Aligning CEO Compensation with Long-term Shareholder Value

Very Hard Corporate Governance Executive Compensation

XYZ Corporation is evaluating its executive compensation structure to align better with shareholder interests. The Board has proposed a compensation package for the CEO comprising a base salary, annual bonuses tied to short-term financial targets, and long-term incentive plans based on stock performance over a five-year period. However, a group of institutional investors believes that the proposed compensation is still too heavily weighted towards current earnings, which may encourage managers to prioritize short-term gains at the expense of long-term sustainability.

The investors suggest modifications to ensure that executive compensation also adequately reflects the company's performance over the long term and is more sensitive to potential downsides. Taking these concerns into account, which of the following changes would most effectively align the CEO's incentives with long-term shareholder value while reducing the risk of excessive short-termism?

Increase the proportion of CEO's compensation that is tied to long-term stock options that vest over a ten-year period.

Introduce a clawback provision that allows the company to reclaim executive bonuses if the company's stock price underperforms in the years following the bonus payout.

Replace the annual cash bonuses with performance shares that are awarded based on multi-year performance targets.

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