Quantitative question:

Imagine you are the chairperson on the board of a large corporation, and you are trying to develop a compensation package to hire a new CEO for the company. The compensation package includes a signing bonus, annual salary, and annual bonuses. Assume the CEO would earn the signing bonus immediately after signing their contract. For sake of simplicity, assume the annual salary is paid to the CEO on January 1st for work they do for the current year, and that the annual bonus is paid on January 1st of the next year. Assume the annual bonus is not tied to company performance.

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Bonus	Signing bonus		Annual bonus	Annual bonus	Annual bonus	Annual bonus	Annual bonus
Annual salary		Annual salary	Annual salary	Annual salary	Annual salary	Annual salary

Assuming a discount rate of 12%, you want the NPV of compensation package to be at least $20 million for the 5-year contract so that the candidate will accept the CEO position.

Insert two tables (like the one above), one that has the undiscounted compensation values and one with the discounted compensation (assuming the 12% discount rate). What is the sum of undiscounted compensation? What is the total NPV of discounted compensation? Remember it must be greater than $20 million or the candidate will not be interested in signing on as CEO. (TIP: It's might be easiest to set up a table in a spreadsheet (like Excel) and then cut/paste into your response.)

Qualitative questions:

How did you structure the compensation package? Did you put more emphasis on the annual salary or annual bonus? Did you select a large or small signing bonus and why? Does your compensation package align the CEO's performance with the company's performance? If you could make this example more complicated, what changes would you make and why would you make them?

One last quantitative question:

In December of Year 3, the Board is unsatisfied with the CEO's work and they would like to fire them. Terminating the CEO's contract requires the company to pay out the NPV of the remaining compensation (both salary and bonus). What is the NPV of the rest of the contract if the CEO is terminated on January 1st of Year 4?