chapter  12
14 Pages

Executive compensation: something old, something new

WithMARIANNA MAKRI, LUIS R. GOMEZ-MEJIA

This chapter discusses several issues for compensation committees related to the design of the executive compensation package. It revisits the same old questions like how much should CEOs make, whether their pay should be tied to firm performance, and the role of risk in their compensation package. The chapter considers changes in legislation such as the Sarbanes-Oxley Act (SOX) of 2002, increased disclosure requirements by the Securities and Exchange Commission (SEC) as well as increased shareholder activism. It introduces some new issues such as how executives of high-technology or family-owned firms should be compensated. The chapter addresses the issue of extravagance in CEO pay. CEOs and board members often result in close relationships that can affect both the length of the compensation contracts by allowing the CEOs to stay on board beyond their useful contribution, as well as the value of the contracts by paying the executive premiums for their loyalty.