Executive Pay Matches Performance

According to a recent study by Equilar and The Wall Street Journal, executive pay seems to becoming more aligned with performance. Examining the period from 2008 to 2010, CEOs received bigger than expected rewards when the company's performance exceeded expectations, but when the company's performance did not meet expectations, CEOs lost much of their potential pay. One pay-for-performance deal we particularly liked was that given to Macy's CEO Terry Lundgren in 2009. Mr Lundgren was given 666,666 shares of restricted stock. In order to receive any shares, Macy's stock had to outperform five of ten large retailer's stock over the next three years. To receive all of the restricted stock, Macy's stock had to outperform at least seven of the ten retailers. In the end, Mr. Lundgren received $22.5 million, far more than the projected $2.4 million, as Macy's stock nearly quadrupled over the next three years and outperformed seven of the selected companies. We like that Mr. Lundgren's restricted stock was tied to the company outperforming and not just the result of a general market increase.

Verizon's Record Bond Sale

Verizon Communications Inc., announced that it is planning to sell $45 to $49 billion worth of bonds as early as tomorrow.  Verizon's offering is almost three times as large as Apple's $17 billion bond sale in April. The various bonds in the issue will carry maturities of three to 30 years, have have both fixed and floating rate bonds, and be issued in U.S. dollars, euros, British pounds, and possibly Japanese yen. The bond issue is intended to finance part of purchase of Vodafone's 45 percent stake in Verizon Wireless.

SEOs Rise

As with IPOs, SEOs tend to be issued cyclically, usually when the stock market is doing well. Given this, it is not surprising that nearly $3 billion in SEOs have been announced recently. For example, Armstrong World Industries announce a $520 million SEO, Enbridge Energy Management announced a $240 million SEO, and Stratys Ltd. announced a $400 million SEO, or about 10 percent of the company's current market value. Given the relative strength of the stock market in the recent past, it would not be surprising to see more SEOs soon.

The Dow Changes

So how did the stock market do today? Although a seemingly simple question, most people refer to a  stock market index to answer that question. Today, the Dow Jones Industrial Average (DJIA), one of the oldest stock market indices in the U.S., announced that it would change its components.  As of next Friday, Alcoa, Hewlett-Packard, and Bank of America will be dropped from the DJIA and Nike, Visa, and Goldman Sachs will be added to the index.

Aligning Shareholder And Manangement Interests

The use of options to better align management and shareholder interests has come under fire since management can often receive huge sums when the options are sold. Recently, it appears that the use of stock options as a management bonus is decreasing while the use of restricted stock is increasing. Restricted stock are shares of stock that are transferable only when certain restrictions have been met. These restrictions are often EPS targets, stock price increases, or tenure at the company. Shareholders appear to be favoring restricted stock because it allows for employees to benefit from stock price increases, but limits the potential gains.

Microsoft's Vertical Acquisition Of Nokia

The acquisition of a cell phone manufacturer by a software company would not have been seen as a vertical acquisition 10 years ago, but Microsoft's recently announced acquisition of Nokia is exactly that. For the past several years, Nokia has been the only major cell phone manufacturer to use the Windows Mobile OS. Given Nokia's recent problems, it is possible that the company would be going out of business soon, or just as bad for Microsoft, changing to the Android OS. In fact, the deal calls for €1.5 billion in immediate financing, a unique clause for an acquisition, a possible indication of financial problems at Nokia. Either way, Microsoft now has a captive cell phone manufacturer for its OS.

Long-Term Financial Planning

When we discuss long-term financial planning, we hope that is was clear to you that the purpose of such planning was to permit our company to prepare for the future, but also to prepare for the unexpected. No financial plan is ever perfect, but it does give us a starting point. As this article discusses, the ability to evaluate how changes in the market and economy affect our company is crucial. And equally as important, contingency planning allows us to be better prepared to deal with major changes in the future.