Question

Executive compensation packages often tie performance to bonus and incentive awards, supplemental retirement packages, perquisites, and severance pay, in order to encourage the management team to align their performance with organizational goals. Which of the following compensation proposals is most likely to be in the best interest of the company's sharehoiders?
A. A base salary of $500,000 plus a stock option package for 250,000 shares that mature in six months
B. A base salary of $500,000 plus perquisites worth $250,000
C. A base salary of $500,000 plus a stock option package for 250,000 shares, with 20% of shares maturing at the end of each of the next five years

Answer 1

Answer:  

Option C is correct because base salary is guaranteed salary and the share option that is partially mature after every year. The value of the shares that mature after every year can be increased by the efforts of the CEO which aligns the shareholders and CEO interests in the organization's future prospect.

The Option 1 is good option but not a better option because the CEO perceive that as very long term commitment to the organization. After every year, when the CEO receives and held the shares, his actions are more oriented towards increasing the wealth of organization.

Option B is totally fixed salary which has no concerns with the future progress of the company. This salary doesn't aligns the interest of the shareholders and the management.