2. Agenda
Introduction + problem statement
Overview of executive compensation
Equity based compensation
Empirical evidence
BMW Case
Shell Case
Summary and Conclusion
3.
4. General Overview
General overview
•Created in 2001 by 3
undergraduate students
•1400 employees worldwide
•Operating on 3 different continents
in 8 different countries
•Market leader
6. Problem statement
Is there an optimal compensation
package and what would it be in our
case?
7. Overview of executive compensation
•Base of
Salary compensation
•Fixed
•Based on
firm/personal
Bonus performance
•Non-equity
•Based on
reported firm
Equity performance
•Shares/Stock
options
8. Salary
Pro Con
Increases loyalty No incentive to maximize
shareholder value
Easy to forecast
Tax restrictions (USA)
Less pressure
Usually minor part of
Lowers unhealthy package
competition
9. Bonus
Pros Cons
Encourages competition Discourages collaboration
& teamwork
Maximizes profits Focuses too much on
measuring profits
Clear measurable Short-term oriented
objectives
Only as good as objectives
set
11. Empirical findings
Executives compensation and incentives
By Core, J.E., Guay, W.R., and, Larcker, D.F. (2003)
Managers holding stocks and options lowers monitoring
costs
Gives managers incentives to maximize shareholder
value.
Multiple firm characteristics needed to construct
prediction of expected level of equity incentives
12. Empirical findings
Performance pay and top-management
incentive
By Jensen, M. C., and Murphy, K.J. (1990)
Examines the value of equity-based compensation
when shareholder wealth increases
Estimated compensation: 3.25$ for 1000$ change
Conclusion: relatively small sensitivity
13. Empirical findings
Are CEOs really paid like bureaucrats?
By Hall, B.J., and Liebman, J. (1998)
CEO wealth often changes by millions of dollars for a
typical change in firm value
Strong and positive relation between performance and
CEO pay
Caused by equity-based compensation
14. Empirical findings
CEO incentives and earnings management
By Bergstresser, D., and Philippon, T. (2006)
Stock-based compensation leads to earnings
management
More incentivized CEO higher level of earnings
management
Significant amount of option exercises and share sales in
periods of high earnings management
15. Empirical findings
Flights of fancy: corporate jets, CEO perquisites
and inferior shareholder returns
By Yermack, D. (2006)
Disclosed personal use of company aircraft by CEOs is
associated with significant underperformance:
Use of corporate jets leads to an underperformance of the
market benchmarks by 4%
At announcement, stock drops by an average of 1,1%
16. BMW Case
Executive bonuses linked to assembly line workers
Pressure from society and shareholders
Award upper and lower employees by same formula
Goal: fair and transparent compensation
Could this be a new trend in compensation policy?
Source: Bloomberg Businessweek
17. Shell Case
„Shell‘s numeration policy firmly links
executive compensation with the
performance of the company, and the
2011 outcomes reflect what was a
positive year for the company“
Source: Bloomberg
18. Shell Case
Increased Gross Profit +24.8 %
Increased net income +53.6 %
Increased EPS from 6.59 to 9.94
Outperformed FTSE by 23%
Source: Shell annual Report
19. Shell Case
Bonus, 3.5
Long-term
incentive, 6.5
Base
salary, 1.55
Source: Bloomberg
21. Shell Case
Responsible for over 200 oil spills in 2011
Systemetic contamination of 1000 Km² in the Niger delta
Worst pollution in Nigerias history
Increasing oil price
Do you still think his Compensation is adequate?
Source: Bloomberg
22. Shell Case
Increases Oil spills
Doubles his salary
Source: Meme generator
23. Compensation for our company
High or low base salary?
Long or short –term incentives?
Personal benefits?
Pay-performance compensation?
