Golden Parasute

8/8/2019 Golden Parasute

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reinforce the culture and policies needed to support the behavior ofthe members of the organization in order to maximize the wealth ofthe investors?

It will also talk about the effects of value driven management topromote control of the market and fend off competitors and thedangers of failing to protect markets with continually adding valuedrivers and allowing competitors entry.

Finally, it will investigate whether the executive perquisites, such asgolden parachutes, make a difference in maximizing investor wealthby comparing the earnings of different firms.

INTRODUCTION

This paper addresses the Golden Parachute and their effects oncorporate performance. Golden Parachutes and executivecompensation have long been the focus of many research studies. Inthe current business environment, it becomes increasingly importantfor shareholders to understand how theses executive perquisites

affect organization decisions. Because investors continually searchfor different ways to increase executives commitment to the firm,this study will investigate some of the correlates of GoldenParachutes and executive compensation and their effect on certainfinancial criteria. The research contained in this paper is anextension, not a replication of previous works on Golden Parachutesthat can be a critical factor in a firms success.

STATEMENT OF PURPOSE

The purpose of this research was to evaluate the empirical data thathas been collected on the relationship between Golden parachutesand company performance to determine to what extent GoldenParachutes predict organizational commitment and positive companyperformance.


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REVIEW OF THE LITERATURE

Theories that affect Golden Parachutes

Agency theory

The theory of Agency predicates the expectations of representationby executives and others that represent the interests of anorganization for the well-being of the owners. When an executivetakes on the responsibilities of an organization, their prime purposeis to support, maintain, and maximize the financial performance ofall assets. This responsibility is the fiduciary responsibility and isextended to all members of the organization that are involved with

the financial activities of the organization.

When a CEO decides to expose an organization to public investorsand other sources of investment it assumes a liability to preserve andprotect those investments made by individuals and institutionsexternal to operations and internal information. The source ofsharing this information about the operations and performance arethe various financial reports that have to be released to share any

organizational information. The fiduciary responsibilities associatedwith the agency theory are the protection that investors rely on tomake certain that their investment is safe and that the organization isoperating in the best interest of the investor.

Essentially, the executive body and board of directors are ultimatelyresponsible to the shareholders and other investors. There seems to

be some confusion by the average investor, there is a lack of concernand little activism on the part of shareholders and owners to makesure that the executives and board members perform and deliver theexpected results, and when they fail to achieve these results there arenot many alternatives or actions that can be initiated to resolve theproblems or remove members from their positions.


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As owners of an organization, shareholders and other members thathave ownership of an organization need to be more active and haveto demand performance and take appropriate action for rewardingand punishing the executives and board for the results that are

delivered. Failure to take action by owners will only make anorganization vulnerable to takeover, merger, or acquisition,bankruptcy and diminished returns on their investment.

The prestige

CEOs of large organizations have several real benefits. The brandthat they represent is established and recognized which allows them

a certain amount of prestige. A recognized brand can also promote atrust with the general public and an expectation on ethicalperspective and fortitude. This reliance allows the CEO to operatewithout restraints that an organization without this trust might. TheCEO must maintain and promote the purpose and cooperation of allconstituencies internal and external to grow the organization andincrease the value of goodwill. The CEO has to protect these assetsfrom diminishing returns and exposure to harm.

Everything from the company name to recognized properties,trademarks, and brands perpetuate value that can be converted intofinancial and material gains for an organization. These elementsprovide much of the core of the competitive advantage thatcompanies use to promote, solidify, and enforce their marketposition and continue to expand as opportunity presents.

Just as the activities of the members of an organization can leveragethese assets to maximize their value the unexpected misgivings andmisbehaving of the members and failure of control of the CEO cannegate any value and cause the erosion of the value that may havepreviously existed. This can cause diminishing returns and loss in


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value for brand and other properties that held value for theorganization.

In the events that became evident in the Enron scandal, there is a

direct correlation between the behavior of the CEO and the membersof the organization and the harm to the organization, its value, andthe shareholders equity. The impropriety and violation of trust andviolation of laws and procedures caused the greatest loss in valueand worth in a company in the U.S. and lead to the exposure of thedangers of power that a CEO has over the value and performance ofan organization. Ken Ley is now known infamously for his part asthe CEO whose failure to protect and maintain the value for

shareholders and constituencies by making selfish financialdecisions.

These activities and behaviors caused the elimination of value for allthe constituencies of Enron. The local communities and otherancillary services that relied on Enron for their survival andexistence were essentially destroyed because of the harmful effectscaused by this behavior.

The unfortunate element is that this has not been an isolatedincident, this has become the introduction of a stream of events ofCEO behavior that has lead to the NY attorney General Eliot Spitzerlevying charges against these guys and other members of theexecutive body that have been associated with these situations. Thishas lead to a parade of CEOs being brought up on criminal and other

charges associated with fraud and embezzlement.

