Unions and other shareholder groups will blast boardrooms with pay proposals during coming years, hoping to support the Securities and Exchange Commission's push to unmask executive pay, perks, and pension benefits. In particular, some individuals like Henry McKinnell, chairman and CEO of Pfizer Company, are front and center. Recent pay studies say he has the fattest retirement package among sitting CEOs of companies in the Standard & Poor's 500 stock list. Estimates suggest that McKinnell, who retired in 2008, gets $6.5 million a year for life. Contrast that with McKinnell's 2006 salary of $2.3 million and Pfizer 's simultaneous sluggish performance, and some labor activists see a problem. Other big investors are restless, too. As of early 2006, Pfizer's stock is down 46 percent since McKinnell became CEO several years ago, compared with the 27 percent slide in the Amex drug index. That has led several investors to question the $4 million cash bonus McKinnell got in 2005. Is this really merit pay for performance?

Instructions

a. Why do you think the Pfizer board awarded a $4 million cash bonus to the company's chairman, Henry McKinnell, even though Pfizer's performance, a 46 percent stock price decline, was below the industry average decline of 27 percent?

b. Do you believe performance-based executive compensation can create ethically inappropriate incentives for managers? Explain why or why not.