You are given the job of constructing a compensation package for a new senior manager in a FTSE listed high street clothing company.

The shareholders have three objectives that they want the manager to pursue; they wish to increase share price, over the next 5 years, they want to reduce the money lost through thefts from the company’s shops from shoplifting and they also want sales made though the company’s website to increase.

The current share price is £86.00. Given current market conditions, if the manager does nothing, it is expected that, on average, share prices will rise in price by 1.5% each year for the next five years. Last year £1,500,000 in stock was lost to shoplifting. The manager will also oversee the development and launch of a new company website as the current website does not attract sufficient customers. Only 16% of the company’s total sales are made though the company website, while competitor companies websites bring in an average of 18.8% of their total sales.

The company wishes to pay the manager a competitive salary and the current average salary for similar senior manager jobs is £600,000. The company does not wish to spend more than a total of £1,100,000 in cash in the compensation package. The maximum number of shares that the company is willing to use in the compensation package is 10,000.

(a) Outline, what you believe would be the most appropriate compensation package to incentivise the manager to achieve the shareholders objectives, using a combination of any, or all, of the following.
· Base salary,
· Annual bonus,
· Stock options,
· restricted stock,
· performance shares,
· Stock appreciation rights.

(b) In each case outline the main features of the component of compensation highlighting the performance measure, the performance standard and the incentive implication of each of your recommendations. Also, highlight any limitations to the package you suggest.

(c) Provide figures to demonstrate that the compensation package you propose will not cost more than £900,000 in cash and 10,000 shares.

Answer rating: 100% (QA)

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