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All of the consultants CRN spoke with agreed that CEO compensation must be aligned with shareholder goals, and that does not simply mean a rising stock price. Looking at stock price alone can give a skewed perception.
"There's no one-size-fits-all in how to structure it," said Bart. "You have to determine, 'What is the company hoping to achieve through the CEO's efforts?' "
However, stock price is, perhaps, the most visible indicator of the health of a company. It's also one of the most deceptive, said Dora Vell, managing partner at Vell Executive Search, Boston.
"It's too simplistic to judge a CEO's performance only on stock price. It may be in the better interest of the CEO and shareholders to take a hit in the short term because they are building long-term value. It's critical to align the interest of the CEO with the board's objectives and shareholder value," Vell said. "A high stock price doesn't mean you're doing a great job. And the CEO is intrinsically interested in the stock price anyway because of his or her stock options that are part of the comp plan."
The most common way to measure pay-for-performance is to look at stock prices, agreed Dr. Hermann Stern, CEO of Obermatt Inc., a Switzerland-based international financial research firm. Stern, who developed the Obermatt/CRN Pay-For-Performance Index used in our study, said there are problems with looking at stock prices as a measurement.
"This gives a distorted view of performance because of market sentiment and business cycles, which is why pay is often also distorted," he said.
Stern's formula calculates pay-for-performance by measuring both performance and pay as percentile ranks. So, for pay to be based on performance, the CEO's performance percentile rank should match his or her pay percentile rank. "If a CEO achieves a performance percentile rank of 60 percent -- better than 60 percent of peers -- the pay should be in the 60th percentile as well -- that is, higher than 60 percent of the peers, but not more. If there is a difference, we call it excess pay."
It can be misleading, therefore, to use stock price to judge CEO performance. Jeff Leopold, managing director at the Boston office of executive search firm Cook Associates, said additional factors to weigh include: Has the CEO changed the value of the company? Has the employee base changed over time? What is the reputation of the company with its customers? More focus should be on the durability of the stock price, rather than the number itself, he said.
"If there is good shareholder value but a lot of employee turnover, then the CEO is mortgaging the future," said Leopold. "If shareholders, employees and customers are happy, then the CEO is doing a good job. Those are three key dimensions you need to evaluate."
Obermatt's Stern recommends companies pay more in fixed salary and use relative measures rather than absolute figures. "Only by comparing a company against its peers can we identify true performance," he said. "This also eliminates much of the massive swings in compensation and will help end the spiraling executive pay."