Companies Look to Make CEOs Accountable

A growing number of companies are attaching conditions to chief executives' pay, requiring CEOs to meet specific performance targets.

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As we've just heard, some leaders lose their jobs when they stumble. Others keep their jobs, but lose their pay. Or some of it, anyway. A growing number of companies are attaching conditions to chief executives' pay. They're requiring CEO's to meet specific performance targets.

NPR's Scott Horsley reports.

SCOTT HORSLEY reporting:

CEO paychecks continue to grow. But more and more companies now insist that shareholders get something in return.

A survey, by Mercer Human Resource Consulting for the Wall Street Journal, found thirty percent of big United States companies now tie some portion of CEO stock grants to the company's performance. That number has nearly doubled in the last three years.

Mercer's Will Ferguson says companies are starting to treat executive stock grants as they would any other investment.

Mr. WILL FERGUSON (Principle, Mercer Human Resource Consulting): People are starting to look at it a little more closely and saying, am I really getting the bang for the buck here, in terms of how I'm spending this money?

HORSLEY: Stock options were supposed to do that; rewarding executives for boosting a company's share price. But that sometimes led to short-sighted decision-making, and in extreme cases, stock price manipulation.

What's more, CEO's with options could sometimes profit from a rising stock market, even if their own leadership was lacking. In contrast, Ferguson says many of the new compensation plans are based on a wider range of financial targets, and they don't necessarily reward CEO's who simply follow a rising tide.

Mr. FERGUSON: So, for example, it's not just good enough to get to a certain level of return. You have to outperform your competitors to get an above-market kind of award.

HORSLEY: Some investors are skeptical, though, having heard this promise before. Managing director Alyssa Ellsworth, with the Council of Institutional Investors, says the new compensation plans are only as good as the financial targets they're pegged to.

Ms. ALYSSA ELLSWORTH (Managing Director, Council of Institutional Investors): Pay for performance currently could mean anything to anyone. We've seen "pay for performance," quote/unquote, that's tied to increases in the amount of assets a company has, tied to, name it. Buying new construction sites. And so, what we often don't know is what that performance means.

HORSLEY: Last month, the Securities and Exchange Commission proposed new rules, requiring public companies to provide more clear information about how much CEO's make and why. But even those new disclosure rules would not force companies to reveal specific targets, or exactly what kind of performance they're paying for.

Scott Horsley, NPR News.

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