Friday, September 30, 2011

HP Gets It Almost Right Compensating Meg Whitman as Its New CEO

I recently wrote about the effect on the mass of unemployed managers seeing Meg Whitman, an HP board member and ex-eBay CEO, become the new CEO of HP. Specifically, I claimed that it was painful for those unemployed former corporate executives to,

"see Whitman asked to take a lushly-compensated job for which even pundits on the business cable networks this morning assert she has no serious credentials to qualify."

So I was partially pleased to read in this morning's Wall Street Journal that Whitman is working as a dollar a year CEO.

Good for her, and good for HP's board.

Here's the rest of her compensation deal, as reported in the Online Journal today,

"Whitman also was granted options to buy 1.9 million H-P shares over eight years. She can’t cash out most of the options until H-P stock’s price reaches 120% or more of the company’s current share price. Whitman’s target bonus for fiscal 2012 is $2.4 million, H-P says."

The print version is slightly different. It says that HP stock has to rise by 40% to fully pay out. It also says the "maximum opportunity equal to 2.5 times the target, subject to performance criteria."

Well, it's close, but no cigar.

You see, were there to be an unexpected upsurge in the S&P, HP's equity price will be lifted, regardless of Whitman's accomplishments, along with the index.

What HP's board should do is condition Whitman's payout on HP's equity gaining 40% above the S&P over the period, and no more than, say, 2 out of the 8 years having a total return less than that of the S&P.

That way, Whitman is conditioned against both rises and declines in the S&P which would make the 40% target meaningless.

I don't frankly understand why boards full of allegedly smart members fail to insulate CEO performance from the obvious correlation of the firm's equity price with the broader market.

If Whitman can keep HP from declining as much as the S&P in a severe downdraft, or propel it 40% above a rising S&P, then that's worth the bonus she is being offered.

But it has to be flexibly conditioned to account for the S&P's performance, not simply fixed over time.

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