The bizarre thing is that these CEO do not feel that they have doneanything wrong. They fail to see how they are responsible forprotecting the organization and its integrity from the damageassociated with their behavior. They have the perspective that theyown this entity and that they should be able to do what they want,


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when they want and how they want to with any and all of theproperty contained within. This perspective destroys all shareholdervalue and trust and therefore it may take an incredible effort torecover the previous levels of trust and value.

Events like these create a stigma that remains in the psychology ofall the constituencies involved with the organization. Even after therecovery and the perception of conditions, returning to normal thereis still a concern in the long-term memory of anyone that had beenpreviously harmed or was aware of the events that did harm. Thispsychological dilemma is similar to the psychological contract thatemployees have with their organization or the deprecation mentality

that was common among Americans that survived the GreatDeprecation and found it difficult not to save every penny they madewaiting for another deprecation to occur. As with these otherpsychologies, the Executives a Thief psychology forces membersof all constituencies to expect improper behavior and cheating by theCEO. While things are going well and everyone is satisfied there isno mention of this perspective but as soon as things are not going as

planned and there is uncertainty about the activities and performanceof the organization, the rumblings and innuendo about cheating andstealing starts to become more vocal, causing question about thelegitimacy of the activities of the CEO.

This is more exaggerated when members of an organization arebeing laid off or having their pay cut while the CEO and otherexecutives are still receiving bonuses and other beneficial

compensation.

These events can create the stress on an organization and the CEOthat can be the distraction that a competitor can use to penetrate themarket hold and barriers that had existed by the organization and canbe used as the force needed to gain cooperation of the constituencies


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that had previously been an active part of the organization. Thispenetration by a competitor can be converted into a barrier orobstacle for the organization to have to overcome to regain itsprevious position, but because of the psychology associated with the

events that lead to this situation it can never regain all of itsconstituents and will remain vulnerable to continued approaches bythis and other competitors because of the inappropriate actions of theCEO.

Establishing an identity

There are a number of CEOs that have found ways to differentiate

their organization and secure their market position. Jack Welch atGeneral Electric examined the value of having all the differentoperations and decided that GE would be a market leader or thatoperation would be sold or closed. This strategy allowed GE to focuson reinforcing their position in the market and recapture the value ofoperations liquidated that were no longer essential to his plan. CEOsthat have this ability and vision continually adapt and change to meetthe changes of various markets and capitalize on them to maximize

value. This creates confidence for the constituencies and promotesconfidence in the executive and management teams.

Some CEOs are brought into organizations to turn the operationaround and attempt to regain value in the organization. This mayrequire the elimination of jobs and the downsizing of theorganization to reform the operation. In many cases, these CEOslose focus on value growth and expansion, diversification and focuson reducing the organization to a small operation that has little or nostrategy for increasing its value. This was the case for Sunbeam

It is now time for shareholders and other investors in organizationsto stand up and be heard. However, what should they be asking?How do they make intelligent suggestions and recommendations for


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measuring the results and compensation for the CEO? These aredifficult questions to answer. Some of the questions are as follows:

What are the problem and costs associated with Golden Parachutes?

What financial results should be the mechanisms for determining thecompensation for the CEO?How should shareholders manage their CEO?What processes and rights do stockholders have?Should the organization have to outperform the market?Should the organization have an overall percentage goal as amarker?What should government do to regulate how a CEO distributes funds

from an organization when they are essentially bankrupting it?What funds should be legally available to them for compensation orbonus?Economic Value Added (EVA) a new method of measuring the realprofitability of an organization.Is there a valid and reliable succession plan for the CEO?

Executive compensation

The issue of executive compensation and fiduciary responsibility hasbeen elevated to one of the most paramount topics in Americanbusiness, law, and justice. There are indictments issued almost dailyagainst CEOs all over the country. There is pressure mounting notonly at the state level by New York Attorney General Eliot Switzer,but also at the federal level by SEC chairman Cox who has beenreceiving a great deal of criticism for salaries of CEO escalatingwhile the organizations performance is diminishing.

The evidence exposed about CEO behavior declares that there issomething very wrong with the return on investment forshareholders while the CEOs are seeing financial rewards that areastronomical. While shareholders of some organizations are losing


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money on the value of their stock and the dividends returns of 1% or2% are not even adequate to make the investment acceptable, whilethe CEOs are receiving compensation gains of tens of percent toseveral hundred percent. This is causing a concern surrounding the

information and activities that is available for CEOs and otherexecutives that are exercising stock options to receive incrediblefinancial gains while the average shareholder of the organization isincapable of having the Upward mobility long an American right inrecent years has become limited to a select few. Corporate CEOshave enjoyed record levels of compensation and corporations haveseen record profits, as more and more middle-class Americans areexperiencing stagnant wages and vanishing benefits.

