The Right Way To Pay The CEO Of GM

Jack Dolmat-Connell,
05.29.09, 01:09 PM EDT

The top boss's compensation package will have to be radically different now.

Jack Dolmat-Connell

With
the American auto industry on life support and the public enraged about
executive compensation in general, there clearly needs to be a new way
to pay the chief executive officer of General Motors. It should not only help taxpayers regain confidence in GM, but shareholders and the executive should benefit, too.

Historically,
GM's pay practices have followed typical large corporation behavior,
relying heavily on data benchmarked from a peer group of similar firms
to provide marketplace norms in both levels and structure of pay. But
that pay package strategy is out of touch with today's reality. The
company replaced tis old CEO, Rick Wagoner, with a new one, Fritz
Henderson, two months ago, but it hasn't changed the way he's paid. In
the future, the compensation of the chief executive of GM should be
tied to his or her performance and linked to the company's recovery,
not just awarded to be competitive.

It should be put together the way private-equity-backed firms do it.
That is the best model for creating a true risk-reward proposition. It
is elegantly simple, featuring modest base salaries and bonuses,
significant upside potential via stock options that promote shareholder
value creation, little to no downside protection in the form of
severance arrangements, and a required personal investment in the
company.

Such a pay structure can be easily understood by
investors and taxpayers, and it creates a laser-like focus on
significantly increasing enterprise value and guiding the company
toward becoming a stable, viable and competitive organization that
repays the taxpayer. With this plan, shareholders and taxpayers win,
but the CEO and executives also win, and potentially win big. If the
CEO doesn't succeed, he or she gets very little, and the taxpayers'
loss is minimized.

The proposed pay package is as follows:

Cash Compensation: Limit annual base salary to $500,000, and
provide for no annual cash bonus. This hews to both the spirit and the
letter of federal bailout legislation that limits salaries and annual
bonuses at companies receiving Troubled Asset Relief Program funds.

Equity Compensation: Long-term incentives would be the biggest
element in the proposed package, as they would properly reward the CEO
without encouraging unnecessary risk. The long-term incentive package
would be made up of three separate premium-price stock-option grants.
Premium-price stock options are grants with an exercise price higher
than the current market price. They're not widely used, but they create
an incentive for executives to reward shareholders first, before their
own equity awards become meaningful. The premium is typically 10% to
20% above the current market price.

In this crisis situation, the premium price should match a recovery of the enterprise value of General Motors
(
GM -

news
-

people
).
Looking back four years, that would mean a stock price of about $30,
for a market capitalization of about $18.3 billion. Currently, the
market cap of General Motors is less than $1 billion. If the CEO could
return the company's share price to $30, and thereby increase the
market cap to prior levels, you could argue that a turnaround had
occurred.

The long-term incentive should be structured into three
grants of equal numbers of premium-price shares. The first tranche
would get a vesting price of 40% of $30, or $12; the second tranche, a
vesting price of 60% of $30, or $18; the third tranche, a vesting price
of 80% of $30, or $24. This would handsomely reward the achievement of
a turnaround at the cost of a modest dilution of company shares.

Severance and Change-in-Command: In this crisis situation,

http://www.forbes.com/2009/05/29/gm-ceo-compensation-leadership-governance-pay.html