Concerns About Executive Compensation Structures

Very Hard Corporate Governance Executive Compensation

In a recent annual meeting for XYZ Corp, the compensation committee proposed a major overhaul of the executive compensation structure. This restructuring involves transitioning from a fixed salary model to a performance-based compensation package. The committee argues that this change aligns the executives' interests with those of shareholders while also providing greater incentives for long-term company growth. However, some shareholders expressed concerns regarding the potential risks associated with excessive risk-taking and short-term performance pressures that may arise from this new structure.

The company’s board of directors is now tasked with deciding whether to adopt this proposed compensation structure or to maintain the existing fixed salary system. The board is considering three key factors: the alignment of executive incentives with shareholder interests, the risk of promoting short-termism, and the effectiveness of performance metrics in capturing long-term value creation.

Which of the following statements best addresses the concerns associated with the proposed compensation structure?

Implementing a balanced scorecard approach that includes both financial and non-financial performance metrics can mitigate the risk of short-termism.

Restricting performance-based compensation solely to stock price appreciation ensures that executives focus exclusively on shareholder returns.

Exclusively using annual performance targets as a basis for executive pay reinforces long-term value creation and aligns with shareholder interests.

Hint

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