Tuesday, January 15, 2008

AmEx gets CEO pay right

Now consider a couple of scenarios. Chenault misses all the targets but the market booms, returning 10% a year, and AmEx stock matches it. After their full term of ten years, his options would be in the money by $258 million - but he wouldn't get any of that. Why? Well, AmEx's stock presumably rode a rising tide, and his shareholders could have done just as well with an index fund while exposed to less risk. Alternatively, the market returns just 6% a year, in line with what many experts predict, but under Chenault's leadership AmEx hits all the targets and the stock returns 9% a year. Chenault collects a pretax gain of $222 million after a decade - an awful lot, but his shareholders are $35 billion richer than if they had chosen an index fund, and he's a hero.

In either scenario, compensation lines up with performance. That's a goal that CEOs and boards should aim for, and that politicians should vow not to hinder as they try to feel voters' pain this spring.

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