The more you pay, the less you get

From Value Discipline

A consulting group, Dolmat Connell & Partners reviews CEO pay at tech companies and comes to what may not be a surprising conclusion:The more you pay in direct compensation, the less performance you should expect!Overall, in 2005 for tech companies, CEO base salaries increased 3.7%, bonuses, increased 5%, and there was zero change in long-term incentive grant values bringing total direct compensation up by 8.9%.

What did management's deliver to shareholders: Revenue growth fell from 13% to 10%, net income growth fell from 38% to 21%, and total shareholder return fell from 19% to 2%. Comparisons are all 2005 versus 2004.

One encouraging observation, long-term incentive comp fell signigicantly in excess of stock price declines. The conclusion that Dolmat Connell reaches is that there is an increasingly strong link between pay and tfirms' financial results.

Stock options are still the most popular long-term incentive employed but only 34% of firms have chosen to use only stock options. Some 53% of firms provided a "portfolio" of incentives, of at least two among (options, performance shares, performance units, restricted stock.)

The value of stock option grants, despite the hardening of the accounting rules, has gone up to 44% of total comp from the 42% level of 2004. Cash comp as a percentage of total comp fell to 36% of total comp versus 43% in 2004.

I share their conclusions: Bonus plans need to balance the upside oppotunity with a real downside risk. Incentives should truly align the incentive scheme that links the performance of management with the performance of the company.

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