A Lot to Like in Intel’s New Executive Compensation Plan -- But Not Everything

Many of the changes to Intel's executive compensation practices are to be commended, but its performance stock plan still falls short of best practice.

Feb 12, 2014 at 10:30AM

  There are a lot of good things to read about in Intel's (NASDAQ:INTC) new executive compensation package. For example, there will not be a repeat of the company's decision to pay out retention stock grants to executives to retain them during the transition to new CEO Brian Krzanich. Stock ownership requirements have been extended to the top 350 senior employees rather than the top 50. And a refocusing of the annual cash bonus on critical operational objectives and a concomitant reduction in emphasis on simple financial metrics has been introduced. This last component should help drive the business rather than simply trying to meet Wall Street's expectations.

In addition, new Krzanich's pay is at the 25th percentile of his peers -- in other words, more than three-quarters of them are paid more than him. Intel says that this is its regular approach to setting pay for new CEOs. After all, they are new to the job, have less experience, and need to prove themselves. This is the approach to pay for almost every other new hire in the economy ... except for CEOs, who are typically hired at pay levels higher than their experienced predecessors, even when promoted from within. Just another demonstration of the insanity principles lying behind CEO pay.

So, it is nice to see that Intel, as in many other things, is bucking the trend.

Performance equity grants, almost

The company is also removing what it refers to as a "floor value" for its performance stock. This is a bit more complicated. Intel grants a mix of time-restricted and performance-restricted stock grants, in a 40:60 mix, respectively. The performance restricted stock's "floor" was 50% of the award. In other words, no matter how awful performance was, executives would still receive a minimum of 50% of the award. And these were called Outperformance Stock Units! Since 40% of equity is already not tied to performance, one would have thought the existence of a guaranteed minimum for so-called performance stock was completely unnecessary.

However, the good news is that this floor is being removed.

The bad news is that the awards only lapse completely when relative total shareholder return (the performance metric that determines whether the stock vests) plummets below the 25th percentile. In other words, if Intel underperforms more than three-quarters of its peers, it won't pay out the awards. But if it performs at the 25th percentile, 50% of the award will pay out.

Now, I don't know about you, but if three-quarters of my colleagues do better than me, I usually don't get a bonus. This situation is so ubiquitous in corporate America that to list the stocks where this is also the case would take pages. So, instead, I'd like to talk about the one company I've found that does not pay its executives for underperforming their peers: Nordstrom (NYSE:JWN).

At Nordstrom, executives don't receive any shares if the company's TSR dips below the median, or if it underperforms half the company's peers, never mind three-quarters. That's best practice -- frankly, it should be the only practice -- but it's a little depressing that I can only find one example.

Hopefully, Intel can follow that lead the next time it's making decisions about compensation.

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Paul Hodgson has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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