CEO compensation is out of orbit: At the 350 largest public companies. The average CEOcompensation is $9.2 million. Compensation for oil and gas execs increased by 109percent between 2003 and 2004.In 2004, the average CEO received 240 times more than the compensation earned by theaverage worker. In 2002, the ratio was 145 to 1. (Center for American Progress, 2005)

Some major concerns for shareholders is how safe is theirinvestment, is everything being done to maximize overall value of

the assets that have been given to management, who is responsiblefor any failures of negative results, will the organization meet theexpectations of the shareholder and will it lead or be a top performerin its industry market. When shareholders invest in an organizationthey have to decide whether to accept the risk for a return that willoutperform other investments and alternatively, risk free marketsecurities. The expectation is that the organization that they choose

will meet this expectation and additionally espouse the values of theshareholder.

Golden Parachute Decisions

According to an article in the CCH Financial Planning Toolkit(2007), the term "golden parachute" is a wonderfully descriptive


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save their jobs, regardless of what is in the best interest ofshareholders.

A third argument is that golden parachutes actually dissuade

takeover attempts by creating a change of control liability thatrenders the takeover financially unsound. Historically, this hassimply driven up the cost of parachute payments. According toour HCE survey of lodging corporations, the average parachuteis now equivalent to approximately two years of totalcompensation and is extended to only the top 10 to 15executives in the organization.

Whether a golden parachute dissuades a takeover or not, it canbenefit a corporation by attracting top executives, thwartingcosts associated with takeovers and promoting stability.(Kefgen & Mahoney)

Economic motives

In an attempt to curtail golden parachute activity many activist

shareholders are seeking to limit the amount the plans can paywithout separate authorization. The shareholders are actually theowners of the company and they feel that they are entitled toapprove these larger optional compensation plans.

In an article in Brown Digest For Compliance Professionals(2007) abstracted from M&A Lawyer (Vol. 11, No.2, Pgs. 9-13) corporate/securities attorney Jonathan Gordon and

executive compensation attorneys Jeremy Goldstein and DavidKahan report that many companies seek to deflect publicopprobrium or avoid bruising shareholder fights by adoptinglimitations voluntarily. Most limitation policies cap severancepayments at a multiple of the executive's base earnings, andthen exempt certain types of payment from the computation.


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The capped amounts often include cash, stock, and the presentvalue of post-termination perquisites and periodic payments.Typical exclusions cover equity vesting and long-term bonussettlements and other compensation earned before termination,

and payments from benefit plans in which employees other thanthe executives participate.

The article also claims that the adoption of a golden parachute limitation plan givesthe board an opportunity to reflect on and articulate its compensation philosophy forsenior executives. In practice, the authors find, the pressure to adopt almost anythingthat deters shareholder resolutions and lawsuits overwhelms the opportunity forreflection. Companies are left with plans that, through vagueness, rigidity, and otherflaws, hamper sound compensation policy and invite litigation. The chief complaintis that policies cannot, in their typically terse wording, address the many hard-to-categorize situations, such as gross-ups for federal excise tax on golden parachute

payments and prorated bonuses for the year of termination. Moreover, if shareholdersmeet only annually, they cannot approve exceptions in advance of the terminationevent, which (for acquisitions) often must be kept confidential until the last minute.Any exceptions a board might authorize to a parachute capfor example, to secure akey executive of an acquired companycould trigger shareholders' lawsuitsclaiming that the company violated its own policy. (Brown Digest For ComplianceProfessionals, 2007)

The authors (Brown Digest For Compliance Professionals, 2007)also note that compensation policy is a matter which corporate lawleaves to the board, and a rigid compensation policy dependent onshareholder overrides may violate directors' fiduciary duties.Companies are well advised to resist shareholders' demands to adoptsuch policies. Since managements must respond to shareholderinitiatives under the SEC proxy rules, it may seem prudent to offer aplan as an alternative to a shareholder-proposed one. Yet, the authorsstress, a well-articulated compensation philosophy is a bettersolution than arbitrary limits on compensation. If the boardnevertheless feels it must adopt a limitation on golden parachutes,


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the plan should give the directors the final word on how to interpretit and how and when to grant exceptions.

In an earlier study by Berkovitch and Khanna (1991, p. 149) they developed a economicmodel of the acquisition market in which the acquirer has a choice between two takeover

mechanisms: mergers and tender offers. A merger is modeled as a bargaining game betweenthe acquiring and target firms; whereas a tender offer is modeled as an auction in which

bidders arrive sequentially an compete for the target. At any stage of the bargaining game,the acquiring firm can stop negotiating and make a tender offer. In equilibrium, there is aunique level of synergy gains below which the acquiring firm makes only a merger attemptas it expects to lose in the competition resulting from a tender offer. For synergy gainsabove this level, tender offers can occur. However, to get tender offers, target shareholdersmust give their managers gold parachutes that give higher payoffs in tender offers than inmergers.

