requires him to meet specific performance targets.
Under the plan, which could set a precedent for other corporations, Mr. Immelt has been granted 250,000 “performance share units.” These financial instruments eventually will turn into stock shares if Mr. Immelt and the company meet two performance measures. If they miss, he will still get his base salary, currently \($3\) million, an undetermined bonus... and dividends . . . on his stock units.
Each stock unit equals one share, and under GE’s current price, the value of the new grants is about \($7.5\) million. If Mr. Immelt meets his targets, the performance-share units would contribute a significant portion of his pay.
Half of the units will vest in five years if GE’s cash flow increases at an average of at least 10% each year. The other 125,000 shares will vest at the same time if GE’s shareholder return meets or outperforms the five-year cumulative total return of companies in the Standard & Poor’s 500 stock index... .

Required:
1. During the late 1990s, stock options were a substantial component of executive pay packages.
How might the use of stock options contribute to accounting gimmickry and financial statement abuses?
2. GE’s new “performance share” plan described here ties CEO compensation to

(a) cash flow performance and

(b) stock return performance over the next five years. Does the use of these performance measures rather than net income or earnings per share increase or reduce the likelihood of accounting gimmickry? Explain why.