We contrary. in its 2004 proxy statement to sh. Electric Company (GE) report Immelt. In their place, GE aware entitled Mr. Immelt to one than their arket value TUI US news JUS in its compensation plan? ament to shareholders, the compensation committee of General F) reported that in 2003 it had discontinued ESOs for its CEO, Jeffrey GE awarded 250,000 restricted share units. One-half of these units to one share each in 2008 if operating cash flow growth, adjusted for ents, increased at an average rate of 10 percent or more during share units would be cancelled. The other 125,000 units e share each in 2008 if the total return on GE shares over the period or exceeded the return on the S&P 500 Index for the same period. he share units would be cancelled. GE's shares were trading for about US$30 effect of unusual events, increased at an av 2003-2007. Otherwise, the share units would b elationship m A bases w propor- both firms entitled him to one share eac 2003-2007 met or exceeded Otherwise, the share unit at the time of this announcement. For 2003, Mr. Immelt's compensation a oncepts of compensa- pensation committee upon contribution to financial perform 02 Mr. Immelt's compensation also included a base salary of $3 million plus a 54.325 million. The amounts of cash bonuses are determined by GE's com- committee upon evaluation of an individual's performance for the year, including tion to financial performance. According to the compensation committee, after in into account cash bonus and restricted share units, more than 75 percent of Me molt's potential compensation for 2003 was at risk. GE also required that its CEO own sed perfor customer in-financial executives? ts of RBC ce. It also Why does six times salary in company shares. se ESOS, mdards in anuary 1, arged to Required a. What balance between short-run and long-run CEO effort is the GE compensation plan likely to induce? Explain. b. What are some of the dysfunctional effects of too much compensation risk imposed on a risk-averse manager? c One-half of the restricted share units awarded to Mr. Immelt is based on meeting an operating cash flow target. Evaluate the relative precision and sensitivity of operating cash flow and net income as performance measures. Also, evaluate the effects on manager effort motivation of eliminating "unusual events" from the cash flow-based performance measure. d. Could the restricted share units based on shareholder return be subject to the "pump and dump" behaviour that some managers seemed to adopt when their compensation was based on ESOS? es of $67 avour of wanted