Behavioral motives

While working stiffs suffered another real pay cut in 2005, it wasanother year of record-setting raises for America's CEOs. A PearlMeyer & Partners survey of large companies found the median CEOreceived a 10.3 percent raise last year to $8.4 million. In addition,those at the top got packages that were truly jaw dropping. CEOWilliam McGuire's accumulation of $1.6 billion worth of

UnitedHealth Group's stock options was so huge and fortuitouslytimed that the Securities and Exchange Commission has taken aninterest. Moreover, drivers around the country fumed when theylearned that Exxon's retiring CEO Lee R. Raymond not only tookhome $49 million just for last year but also is now collecting apension worth $98 million. (Clark, 2006)

It has gotten so bad that a few chagrined CEOs, worried about theeffect of this entire largess on investors and workers, have started tohand back some of the goodies. One of these is Edward J. "Ned"Kelly, CEO of Mercantile Bank, who earlier this year canceled astandard golden parachute contract that would have given him threetimes his annual salary and bonusa total of $9 millionif he hadsold the bank holding company. Kelly is a veteran of boardrooms


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who has served on the compensation committee of ConstellationEnergy Group and now heads the audit committees of CSX and theHartford. (Clark, 2006)

When asked why he does not have one he said that that he wasconfident he could get another job because of his unique backgroundand that he believed that if you are being paid for performance, thereis no need to worry about finding another job.

An example of Golden Parachutes gone wrong is Bob NardellisReward for a job badly done at Home Depot. Nardellis handsomereward has brought the inequities of extreme capitalism into the

spotlight, says Chandran Nair. (Nair, 2007)

There was no surprise when Bob Nardelli decided to quit aschairman and chief executive of Home Depot. The worlds biggesthome improvement retailer suffered falling sales and a slide in itsshare price on his watch. What sent eyebrows arching was the size ofhis payout: Nardelli walked away with $210 million.

The size of his severance package prompted editorial outrage inmany of the worlds leading newspapers. It drew anger from laborunions, which described the payout as extreme and obscene. It hasmoved leading investors to launch an unprecedented campaign tocurb such packages. If he has done nothing else, Nardelli has helpedbring worries about extreme capitalism to mainstreamconsciousness. These golden parachute agreements are the norm,with executives paid huge sums regardless of their companysperformance. They embody the kinds of excess that poisoncapitalism and globalization in many peoples minds. (Nair, 2007)Interestingly, these excesses are uncommon in Asia, for all its flaws.It is Asian shareholders and business leaders vital challenge tokeep them from taking root even while they clean up their


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corporate governance act. (Nair, 2007)Disney: an example.

In the investigation for how CEOs are compensated there is greatconcern for the behavior of the trustees of the boards of the

organizations that are awarding these salaries. It has been a concernof a number of experts and is evident as an abuse but despite all thescandals with CEOs and financial abuses, this practice remains at theforefront of abuses that are continued. In an article in Tulsa world, itis documented that Michael Eisner is compensated at a rate thatdiametrically opposes his performance from 1991 to 2002.

For instance, Walt Disney Co.'s outgoing CEO Michael Eisner was paid $38 million

above the industry average from 1991 through 2002. That's even though thecompany's performance declined when compared with others in the business,according to Robert Daines, a Stanford University law professor who co-authored astudy on the link between CEO skill and pay. (Beck, 2005)

For CEOs who dodge the bullet or are doing a fine job, the trappings remainhandsome: Paychecks for American CEOs grew 7.2 percent in 2003 and 10 percentin 2002, according to a survey of 350 companies conducted by Mercer HumanResource Consulting. The median CEO compensation in 2003 was $2.1 million.Mercer's latest survey, with 100 companies reporting so far, shows their CEO paywas up 25.3 percent in 2004.

No tears. That such largeness comes with strings attached--youmight be fired if you underperform--would hardly seem unfairto the average salaried worker. "If you want job tenure, there's agreat position in the mailroom," says Minow.

However, not in Disney's mailroom, at least not for Magic Kingdom kingpin Eisner.

Last week he announced that his 21-year reign over the House of Disney will end inSeptember, a year earlier than planned. Eisner has long been a poster boy foroutlandish executive compensation, having taken home over $1 billion during histenure at Disney. Though he transformed the company from a sleepy but well-known

brand into a media and entertainment powerhouse, the board seemed to want to knowwhat he had done for shareholders lately. "Eisner overstayed his welcome," sayssecurities analyst Dennis McAlpine. "He did very well when he had things he could


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do, but after he got those cleared up, what was he going to do for an encore, go afterthe window washers?" (Beck, 2005)

Figure 1 shows the financial performance of The Walt DisneyCompany. Figure 2 is the evaluation of the gain in financial

performance of the organization and the rate in change in MichaelEisners salary. These results show a dramatic discrepancy betweenorganizational performance and the CEOs compensation.

Fig 1: Financial performance

1999 2000 2001 2002 2003

Percentage inchange ofrevenue fromprevious year N/A 7.9727% -0.6041% 0.6237% 6.8380%

Percentage ofchange in

MichaelEisner'sSalary N/A 6654.67% 43.80% -98.62% 0.10%

MichaelEisner'sSalary $750,000 $50,660,000 $72,848,000 $1,004,000

Fig. 2: Change in income, salary, & revenue.


