Before describing perfect pay for performance, objectives of performance pay must be clarified. Objectives include incentives for value creation for shareholders, provide reasonable pay when there is crisis and minimize remuneration cost without sacrificing the above two conditions. The author listed two traditional performance pay method before World WarⅡ, Carnegie and Sloan. Carnegie performance pay method gives management the right to buy shares at book value and pay future dividend. This method provides executives far more than current stock, but it requires consistent capital gain and high shareholders’ control of the company. Nowadays it is often used in professional partnerships. Sloan method gives more employees the contribution-related bonus, but it also raises some problems that employees cannot be sufficiently encouraged when there is industrial regression. After World WarⅡ, a human resources model occurs with more emphasizing the value creation. Survey conducted by AMA in 1966 shows that, high or low management pay is consistent with high or low company profitability. A further survey found that, there is a linear relationship between log of pay and log of sales. But few companies are found actually using this formula. Actually, pay leverage 0.8 is closer to partnership pay and the human resources shows a leverage of 0.4 is because bonus and equity fill the gap. Furthermore, according to David McLaughlin, pay component has changed during the past twenty-five years. In 1990s, pay for performance has become strategic and have different kinds of long-term related pay method. Another change in 1990s is that remuneration for executives were closely tied to stock grant.
The author then precisely desc...
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...stock return movement are partial due to management and the investor have no idea the percentage of total return contributions are made by managers. It works out the target leverage and investing plans needed to get the best compensation. One the first day of management taking office, a proportion of future expected pay is invested and maintain target percentage during the year. E&G’s method is to reach the optimal cost efficiency plan. With the serving time of CEO reduces, the stock is adjusted. If the CEO’s serving time is infinite, the compensation will equals to market compensation x (1 + cumulative TSRn) ^target leverage. To conclude, three PP4P plans contain fixed amount pay plus proportion of excess return. They have many similarities and all have their own strengths. The only problem relies on cumulative past value have been included to work out the average.
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