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07/29/2011

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Nope, stock price is not a particularly useful metric of CEO performance. But shareholders still fire CEOs when their earnings fall out of line.

Stock options are more effective, in my opinion, as retention devices (raising disengagement costs) than as incentives: while the captain may control the wheel, he or she can't control the winds. Stock options were justified in The Day as creating an identity of interest, which they do; but they are not as good a scorecard as long-term return on equity or total shareholder return. To use your own example, Bailey Building and Loan stock price probably bottomed out in 1946, but it turned out to be a great investment over the long term.

Great article Jacque.

My take is this. CEOs and other C-Suite executives have no impact on stock price and a total impact on stock price. Kind of like the head coach of a football team. They are not directly responsible for the actions taken on the field, but somehow good coaches have better winning records than bad coaches.

People will sometimes list the "great" coaches who have only been able to compile lifetime .500 (or less) winning records. The fact is that GREAT coaches win.

The same is true for CEOs. While they no longer have the direct impact on stock price that CEOs had in the past, GREAT CEOS somehow provide ways for shareholders to make money (which is mainly done by buying and selling stock) and poor CEOs to not provide profits for investors. Therefore there must be a linkage between good CEOs and stock price.

As the market becomes the major force in large stock price movements, more emphasis is being put on performance goals that look at relative stock prices (actually relative Total Shareholder Return) or, even better, metrics that look at the things that should DRIVE the long-term value of the company (and therefore the long-term increase of stock price).

I discussed Equity Compensation's Golden Decade in a prior Comp Cafe posting (http://www.compensationcafe.com/2011/02/stock-option-moving-sale.html). You can clearly see how stock price from 1988-1999 was likely a worse indicator of performance that it is now. There is very little support for the continuous upward improvement as shown during the Golden Decade.

Hi Dan ---- I hope you are right. I would like to see analysis on how these performance measures do impact CEO performance and therefore stock price.

I still feel that today the world is more complex with many variables that did not exist 30 years ago and that this impacts the CEO's ability to influence stock price.
Any CEO.

This issue has been bugging me for a long time. I think the metric should change to something like Jim suggests. Of course that would break the link between shareholder and CEO interest.

Sigh ---- any more info you can provide me I would be grateful!

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