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In the data above, there is valid and reliable measure or formula forevaluating the organizations financial performance to the value orcompensation of the CEO, this is a measurement of change in

percentage of financial activity. In this data, a modest or expectedlevel of gain in the results of the organization translates intoastronomical compensation for the CEO and negative results presentno real harm to the compensation. The discrepancy between thefinancial results and CEO compensation fails to discern any specific,measurable, logical, or identifiable pattern that is predictable or acalculation for consistency.

In an examination of the organizational assets and value it isapparent that there is a reason for concern for shareholders and thatexcess compensation for management has caused financialchallenges for the organization and has diminished the value of thestock.


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In 2001 The Walt Disney Company experienced some financialdifficulty and initiated a Voluntary Separation Period (VSP), thisgave members of the organization the opportunity to decide theirown fate and volunteer to accept a severance package. During this

time and continuing for the next fiscal year there were additionalfreezes on wages for members of the organization, but Mr. Eisnerssalary increased dramatically and then dropped to just over his baseof $750,000.00 but still in excess of his base salary, while othermembers didnt receive any rise in compensation and stock holderscontinued to receive only $0.21 per year from the period of 2000through 2002.

Financial results

Shareholders invest in a firm to achieve positive financial gain. Thisis in either dividends or the increased value of a stock in the growthof the stock price. As a measure of these results, shareholders willuse an Expected Rate of Return calculation that is the sum of theoriginal cost of the stock, the dividend it pays, and the percentagegain that they are anticipating. In figure 3 below the 1999, stock

price for The Walt Disney Company is calculated with varyingpercentage returns expected from that time through to 2005. Basedon figure 4 the results of the actual return on the investment areevident.

Fig. 3: Expected stock price

Expected Stock Price based on actual 1999 price1999 2000 2001 2002 2003 2004

8% Rateof

$29.56 $31.92 $34.48 $37.24 $40.22 $43.43


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Return

7% Rateof

Return $29.56 $31.63 $33.84 $36.21 $38.75 $41.46 6% RateofReturn $29.56 $31.33 $33.21 $35.21 $37.32 $39.56

5% Rateof

Return

$29.56 $31.04 $32.59 $34.22 $35.93 $37.73 4% RateofReturn $29.56 $30.74 $31.97 $33.25 $34.58 $35.96

1% RateofReturn $29.56 $29.86 $30.15 $30.46 $30.76 $31.07

Fig 4: Actual return

TheREALprice ofDisneyStock on

the firsttradingday ofthe year $29.56 $29.88 $27.94 $21.45 $17.26 $23.67

In the trend of stock value prices for The Walt Disney Companystock price from 1999 2005 (Figure 5) the results are sporadic and


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inconsistent and for this period inclusive would result in a yield thattranslates into a negative value for their owners. The year-to-yearcomparison of results has some extreme variances for each period,which would result in extremely negative losses of extremely

positive gains. This pattern would be exceptionally difficult forinvestors to prepare for or predict to take advantage of for thedesired gain. The CEO on the other hand has the information thatwould be necessary to execute a stock option for their optimal gain.

Fig 5: Performance items

Year 1999 2000 2001 2002 2003 2004

Percentagechange invalue from1999 to anyother year 1.08% -5.48% -27.44% -41.61% -19.9

Percentagegain/loss instock valuecompared toprevious year 0.00% 1.08% -6.49% -23.23% -19.53% 37.14

Overtimeframe1999-2005gain/loss 6%


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The performance and value of The Walt Disney Company hasdemonstrated unacceptable results and has performed negatively.The risk-free rate for investing in market securities is about 4% atthat level The Walt Disney Company should have achieved a stock

price of 37.40 in 2005. In figure 6 below, it is evident that it failed toachieve a positive return for investors. For every $1000.00 investedin The Walt Disney Company stock there is a loss of $57.85 for theperiod of 1999 2005.

Fig 6: Performance & value units

1999 2000 2001 2002

Percentagegain/loss instock value 1.08% -6.49% -23.23%

Over the

lifetimegain/loss -6%

@ 1% 4% 5% 6%

Loss basedon expected% gain -11.25% -25.54% -29.70% -33.58%

$1000invested in1999 is in2005 valued

$942.15


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at

1% 4% 5% 6%

Expectedreturn on$1000invested in1999 onDisney Stockto value in

2005 at agivenpercentagerate $1,061.52 $1,265.32 $1,340.10 $1,418.52

Compensation

The CEO of any organization receives a base salary; this is the

compensation he receives regardless of his performance and is theobligation of the owners or shareholders and secondary componentsare added based on performance of the organization. This is essentialfor attracting and maintaining any executive in any organization.The secondary or additional components in the compensation for aCEO are stock options, perquisites, profit sharing, and otherincentives that are of value by the CEO.

