Evaluation of Executive Compensation Effectiveness

Hard Corporate Governance Executive Compensation

In recent years, the issue of executive compensation has come under increased scrutiny from shareholders and regulatory bodies. Companies must now balance the need to attract and retain top executive talent with the expectations of their stakeholders regarding fairness and transparency in pay structures. Consider a hypothetical company, Alpha Corp, which has implemented a performance-based compensation package for its CEO. The package includes a mix of salary, bonuses tied to EPS growth, and stock options that vest based on long-term performance metrics.

Which of the following statements best evaluates the effectiveness of Alpha Corp's approach to executive compensation?

The heavy reliance on stock options improves alignment with shareholder interests but increases agency costs if executives focus excessively on stock price performance.

The absence of a fixed salary component means the CEO's compensation is completely dependent on performance metrics, reducing the incentive to pursue long-term strategic goals.

By tying bonuses to EPS growth alone, the compensation structure encourages the CEO to increase earnings through accounting manipulation rather than sustainable growth.

Hint

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