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Executive Performance

Prairie Home Companion's Garrison Keillor joked recently that the 90% of corrupt CEOs are making it difficult for the 10% of honest ones.

Graef "Bud" Crystal, the current grandfather of compensation consulting, reports the latest fall from grace of a CEO.
  • "Computer Associates International Inc. Chief Executive Officer Sanjay Kumar resigned and the company has had a flurry of firings and guilty pleas in connection with a federal investigation of securities fraud, longtime shareholders can look back --- on a company with a poorly designed executive compensation plan." -- April 21 (Bloomberg)
  • Crystal provides a running commentary on the need for sound compensation planning for executives who run enterprises of all sizes.

Following Crystal's (and other's) leads to holding boards to a higher level of accountability, companies like GE have gone out of their way to tie Jeff Immelt's, current GE CEO, pay to performance. Use of performance share units at GE, and other companies, has created greater importance in real "added value" of every dollar assigned to Immelt's (the CEO's) long-term incentive payout.

Level 3 Communications Inc. a company born and formed by Peter Kiewit Sons', Inc. of Omaha, implemented and continues a very unique long-term incentive plan during the .com craze in the 90's.

  • Tied to an average of the price of shares of high performing public companies, the Level 3 Communications, Inc. incentive plan is triggered for a targeted payout only if its stock price betters the average.
  • The cost of the Level 3 plan is expensed, thus not enjoying positives of fixed accounting.
  • This assures shareholders that the value associates of Level 3 add to the company over time has to be greater than the peer group of comparators AND the embedded cost of the plan.
  • That is the level of assurance that shareholders in public companies and stake holders in private companies want from senior management.

Executive level performance must be rewarded if it clearly equates to exceptional short term and sustaining long-term performance of the company.

  • Plans in start-up enterprises must reward for cash build-up and market penetration.
  • Plans in renewing companies must reward for profitable use of already invested tangible and intangible capital.
  • Plans in sustaining profitable companies must reward for efficient use of capital and resourceful management of expenses.

These highlights of executive compensation plan guidelines parallel the due diligence checklists of public and private investors.

This parallel is not capricious, it is essential that the investor mentality be part of planning for executive compensation.

At the same time, board members must insist that executive compensation plans attract new investors and protect current investors.

  • Such protection comes from smart planning and the use of proven compensation formulary.

As well, executive compensation plans must fairly reward and openly retain exceptional executive talent.

  • This balance must be reached with each new plan and with each revision to existing plans.
The HARLON GROUP applies articulated ethics in each discussion on executive compensation planning. The foundation for these ethics is found in business successes guided by traditional conservative teachings and experiences.

Our commitment to companies is that we will insist that the board of directors or advisors to management drive the process of executive compensation planning.

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