Choosing the Bases/or a CEO's Bonus Award

[The following is an except from the Definitive Proxy Statement, SEC Form 14A, filed by General Electric on March 12", 1997.]

The Committee's decisions concerning the specific 1996 compensation elements for individual executive officers, including the Chief Executive Officer, were made within this broad framework and in light of each executive officer's level of responsibility, performance, current salary, prior-year bonus and other compensation awards. As noted above, in all cases the Committee's specific decisions involving 1996 executive officer compensation were ultimately based upon the Committee's judgment about the individual executive officer's performance and potential future contributions, and about whether each particular payment or award would provide an appropriate reward and incentive for the executive to sustain and enhance the Company's long-term superior performance.

For 1996, Mr. Welch received total cash payments of $6,300,000 in salary and bonus. The Committee continued to consider this level of payment appropriate in view of Mr. Welch's leadership of one of the world's top companies in terms of earnings, balance sheet strength, creation of share owner value, and management processes. In 1996, the Committee also granted Mr. Welch 320,000 stock options, half of which will become exercisable in 1999, and half in 2000. The primary basis for the Committee's determination to grant such stock options to Mr. Welch in 1996 was to provide a strong incentive for him to increase the value of the Company during the remainder of his employment.

The bases for the Committee's determinations regarding Mr. Welch's compensation in 1996 included his aggressive leadership, which drove the Company's outstanding financial results and improved its overall global competitive position; his vision and determination to achieve preeminent quality in all of the Company's products and services;

and his drive to reinforce a culture of integrity, stretch targets, boundaryless behavior, and employee invo.lvement throughout the Company. As in prior years, the key judgment the Committee made in determining Mr. Welch's 1996 compensation was its assessment of his ability and dedication to continue increasing the long-term value of the Company for the share owners, by continuing to provide the leadership and vision that he has provided throughout his tenure as Chairman and Chief Executive Officer.

Required

( 1) What do you think about the scope of the bases used by the compensation committee to detennine the bonus paid to Mr. Welch in 1996? Note that these are the particulars of the short-tenn bonus plan. Mr. Welch is also provided incentives by the long-run plan that relies on stock options to motivate behavior.

(2) Suppose that as a management accountant you were asked to help the committee develop perfonnance measures for the bases used by the committee to evaluate performance for the purpose of awarding the bonus. How would you measure each of the identified perfonnance bases?

(3) What perfonnance measures, if any, would you add to the committee's group? Why?

(4) What perfonnance measures, if any, would you drop from the committee 's group?

13-6 Why?

Measuring the Awards Bases of the Annual Bonus Plan

[The following is an excerpt from Rockwell International, Definitive Proxy Statement, SEC Form 1 4A, filed by Rockwell International, in 1996.)

e.nnual Incentives. Near the beginning of each fiscal year, the Committee reviews with the Chief Executive Officer and the President the Corporate Goals and Objectives for that year, including measurable financial return and shareowner value creation objectives as well as long-term leadership goals that in p_art require more-subjective assessments.

Principal 1995 financial goals included increasing earnings per share well above fiscal 1994, achieving a return on equity of 20% and generating sufficient cash flow to provide at least $400 million for dividends, acquisitions, debt r1rduction, and share repurchases. In 1995, the Corporation achieved a primary earnings per share increase of 19%, return on equity of 20.8%, and met its cash flow goal. Shareowner value goals for 1995 included achieving a total return (stock price appreciation and dividends) exceeding a composite of the peer companies selected by the Corporation and utilizing interbusiness sharing of competencies, technology, product development, and facilities to achieve added leverage for competitive advantage. The Corporation's long-term goals included developing new products, investing in new technologies, and taking the management actions-focused on promoting teamwork, organizational effectiveness, streamlining, and empowerment---essential to assuring quality, reduced product cycle times, and enhanced customer responsiveness.

After the end of the year, performance against the Corporate Goals and Objectives is evaluated and the results are considered by the Committee in awarding annual incentive compensation to corporate executives who were not directly responsible for the management of a business unit. Individual awards to members of the senior management group, including the Named Officers other than the Chief Executive Officef .and the President, are determined by the Committee after reviewing with the Chief Executive Officer and the President the recommended awards, taking into account the contributions made and the levels of responsibility of each of the participants. While the Committee believes achievement of the financial, shareowner value, and long-term leadership goals are each important, it accords greater significance to the first two in determiniJJg the total amount available for annual incentive payments.

The amount available for annual incentives is determined for the Corporation's senior executives and other key management under the Corporation's Incentive Compensation Plan. Under the Corporation's Plan, the addition to the incentive fund for a fiscal year cannot exceed either the aggregate amount of dividends declared on the Corporation's outstanding stock during the year or an aggregate amount computed by adding 2% of the first $100 million of the applicable net earnings ( defined as net income, before provision for domestic and foreign taxes based on income, of the Corporation and its consolidated subsidiaries) for the year, and 3% of the next $50 million of such earnings, and 4% of the next $25 million of such earnings, and 5% of the balance of such earnings. Generally, the Committee makes awards under the Corporation's Plan in an aggregate amount well below the amount available thereunder.

Required Evaluate the positive and negative elements of Rockwell's bonus plan for senior executives.

Note that this focuses only on the annual incentive plan. All senior Rockwell executives also participate in a long-run incentive plan.