The board of directors compensation committee are responsible forputting a package together that will be rewarding and satisfactory forboth the shareholders and the CEO. They are charged with thefiduciary responsibility of maximizing value for the shareholdersand acting as an agent to protect them. In the recent past, thecompensation committees have not been acting with due diligence


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for the shareholders. There are now some activities and behavior ofthe CEO that is noticeable to the boards of directors at allorganizations. In the recent legal action by ENRON shareholderssuing the Board of directors and the out of court settlement there is

now concern for how a CEO should be compensated and the boardcan now be held accountable for not acting carefully. (Benjamin,2005)

First, academic research indicates that shares of companies withwhat are perceived to be good corporate governance provisionstend to outperform other stocks. Second, "investors viewgovernance as a risk factor, says Patrick McGurn, executive

vice president of Institutional Shareholder Services, which trackscorporate governance issues. The firing of CEOs who don'tperform according to shareholder expectations is discussed.

So perhaps it is no surprise that the list of ousted executives includes both those whosesin was failing to deliver on their promises to shareholders--like Hewlett-Packard'sCarly Fiorina and Disney's Michael Eisner--as well as those whose sin was, well, real,such as Boeing's Harry Stonecipher, who lost his job after acknowledging an affairwith a subordinate. Such entrenched imperial leaders as AIG's Maurice "Hank"

Greenberg are not above boardroom discipline as soon as a whiff of scandal arises.Even the Japanese, whose love of ritual and respect for hierarchy are legendary, aregetting into the act: Sony directors replaced CEO Nobuyuki Idei with Welsh-bornAmerican Howard Stringer in an attempt to shake up the company and boost itssagging stock price.(Benjamin, 2005)

Perquisites

As part of any compensation plan in an organization, all members

receive some perquisites or benefits that are not necessarily financialrewards. These can be intrinsic or extrinsic, or tangible or intangiblebut still allow the individual to exercise these benefits based onachievement or as part of affiliation with the organization. These arepersonal use of organizational assets, prestige of being thefigurehead or leader of the firm, discretionary use and distribution of


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organizational assets, access to organizational knowledge andinformation, and other activities. Although a dollar figure could beassociated with these items, it is usually not a consideration in anyfinancial representation of compensation for the CEO.

These benefits should have an associated weight for offsetting someof the compensation for the CEO as acquisition would have a realcost if not accessible within the organization. These items shouldalso carry value to the CEO or should not be available for use andshould be part of a conversion into other savings or revenue forshareholders.

Association with a successful organization will provide numerousopportunities for the executive to enhance their value to theorganization while increasing their earning potential from externalsources. These will have to meet with approval of a committee tomake certain that they are not in violation of the contract with theorganization and will not diminish the value of the executive to theorganization.

CONCLUSIONS


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The failure to reinforce value driven management elements that havediminished the value and return of the organizational assets must bea concern for the shareholders and anyone that has authority to planand deliver a compensation package for a CEO. How a CEO is

measured and compensated must be based a number of elements andthere should be safeguards in place to protect the interests of boththe CEO and investors in the organization.

There is a formula for extracting the economic performance of anorganization that should include the Cost of Capital, Plowback Rate,ROA, ROE and change in EPS from one year to the next, and basedon these element the formula for CEO compensation can be derived.

(Keown, 2003) In addition to this the potential for stock options canbe allowed with placing controls that would force the escrow ofthose funds for a period of one to two years to be used for preventingCEOs from using them as an escape plan and the results of anyactions that the CEO may have taken to harm to organization, whichin turn could be used to penalize the CEO and offset the harm toinvestors by recapturing part or all of these funds.

The behavior of the board should be of concern to the shareholders,as they are the responsible party for releasing the financial assets thatmake up the compensation package and affect the other financialactivities affecting the performance of organizational assets. Aprocess for governing the board or making them directly responsiblefor the harm to shareholders must be established and enforced.

To present a fair and balanced presentation of the material a requestof Michael Eisner to participate in this research was offered. Due tohis schedule and other conflicts, he was not able to offer anyessential information that might provide insight into the intricaciesof the responsibilities of a CEO and justification for the


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compensation schedules that are evident in this analysis andreflected in the position in firms across the U.S.

