Suppose you are a director of an energy company that has three divisions—natural gas, oil, and retail (gas stations). These divisions operate independently from one another, but the division managers all report to the firm’s CEO. If you were on the compensation committee as discussed in question 1-16 and your committee was asked to set the compensation for the three division managers, would you use the same criteria as you would use for the firm’s CEO? Explain your reasoning.

Question 1-16

Suppose you were a member of Company X’s board of directors and chairman of the company’s compensation committee. What factors should your committee consider when setting the CEO’s compensation? Should the compensation consist of a dollar salary, stock options that depend on the firm’s performance, or a mix of the two? If “performance” is to be considered, how should it be measured? Think of both theoretical and practical (that is, measurement) considerations. If you were also a vice president of Company X, might your actions be different than if you were the CEO of some other company?