With the recent crash of the global financial market, many executives of bankrupt companies walked away with millions of dollars despite the poor financial performance of their respective companies. At the same time, there are still many publicly traded corporations today that are not performing well in terms of financial growth and success, yet their executives are being paid salaries which are not reflective as either being neither fair nor realistic. An effective executive compensation program ensures that compensation, base salary and added bonuses, are tied to the best interest of the corporation and its many stakeholders; the shareholders being amongst the most important. Effective executive compensation programs should be used in such a way that defeats the on-going agency problem where goals of the mangers may not be aligned with those of the shareholders; they should be linked directly to the financial growth and success of the firm the executives help obtain and should be a tool used to effectively attract and retain new and existing talent.

First of all, effective executive compensation plans are those that are tied to the best interests of the many stakeholders of the organization. For publicly traded companies such as GE, the most important stakeholder would often be the shareholders of the company who invest their hard earned money into the firm. A way to go about defeating the agency problem is to include stock options as part of the compensation executives receive. An executive would be inclined to be productive and have their organization grow so they may reap the benefits of “in-the-money” stock options. Their goals would be congruent with those of the investors of the firm because both parties would want the value of GE shares to increase. GE understood the importance of stock options and thereby converted existing Stock Appreciation Rights the executives had to stock options. Prior to the change, executives at GE were being rewarded on the appreciation of stock prices of GE shares. The SAR’s would cause an adverse effect on the cash flows of GE as they would have to pay out in cash and reward the executives every time the shares had appreciated in value. With the stock options, the company will only be required to compensate the executives once those options have been exercised thereby increasing the cash flow at GE. Also, stock options are beneficial for the holder only if the stock appreciates in price and is worth more than the exercise price. Therefore, the executives will still be motivated to turnout the best financial results and grow GE in order for the share prices to increase so they will be able to exercise their options when it is worth while. In both cases, goals of the executives and the shareholders are aligned and congruent, helping reduce the agency problem and also proving to be an effective means of executive compensation.

Another important stakeholder of any corporation that provides goods and services to the general public is the customers and/or clients. In the case of GE’s executive compensation plan, they have gone beyond the scope of only looking out for the best interest of the shareholder but also those of the customers who make up the all-important revenue figure that is included in the year-end financial statements. GE has decided to further compensate their executives based on customer satisfaction. Upon initial examination, it is noted that customer satisfaction is a criteria which is tough to measure accurately. For a corporation the size of GE with customers in every corner of the world, such methods as surveys would not prove to be efficient in gathering information on customer satisfaction. This however leads us back to the financial statements and the growth displayed by GE on a yearly basis. If overall sales figures grow by a margin that is respectable, it can be used as an indication that customers are indeed satisfied with the offerings by GE and based on this, the executives can be compensated accordingly.

Secondly, effective executive compensation programs should take into account the work put in by the executives and use benchmarks to reward these executives directly to the performances that are measured. In the case of GE, they had offered their executives Performance Share Units which could also be converted to stock options. The conversion however would only be applicable if the executives had met certain standards set at the top of the organization. Amongst one of the requirements was to generate cash flows of 10% or more yearly in a span of a five year window and that shareholder returns must equal or be greater than the returns of the S&P 500 over the same five year period. Having this stipulation in place allows the executives at GE to achieve the standards that are set and promotes them to have excellent performance when it comes to the financial situation at GE. This added form of compensation is tied directly to performance which is great in not only rewarding the executives for meeting certain goals, but recognizing their achievements in such a way that becomes a financial reward business-wise and personally. Again, having the opportunity to convert the PSU’s to stock options is going back to aligning the goals of the executives to that of the shareholders.

GE also has initiated another gauge in which they are able to reward executives based on their performance. The CEO and Chairman of GE, Immelt, described a program in which leaders at GE would propose three new technological projects each year which would receive funding in the neighbourhood of billions from the corporation. This is a great initiative taken on by the executives at GE to promote internal growth and reward those leaders who propose successful projects that are financially and monetarily viable. Since these projects would create growth for GE, the executives would then be compensated accordingly for the contribution they have made for the long-term growth and sustainability of the organization.

Finally, a well designed executive compensation plan is one that is capable of attracting and retaining future and current executives. To determine whether or not a compensation plan has the capabilities, it should be compared to similar plans of other companies within the same industry. At GE, their form of compensation includes everything from monetary rewards in the form of cash through base salaries to those of future monetary rewards such as stock options. Together, they achieve both the interests of the executives as well as the interest shared with shareholders creating an environment of an effective executive compensation plan. They provide room for entrepreneurship where executives are rewarded for successful ideas and creating internal growth for the organization. To an outside party, this may seem to be a very attractive form of compensation which will attract prospective executives to GE and assist and retaining those already in position.

In conclusion, the executive compensation plan put forth at GE does seem like it will prove to be successful as it meets the criteria we have outlined above. The plan seeks to combat the agency problem by aligning the goals of stakeholder with the executives, shareholders being one of them, through the use of stock option plans. Customers of GE are the other stakeholders that are looked after with the compensation plan at GE by placing an importance on customer satisfaction. The plan also seeks to encourage internal growth and success and reward those leaders who do so by compensating them appropriately for their efforts and for meeting certain benchmarks and pre-determined standards and goals. Finally, the plan at GE is competitive and attractive enough to help attract prospective executives in the future and retain those in the present who are achieving personal success and bettering the financial state of GE altogether. Therefore, the executive compensation plan at GE seems to be very effective and successful in achieving its purpose.