A well-designed CEO-compensation plan has four elements to it. One is base salary; one is a short-term bonus that is basically a one-year result based on customer satisfaction and the employee-values survey as well as just financial results. Then there’s a longer-term cash bonus, based on the same results over three to five years. Finally, I think stock options-at a reasonable level, please-are an appropriate part of compensation. But they ought to reflect true economic value creation over time. One way to do that would be to say that stock options don’t vest until after at least five years, and then they vest ratably over the next five years. Stock options are about giving executives a chance to participate in the value that they create over time. If you didn’t create any value over a five-to-ten-year period, then shame on you-you don’t deserve anything anyway.
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