Chapter 12

15 years working at a small, family-run business, you have received an offer for a new opportunity in a large corporation. During a series of interviews with executives in the company, you learn about a variety of avenues to move up the corporate ladder. You believe that the position as a department manager provides you an opportunity to join a company where you could spend the rest of your career. As an executive position with the company could be in your future, you think that you should learn more about the compensation that executives at this company receive. Further, you want to make sure that you will be joining an organization that behaves ethically and pays all employees fairly. You have a concern about what you have heard in the media about excessive executive compensation in large companies such as the one you are thinking about joining. You have read stories about public protests of large corporations and have also heard about executive scandals in which organizational leaders have inflated expenses to companies and spent money on excessive parties and furnishings for private residences. You are curious about whether such protests or scandals have involved your potential future employer. page 333 You start to research this issue and are relieved to learn that there have not been any executive scandals at this organization. There is an article, however, about a previous CEO receiving a platinum parachute. You arent sure what this means, but you understand that the company lost quite a bit of money while that person was the CEO, and it seems as if he still received a fairly generous separation package from the company. The article also states that most top executives at this organization have a golden parachute clause in their contracts, and you arent sure what the difference is between platinum and golden parachutes. The company is publicly held, and you learn that its executives do participate in an incentive stock option plan. Executives are granted a certain number of stock options each year that they are able to exercise after five years. As a result, there is an incentive for executives to work to increase the overall value of the company stock. This part of executive compensation seems to make sense. You hope that someday you also will be rewarded by the companys success. In the companys annual report, you are able to see the total compensation of many of the companys top executives, and overall, it seems that the executive pay and benefits at the company are not generally considered to be excessive. It also seems that executive compensation is attractive and in line with something that you should aspire to receive. Based on your research so far, this opportunity might just be the right move for your career.

What is the purpose of the platinum parachute? Why would the company provide this benefit? How does it compare to the golden parachute? Why does the company offer an incentive stock option plan? What other protections are in place for the shareholders and employees relative to executive compensation in organizations?

2.Compensating Executives at Safeguard Insurance The executives at Safeguard Insurance are focused on continuing efforts that have brought the company significant growth in the past 15 years. Director of Human Resources Beth Frazier is considering how to provide more incentives to executives to continue this focus. Two years ago, the company went public and began selling shares of stock on the stock market. While executives were granted some stock in the companys initial public offering, Beth now wants to examine the best way to use the companys stock value in the executive compensation plan. She knows that company ownership can help incentivize executives to increase the value of the company stock, and thus the ongoing success of the company. Safeguard Insurance is led by an executive team that includes the chief executive officer, the chief operating officer, and functional area leaders, including chief legal counsel, the director of finance, the director of operations, the director of marketing and sales, and Beths position. There are also leaders within the different lines of business, including the director of personal lines insurance and the director of commercial lines insurance. Beth is working with the companys board of directors to examine the compensation structure of this team of leaders. In addition to a retirement plan and other basic benefits such as time off, the company offers a competitive base salary plus a bonus plan that is tied to company revenue. Beth believes that a more direct tie to the companys stock value may add just the right incentive for executives. Since the companys stock went public, its value has been a key indicator of the overall success of the company. As the company executives are closely monitoring the company stock value, Beth believes that tying executive compensation to the stock value will provide a clear incentive for executives. If executives remain focused on increasing the overall value of the stock, they should make decisions that are in the best interest of the company. page 334Further, both executives and the company will benefit if the value of the stock continues to increase. Initially, Beth thought granting the executives annual incentive stock options would create the right incentive for the team. By doing so, the company would grant the executives the option to purchase stock at a later date at the price on the date of the grant. The executives would then have an incentive to grow the stock value over time. However, a member of the board of directors suggested considering offering a phantom stock plan instead. A phantom stock plan exists when executives are compensated with hypothetical company shares rather than actual shares of company stock. Upon meeting certain conditions, executives receive income that is equal to the increase in the value of the company stock from the date that the phantom stock was granted until the conversion date. Beth needs to conduct more research on both types of plans in order to formulate a recommendation for an incentive plan for executives. She must first decide if an incentive plan tied to the value of company stock is a good alternative for the company. It seems that this is a logical move to make, but Beth also needs to determine the best way to structure the plan. She thinks that the phantom stock plan may offer some advantages, but as she starts her research, she knows she needs to consider all of the options.

How does a stock option plan provide an incentive for executives? Which plan would be better for Safeguard Insurance, the incentive stock option plan or the phantom stock plan?