For example, let's suggest just a modest salary for the CEO. Well not really modest, say GBP 80,000 per annum salary. Why should a good CEO leave a GBP 3,000,000 position to accept our proposal? We'll give him shares, from day one, in the current market value of 5 x GBP 3,000,000.
Wait a moment you say, he'll just take the shares and go on? Well, we're not that stupid. The shares will be deposited in some trust. She'll not be able to sell them till only after 10 years from the starting date. More than this, with any dividends given in the first 10 years, the trust will immediately buy additional shares that will be attached to the share that gave the dividend.
In the case of early termination of the contract, if initiated by the CEO, she'll need to return all the shares prorate to 5 years. In the case of early termination of the contract, if for any other reason, the CEO will need to return all the shares prorate to 5 years but as if worked additional 1 year (or till the end of the 5 years if left less than a year).
Let's look into the head of a CEO considering such an offer. The annual salary will enable her to live comfortable, in a nice house, sending the kids to a good school, helping her parents. Yet it is certainly no what she fought for all her life. Yet the shares, as she well know is something totally real. And she's getting all those shares from day one! Every penny that those share make, is hers from day one. She'll just need to wait for them for 10 years. A lovely retirement indeed!
So she accepts the offer. What will she do now? Shall she sit around and see that nothing changes? We all know what happens to companies that do not give a fight, in the long run (10 years is a lot of time for a company). Shall she try to gain short term profits? Will she give dividends irresponsibly? She is indifferent regarding dividends. It is just a matter of satisfying the various stakeholders, just as god intended.
MBA student, the Open University of Israel
What is the current incentive schema and what is the problem with it?
There is no rule that prohibits a CEO from leading a company for more than 5 years, yet it is the common practice to expect a CEO to stay around for about that period. In which she is expected to advance the company to a new area, steering it through the red waters to a safer strategic point. It is understood that both the company needs fresh blood every so and so years, and the CEO needs some newer, bigger, excitement. A successful CEO will get offers towards the end of the period. The CEO will expect a higher salary, options to share the promised success with the shareholders, and some compensation schema for the case he'll be sacked in the first years after giving up the current high position for the sake of the new offer. While the amounts that is paid to the CEO and other seniors outrages a lot of commoners like myself, let's face it, most of us cannot replace the CEO and deliver the expected results. For the shareholders, letting the company pay the huge benefits to the CEO are okay as long as the value of the company raises significantly and it is more competitive. As long as they can count the money at the end of the quarter, they don't really care about the small details.
A CEO, lucky enough to get a good offer, is quite safe. Every month, he gets a very big pay slip. If he seems to do good job, his options will be worth some additional millions. In that case he may also get a better proposal next round. If worst come to worst, he is still left with his compensation. A modest CEO, will just try to keep everything as is, enjoying the salary, and keeping his sit. A greedy CEO will push the company to risks for fast profits and share price gains. In both cases there is no alignment between the value of the company in the long run and the CEO's pocket. Two years after a CEO left for a new job, her prestige will not be damaged or linked to the failures in the previous working place.