Hewlett Packard, a multi-billion dollar global IT services giant recently disclosed the compensation package for its new CEO, Ms Meg Whitman. The compensation structure confirms the emerging trend in CEO compensation which is heavily skewed towards the company performance (read “company’s stock performance”). As a part of this package she will draw a fixed base salary of $ 1 per year and in addition will be entitled to company’s stock options which have a unique structure

Total options granted : 1.9 million

Vesting :

Time based - 300,000 options to vest equally over 3 years if she continues in service

Performance based - 1.6 million based on performance in the next 2 years

Performance condition -

First vesting of 800,000 options at the end of first year only if HP’s share price has risen by 120% of the current price and has stayed that high for at least 20 days

Second vesting of 800,000 options at the end of second year only if HP’s share price has risen by 140% of the current price and has stayed that high for at least 20 days

Exercise price : She will pay the current market price for exercising the options

Cash bonus : She will be entitled to an annual cash bonus of $ 2.4 million linked to the Cashflow performance of the company.

Severance : If she is fired during her term all that she will be entitled to would be 150% of her fixed pay (which is whole of $1.50) plus the average of the Annual cash bonus paid to her in the preceding 3 years.

One can look at this structure in a couple of ways.
Firstly, is this setting a trend in CEO compensation? Not long ago the late Steve Jobs worked on a similar fixed pay for Apple and Vikram Pandit agreed for similar terms when he took charge of Citibank. While undoubtedly Apple under Steve Jobs was a huge success story, Citibank has turned the corner though not completely out of woods. If this is the trend, it is indeed commendable for the CEOs to have agreed on such compensation packages which are heavily skewed towards performance conditions. Ms Whitman deserves compliments for taking up the challenge.

The other dimension to this structure is that the only Performance condition is the growth in stock price. To be fair to Whitman, 120% growth in stock price in the current economic environment is an extremely tough goal even if one were to ignore the issues HP is facing with its businesses. More important issue is whether such a condition will drive her to take decisions with a short term view which will boost the stock price. There have been numerous examples of manipulating stock prices through engineered financial statements and stock market dealings.