References

Beck, R. (Apr 3, 2005) News Analysis: Benchmarking inflates CEO salaries;[FINAL HOME EDITION] Associated Press. Tulsa World. Tulsa, Okla.: pg. E.7

Benjamin, M, Lim, P.J. Streisand, B. (Mar 28, 2005) Giving the boot; Boards withnew backbone are dumping imperial CEOs U.S. News & World Report. Washington:Vol.138, Iss. 11; pg. 48

Boyd, R. (2005, Dec. 10) SEC to CEOs: Reveal all; New YorkPost, New York, N.Y., Pg. 23

(Berkovitch E Khanna N 1991 Theory of Acquistion Markets: Mergers vs TenderOffers, and Golden Parachutes)Berkovitch, E., & Khanna, N. (1991).A Theory ofAcquisition Markets: Mergers vs Tender Offers, and Golden Parachutes. Retrievedfrom University of Michigan, School of Business Administration, Ann Arbor WebSite: http://http://rfs.oxfordjournals.org/cgi/content/abstract/4/1/149

(Brown Digest For Compliance Professionals 200706 Limits on Golden ParachutesMay Please Activists ut Harm the Company)Brown Digest For ComplianceProfessionals. (2007, June).Limits on Golden Parachutes May Please Activists ut

Harm the Company. Retrieved from Brown Digest for Compliance ProfessionalsWeb Site: http://www.bowne.com/securitiesconnect/details.asp?storyID=1472http://

(Burton J A Weller C E)Burton, Christian E., and Burton, John A. (2005 May). HowCEO Pay Took Off While Americas Middle Class Struggled. Washing DC: Centerfor American Progress.

(Cch Financial Planning Toolkit 200707 Golden Parachutes)Cch Financial PlanningToolkit. (2007, July). Golden Parachutes. Retrieved July 30, 2007, from CCHWolters Kluwer Buisness Web Site:

http://www.finance.cch.com/text/c40s10d490.asp

(Clark K 20060517 Thabkjs, but I don't want a Golden Parachute)Clark, K. (2006,May 17). Thanks, but I don't want a Golden Parachute. Retrieved from US New andWorld Report Web Site:http://http://www.usnews.com/usnews/biztech/articles/060517/17kelly.htm
http://0-proquest.umi.com.novacat.nova.edu/pqdweb?RQT=572&VType=PQD&VName=PQD&VInst=PROD&pmid=7502&pcid=15082321&SrchMode=3http://0-proquest.umi.com.novacat.nova.edu/pqdweb?RQT=318&pmid=7502&TS=1114481385&clientId=17038&VType=PQD&VName=PQD&VInst=PRODhttp://0-proquest.umi.com.novacat.nova.edu/pqdweb?RQT=572&VType=PQD&VName=PQD&VInst=PROD&pmid=28688&pcid=14966381&SrchMode=3http://0-proquest.umi.com.novacat.nova.edu/pqdweb?RQT=318&pmid=28688&TS=1114489336&clientId=17038&VType=PQD&VName=PQD&VInst=PRODhttp://http//rfs.oxfordjournals.org/cgi/content/abstract/4/1/149http://http//rfs.oxfordjournals.org/cgi/content/abstract/4/1/149http://www.finance.cch.com/text/c40s10d490.asphttp://0-proquest.umi.com.novacat.nova.edu/pqdweb?RQT=318&pmid=7502&TS=1114481385&clientId=17038&VType=PQD&VName=PQD&VInst=PRODhttp://0-proquest.umi.com.novacat.nova.edu/pqdweb?RQT=572&VType=PQD&VName=PQD&VInst=PROD&pmid=28688&pcid=14966381&SrchMode=3http://0-proquest.umi.com.novacat.nova.edu/pqdweb?RQT=318&pmid=28688&TS=1114489336&clientId=17038&VType=PQD&VName=PQD&VInst=PRODhttp://http//rfs.oxfordjournals.org/cgi/content/abstract/4/1/149http://www.finance.cch.com/text/c40s10d490.asphttp://0-proquest.umi.com.novacat.nova.edu/pqdweb?RQT=572&VType=PQD&VName=PQD&VInst=PROD&pmid=7502&pcid=15082321&SrchMode=3


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(Garsten E 5 Struggles at General Motors: Kerkorian targets GM Offer)Garsten, E.Struggles at General Motors: Kerkorian targets GM Offer. Retrieved from CNNMoney. http://www.detnews.com/2005/autosinsider/0505/09/A01-172472htm

(Kefgen K Mahoney R 1997 Golden Parachute Packages Promote Stability in HeavyMerger Market.)Kefgen, K., & Mahoney, R. (1997, Dec). Golden Parachute

Packages Promote Stability in Heavy Merger Market. Retrieved from Ideas andTrends Web Site: http://www.hotel-online.com/Trends/HVS/Kefgen?ParachutesPromoteStability.html

(La Monica P R 8 Icahn calls for for Time Warner Breakup, Buyout)La Monica, P.R.Icahn calls for for Time Warner Breakup, Buyout. Retrieved from Detroit News.http://money.cnn.com/2006/02/07/news/companies/timewarner_icahn/index.htm

(Nair C 20070311 Executive Pay: Shooting Holes in Golden Parachutes.)Nair, C.(2007, March 11).Executive Pay: Shooting Holes in Golden Parachutes. Retrieved

from Ethical Corporation Magazine Web Site:http://www.ethicalcorp.com/content.asp?ContentID=4945

