Effective Compensation Effective Compensation Management – a GE ProspectiveManagement – a GE Prospective

MGMT 6333

Human Resources Management

Dr. Uche M. Nwabueze

October 21, 2006

Presented by:

Shailin Chokshi

Valerie Reid

William Ruddell

Lyndell Scott

Vincent Wedelich

Types of Compensation Systems

Direct

Indirect

Non-Financial

Strengths

Flexibility

Customization to Company

Customization Employee

Weaknesses

Execution

– Perceived Favoritism– Inequities– Low Morale– Frustration– High Employee Turnover

Management Method

Then– Pay for Work Performed

Now– Pay for Work Performed– Linkage with Goals/Objectives– Motivational Tool

Best Practice

Job Descriptions Job Analysis Job Evaluation Job Classifications/Pay Structure Salary Surveys – Wage Rates Policy and Regulations Employee Communication & Training

• Chairman and CEO of GE 1981 – 2001

• Increased market value of GE by $400b

• Joined GE in 1960 as a junior engineer with a starting salary of $10,500

• Fired bottom 10% of managers; bonuses to top 20% of managers

• Stock options program expanded from

management only to 30% of staff

John Francis "Jack" Welch, Jr.

Source: http://en.wikipedia.org/wiki/Jack_Welch

• Supports “free market” pay for top executives – opposes caps

• Opposes SOX and similar type controls

• Compensation in 2000 reported as $125 million* which included a salary of 4 million salary, a $12.7 million bonus, $57 million in options and $48.7 million in restricted stock grants

• Retirement salary of $8 million a year, plus “perks” whichincreased compensation to an estimated at $20 - $50 million a year

John Francis "Jack" Welch, Jr.

* Source - http://www.esrc.ac.uk/ESRCInfoCentre/PO/releases/2005/June/index9.aspx?ComponentId=11053&SourcePageId=11077

Jeffrey R. Immelt

Hand picked by Jack Welch as CEO since 2001

Over 20 years at GE, was president and CEO of Medical Systems

Total compensation for 2005 was >29 million

Corporate Governance changes

Expanded the size and scope of financial reporting

Increased the number and ratio of independent board members

Required executives to hold company stock

Started expensing stock options

Required a 1 year holding period on exercised stock options

The Role of the Board of Directors

“The Board is fully engaged with the issues that are most important to the Company. We are an active Board, meeting at least eight times per year. Our insights and oversights are also complemented with at least two independent business site visits (without senior management present); in total making more than 30 visits last year.”

Ralph Larsen Presiding Director

The Role of the Board of Directors

GE had a total of 15 directors in April 2004 (compared with 19 in 2000), of whom 12 did not work directly for GE.

Two-thirds of all directors were to be independent under the New York Stock Exchange (NYSE) guidelines for independence.

The Role of the Board of Directors

To protect the shareholders assets and ensure they receive a decent return on their investment.

Align compensation for the top 600 leaders with shareholder interests.

Tie executive compensation to clear performance goals.

Highest governing authority within the management structure at GE.

The Role of a Company’s Culture

GE is a leader in every business it competes in.

GE is looking for new leaders who will take them even further.

GE offers the energy and initiative of a small company, with the strength and resources of a large company.

The Role of a Company’s Culture

Immelt championed responsible corporate governance and the idea of the morally responsible CEO:

“I think sometimes CEO’s forget what their job really is, which is to serve investors, serve employees, and lead companies. That’s what turns on the very best CEO’s I know. Money and power are just an outcome of that”

Do CEO’s merit what they are paid?

We have reviewed the compensation system

We have reviewed the Board of Directors roles.

We have reviewed the governance system.

Do CEO’s merit what they are paid? Are they really looking after the shareholders interests?

• CEO and Co-founder, Whole Foods Market

• Open Whole Foods Market in 1980

• 1992 - 12 stores and $92 million in sales; goes public on NASDAQ

• Fortune 100 best companies to work for since 1998

• One of the core values - Shared Fate Salary cap limits compensation of any Team Member to fourteen times average total compensation of all full-time Team Members in the company.

John Mackey

Source: http://www.4empowerment.com/en/community/expertspotlight/biz/mackey.jhtmSource: http://www.wholefoodsmarket.com/company/corevalues.html

Executive Compensation

Is 14 times the annual salary fair?

Is 29 to 50 million really in the best interest of the shareholders?

Do CEO’s merit what they are paid?

Question??

The End.

Works Cited

Esrc.ac.uk. http://www.esrc.ac.uk/ESRCInfoCentre/PO/releases/2005/June/index9.aspx?ComponentId=11053&SourcePageId=11077(Oct. 15, 2006)

Wikipedia.com http://en.wikipedia.org/wiki/Jack_Welch

Wikipedia.com http://www.4empowerment.com/en/community/expertspotlight/biz/mackey.jhtm (Oct. 20, 2006)

WholeFoods.com http://www.wholefoodsmarket.com/company/corevalues.html (Oct. 20, 2006)