Thursday, December 07, 2006

Is One-Million Stock Options What it Used to Be?

Many academics argue that CEO annual pay is not correlated with firm performance. We do not disagree. Our own research has uncovered hundreds of examples positing that executive compensation arrangements are often designed to benefit the executive at the shareholders’ (collective) expense.

We suggest, however, that this premise of managerial power—coupled with a servile board of directors--ignores that not all contractual power rests with the executive. We now present a case study that shows that an optimal CEO contract can be negotiated where the future wealth of the CEO is directly aligned with that of the shareholder.

In May 2001, Stephan Godevais left Dell Computer (DELL) to join rechargeable battery systems maker Valence Technology (VLNC) as its Chief Executive Officer at a salary of $500,000 per annum.

Under his employment agreement, the Company granted Mr. Godevais stock options to purchase an aggregate of 1,500,000 shares of common stock at an exercise price of $6.52 per share, vesting over a period of four years....
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