Keown, A.J., Martin, J.D., Petty, J.W., Scott, Jr., D.F., (2003)Foundations of Finance; The logic and Practice of FinancialManagement; 4th Ed. Prentice Hall Publishers, PearsonEducation, Inc., Saddle River, N.J., pg. 332

Michael Eisner Salary Information

2004-

http://www.forbes.com/static/execpay2004/LIRC3YW.html?passListId=12&passYear=2004&passListType=Person&uniqueId=C3YW&datatype=Person

2003-

http://www.forbes.com/finance/lists/12/2003/LIR.jhtml?passListId=12&passYear=2003&passListType=Person&uniqueId=C3YW&datatype=Person

2002-
http://www.detnews.com/2005/autosinsider/0505/09/A01-172472htmhttp://money.cnn.com/2006/02/07/news/companies/timewarner_icahn/index.htmhttp://www.ethicalcorp.com/content.asp?ContentID=4945http://www.forbes.com/static/execpay2004/LIRC3YW.html?passListId=12&passYear=2004&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.forbes.com/static/execpay2004/LIRC3YW.html?passListId=12&passYear=2004&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.forbes.com/static/execpay2004/LIRC3YW.html?passListId=12&passYear=2004&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.forbes.com/static/execpay2004/LIRC3YW.html?passListId=12&passYear=2004&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.forbes.com/finance/lists/12/2003/LIR.jhtml?passListId=12&passYear=2003&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.forbes.com/finance/lists/12/2003/LIR.jhtml?passListId=12&passYear=2003&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.forbes.com/finance/lists/12/2003/LIR.jhtml?passListId=12&passYear=2003&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.forbes.com/finance/lists/12/2003/LIR.jhtml?passListId=12&passYear=2003&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.detnews.com/2005/autosinsider/0505/09/A01-172472htmhttp://money.cnn.com/2006/02/07/news/companies/timewarner_icahn/index.htmhttp://www.ethicalcorp.com/content.asp?ContentID=4945http://www.forbes.com/static/execpay2004/LIRC3YW.html?passListId=12&passYear=2004&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.forbes.com/static/execpay2004/LIRC3YW.html?passListId=12&passYear=2004&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.forbes.com/static/execpay2004/LIRC3YW.html?passListId=12&passYear=2004&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.forbes.com/finance/lists/12/2003/LIR.jhtml?passListId=12&passYear=2003&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.forbes.com/finance/lists/12/2003/LIR.jhtml?passListId=12&passYear=2003&passListType=Person&uniqueId=C3YW&datatype=Personhttp://www.forbes.com/finance/lists/12/2003/LIR.jhtml?passListId=12&passYear=2003&passListType=Person&uniqueId=C3YW&datatype=Person


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2001-


2000-


1999-


Biography

Ernest Curci

Ernest Curci, II is a 30 year veteran of businesses in the IT,Construction Trades and Hospitality industry. Currently he is aTechnical Specialist for The Walt Disney World Company intheir IT domain in the Content Management arena. He holds anMBA from Nova Southeastern University with a specializationin Leadership and is currently perusing a Doctorate of BusinessAdministration (DBA) from Kennedy Western University. Asan Owner, Manager, Consultant, and Project Manager forcompanies like Computer Associates and Disney as well asother SMBs and Government Agencies he has experienced thechallengesthat businesses have in all delivering products and services inevery situation. His education has lead him to explore more
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creative and efficient solutions for the organizations that hesupports

Dr Peter T DiPaolo

Dr. DiPaolo currently serves as an Assistant Professor ofFinance and Economics at the H.Wayne Huizenga School ofBusiness and Entrepreneurship teaching courses for both theMasters of Business Administration and the UndergraduateBusiness Programs and is the lead instructor for severalundergraduate business courses.

Dr DiPaolo became a full-time instructor after more than 30years as an engineer, executive, consultant, and educator in theinformation technology industry where his unique combinationof behavioral and quantitative skills reinforced by an advancededucation in business management, led to a proven record ofbringing successful products to the marketplace, thedevelopment of several strategic business plans, and the abilityto become an effective educator and mentor. During his

corporate career, DiPaolo patented a mechanical sortingapparatus he developed for the Burroughs Corporation and wasthe first in the Modular Computer Systems Corporation to bepromoted to the position of Corporate Fellow, the apex inengineering titles, recognizing his outstanding contributions tothe science and technology of the company.

Dr. DiPaolos undergraduate degree (Villanova University) isin Mechanical Engineering and his MBA and DBA (NovaSoutheastern University) degrees are in BusinessAdministration with Management as a major. His doctoratedissertation research was on the topic of Capital BudgetingTechniques in Direct Foreign Investment.


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Dr Tom Griffin

Dr Griffin is a Professor of Decision Sciences at NovaSoutheastern University. He has held numerous academicleadership positions including academic dean. He has extensive

manufacturing management background and held positions as VPof Corporate Quality System and President. He has published inQuality Management Journal, International Journal of ProductionResearch, Journal ofManagerial Issues, etc.

Golden Parasute

Documents