Connection and Correlation of
Executive Compensation to
Stockholder Metrics
A Study of Four Major US
Corporations
November 30, 1999
Executive Compensation
Agenda
•
•
•
•
•
•
•
•
Hypothesis
Research Methodology
IBM
GE
Colgate/ Palmolive
Walt Disney
Summary
Conclusion
November 30, 1999
Executive Compensation
Hypothesis
• Stock options do support investor’s
interests.
November 30, 1999
Executive Compensation
Research Methodology
• Identify four companies
• Gather information on CEO
compensation and financial returns
• Determine if there is a positive or
negative link between the CEO
compensation package and the financial
returns
• Analyze the trend of the four companies
November 30, 1999
Executive Compensation
Metrics for Review
• Earnings per Share (EPS)
– Net Income/# Outstanding Shares
• Return on Equity (ROE)
– Net Income/Stockholder’s Equity
• Stock Price
November 30, 1999
Executive Compensation
IBM
• CEO - Lou Gerstner
• Incorporated in 1911 as ComputerTabulating-Recording Co.
• Today IBM is one of the leading
information technology company
• Revenue - $81.7 billion
• Net Income - $6.3 billion
November 30, 1999
Executive Compensation
IBM Executive
Compensation Package
• Two main components of executive compensation
package
– Base salary and Cash Incentive/ Bonus
– Long-term Incentive Compensation
• Three main elements drive compensation package
– Competitive marketplace
– Complexity of leading IBM
– Gerstner performance
November 30, 1999
Executive Compensation
Lou Gerstner Compensation
Contract
Year
Salary
Bonus
1998
1997
1996
$1,875,000
1,500,000
1,500,000
$7,500,000
4,500,000
3,270,000
November 30, 1999
Other Annual
Compensation
$12,384
5,081
5,838
Long-Term
Compensation
Awards
$0
2,200,000
600,000
Executive Compensation
Long Term
Incentive Plan
Payouts
$4,145,419
2,094,018
2,072,567
Total
Compensation
$13,534,801
$10,301,096
$ 7,450,401
IBM Corporate Performance
IBM Earnings Per Share
IBM Return on Equity
1
0.8
0.6
0.4
0.2
0
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1996
November 30, 1999
1997
1998
Executive Compensation
1996
1997
1998
General Electric
• CEO - Jack Welsh
• Only original member of the Dow
Industrial Average - Since 1889
• GE is a large Conglomerate
• Revenue - $58,687,000,000
• Net Income - $9,296,000,000
November 30, 1999
Executive Compensation
General Electric – Executive
Compensation
• Two main components of executive compensation
package
– Base salary and Cash Incentive/ Bonus
– Long-term Incentive Compensation
• Three main elements drive compensation package
 Aggressive Leadership
 Overall Global Competitive Position
 Preeminent quality of products and services
 Reinforcement of a culture of integrity and
boundaryless behavior
 Positioning the company for continued success
November 30, 1999
Executive Compensation
Jack Welsh’s Compensation
Year
Salary
Other Annual Long-Term Long Term
Total
Compensation Compensation Incentive Compensation
*
Awards
Plan Payouts
1998 $2,800,000 $7,200,000 $104,944
$27,018,750
--$37,125,692
1997 2,500,000 5,500,000 69,190
----$8,071,187
1996 2,300,000 4,000,000
----$15,105,000 $15,105,000
November 30, 1999
Bonus
Executive Compensation
General Electric Corporate
Performance
Return On Equity (GE)
Earnings Per Share (GE)
$5.00
24.00%
$4.00
23.80%
23.60%
$3.00
ROE
EPS
$2.00
23.40%
$1.00
23.20%
$0.00
23.00%
1996
1997
1998
1996
Year
1997
Years
Stock Price* (GE)
$120.000
$100.000
$80.000
$60.000
Stock Price*
$40.000
$20.000
$0.000
1996
1997
Year
November 30, 1999
Executive Compensation
1998
1998
Colgate/Palmolive
•
•
•
•
CEO Reuben Mark
Founded in 1806 by William Colgate
Soap, Candles, and Starch
Operations in 70 countries and markets
its products in over 200.
• World leader in Personal Care Products
November 30, 1999
Executive Compensation
Colgate/Palmolive
Compensation Package
• Two main components of executive compensation
package
– Base salary and Cash Incentive/ Bonus
– Long-term Incentive Compensation
• Main elements compensation package include:
– Fosters profitable growth & Increased shareholder value
– Align interest of executives & shareholders.
– Attract, retain, & motivate high-caliber executives.
November 30, 1999
Executive Compensation
Reuben Mark Compensation
Year
Salary ($) Bonus ($) Restricted Stock
Options
November 30, 1999
Securities Underlying
All other Compensation
options
($)
Total Compensation
1998 1,200,250 2,256,084
6,999,503
153,505
$178,466
$10,789,806.00
1997 1,122,500 2,724,055
3,379,485
2,600,000
$141,305
$9,969,342.00
1996 1,021,000 1,656,302
2,416,800
0
$130,802
$5,226,900.00
Executive Compensation
Colgate/Palmolive
• Increase in Net Income by 15%
($849Million)
• Total Revenue: 9 Billion.
• Over 38,000 Employees around the
world.
November 30, 1999
Executive Compensation
Colgate Palmolive Corporate
Performance
Earnings Per Share
$3.00
$2.00
$1.00
$0.00
1996
1997
1998
Return On Equity
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
1996
November 30, 1999
1997
Executive Compensation
1998
• #2 media company.
• TV, movies, theme parks, publishing,
vacations, etc.
• $23 billion in 1998 revenues.
• $1.85 billion net income.
• $.89/share earnings.
November 30, 1999
Executive Compensation
• Executive Compensation at Disney:
– Base Salary
– Performance base annual bonus
• Net Income, ROE, ROA, EPS
• Stock or cash awards
– Stock options
• Initial employment, promotion, renewal or fully
vested.
November 30, 1999
Executive Compensation
Michael Eisner’s Total Compensation 1996-1998
Year
Salary
1998
1997
1996
$764,423
$750,000
$750,000
November 30, 1999
Bonus
Other Annual
Compensation*
$5,000,000
$9,900,000
$7,900,000
$3,820
$3,820
$3,520
Long-Term
Compensation
Awards
-------
Executive Compensation
Long Term
Incentive
Plan Payouts
-------
Total
Compensation
$5,768,243.00
$10,653,820.00
$8,653,520.00
Walt Disney
EPS
Walt Disney Company EPS
1.1
0.9
0.7
0.5
1994
1995
1996
1997
1998
1999
(est)
Years
% ROE
Walt Disney Company ROE
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1994
1995
1996
Year
November 30, 1999
Executive Compensation
1997
1998
November 30, 1999
Executive Compensation
• 1999 compensation - over $575 million.
• Stock options issued in 1989. Exercised
1999.
• Current stock options - no vested shares now.
24 million unvested.
• 500% increase in stock price - 1984-1989.
• Overall return is excellent.
November 30, 1999
Executive Compensation
Summary
• Evaluating executives on financial
benchmarks is important.
• ROE, EPS and stock price accurately reflect
executive performance.
• Stock options encourage benchmark
improvement.
November 30, 1999
Executive Compensation
Conclusion
• Stock Options work.
• Pay for performance benefits investors.
• Long term investors should applaud
stock options.
• Continuation and expansion of stock
options should
November 30, 1999
Executive Compensation