The Dangers Of Linking Executive Pay To Share Price Alone

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11th May 2009, 08:54am - Views: 530

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11th May 2009

The dangers of linking executive pay

to share price alone

...and why executives should be rewarded for generating long term value that’s not always

reflected in share price.

Colin Melbourne, Director at Brisbane-based change management consultants Astor Levin, warns companies of the

dangers of linking executive remuneration to the company’s share price and suggests five general rules for good

practice in setting executive pay.

In his recent article “Executive remuneration based on share prices”, he outlines how share price-based remuneration

packages can encourage senior executives to pursue strategies that are not always in the best long term interests of the


He explains:

“It can be much easier and more exciting for executives, in the short term, to create a wonderful blue sky growth story,

rather than continue to slog away, delivering fantastic financial results time and again. Beware! There are numerous

examples of expert ‘turnaround’ CEOs that join a company, cut staff and product lines, come up with a wonderful (and

completely unrealistic) future story, make a killing with stock options and move on quickly - in fact just before the

company collapses, as it no longer has the capacity to deliver.”

He suggests five general rules for good practice in setting performance based pay for senior execs:

1 Don’t use the share price as the only measure

2 Consider using a relative value Total Shareholder Return (TSR) against a peer set of companies

3 Broaden the measures of performance appraisal

4 Restrict how often performance bonus shareholdings can be sold

5 Leave some room for discretion at Board level


About Astor Levin

Astor Levin Pty Ltd is a Brisbane based human resource and management consultancy firm that provides services to a

range of private and public sector clients throughout Australia.  The team consists of highly qualified consultants with a

mixture of human resource management, business analysis and organisational psychology backgrounds with global

experience.  Their client base ranges from small business to ASX200 companies. 

For a full copy of the Astor Levin article, or to speak to author Colin Melbourne please

contact David Bateson on 07 3901 1055 / 0402 332287.

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