Executives' reward plans should be tied to long term

ON THE MONEY

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June 25, 2006|By GAIL MARKSJARVIS | GAIL MARKSJARVIS,CHICAGO TRIBUNE

Let's be intellectually honest.

Supposedly, investors buy stocks for the long run, banking on companies to become increasingly profitable and shares to perhaps double or even triple as many years go by. But if that's true, then why are so many chief executive officers given multimillion-dollar compensation packages as rewards for the past year, rather than for effective leadership for 10 years or so?

William George, a Harvard Business School professor who was given plenty of multimillion-dollar packages while CEO of medical device-maker Medtronic Inc. between 1991 and 2001, thinks the system is topsy-turvy.

"There must be clear pay for performance," he said. "And that should be measured over a long period of time."

You might have heard that line before. It's the mantra of the boardroom - often applied for better or for worse, when stocks soar or limp along from one year to the next.

But George suggests scrapping the current system, which generally enriches executives with bonuses and gifts of stock options or restricted stock based on some type of grade on the company's report card that year. Maybe it's the stock price, maybe earnings growth. Each company uses its own criteria to grade the CEO, and it's often fuzzy - difficult even for pros like George to discern from the corporate proxy.

George doesn't think one year is worth a multimillion-dollar pat on the back. The median compensation package for chief executives at major U.S. companies was $8.4 million in 2005, according to research by Pearl Meyer & Partners. For some, it's $30 million or higher.

Instead of letting executives enjoy the goodies whenever they want, George would like to see chief executives and directors show patience and confidence in the outcome of their corporate toil. The way George envisions it, corporate leaders would give their jobs their best day after day, accumulating stock options or stock in some other form. But they would have to hold onto it.

George wouldn't shower executives or directors with rewards even on retirement. He wants the executive to walk out the door with stock, let the shares age for one more year, and only then have the right to sell. If the price is higher after he or she has been on the golf course and away from the executive suite for a year, George figures the executive is rightly partaking in a long-term performance reward for years on the job.

"If the shareholders benefit, the CEO should too," he says.

And if the stock plummets after the executive has left, George figures the former executive, like shareholders, will suffer for a job that might not have been up to snuff. "You go down with the ship," he said.

Noting that Kenneth L. Lay sold tens of millions in stock before Enron Corp. went into bankruptcy in 2001, George said, "It's the cashing out before it collapses that I object to."

Increasingly, executives and directors are being required to have "flesh in the game" by holding an amount of stock while on the job, said Jeffrey London, an executive compensation attorney with Sachnoff & Weaver Ltd. of Chicago.

McDonald's Corp. requires executives to hold a minimum amount of shares while they are at the company. Hospira Inc., an Abbott Laboratories spinoff, does the same. Boeing Co. requires that the directors hold a certain level of stock until they leave the board. Insurer UnumProvident Corp. gets even closer to what George envisions - requiring the chief executive to hold 100 percent of his shares for at least three years and 75 percent until he retires or is terminated.

But George goes further, tacking on an extra year to the holding period before selling.

gmarksjarvis@tribune.com

Messages for Gail MarksJarvis also can be left at 312-222-4264.

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