Attention, CEOs around the globe: The gold standard has been set.

Of course, many company chiefs do an outstanding job and earn every penny of their take. But as more and more investors begin to follow CEO compensation with a more watchful eye, the times they are a-changin'.

Gone are the days when showing up to the office with a clean, pressed suit and a fake smile justified an eight-figure salary and retirement package that rivaled the gross domestic product of many small countries. Remember Bob Nardelli, the ex-Home Depot (NYSE: HD) CEO who took home nearly a quarter of a billion dollars over his six-year tenure, even though investors lost money during that same period? Or how about former Merrill Lynch (NYSE: MER) boss Stan O'Neal, who left his firm gasping for air in the wake of the subprime fiasco but skipped away smiling with a retirement package worth an estimated $160 million? And who could forget when Pfizer (NYSE: PFE) CEO Hank McKinnell walked away with $200 million after shares fell 40% under his watch?

We got far too comfortable allowing CEOs who performed mediocre at best -- if not downright poorly -- to walk away richer than a Roman emperor. Even in the wake of leadership fallout from Enron and WorldCom, way too many CEOs are paid vast sums of money when the shareholders themselves were left high and dry.

That's why I was more than pleased to read coverage in Fortune magazine of American Express (NYSE: AXP) CEO Ken Chenault's new compensation package. For once, it seems, a CEO of one of America's largest and most respected companies has his compensation squarely lined up with that of shareholders' interests.

To be sure, Chenault still holds the possibility of walking away with a nine-figure payday, but only if his performance and leadership are second to none.

By month's end, Chenault will have amassed options controlling 2.75 million shares of AmEx stock. To take advantage of these options, however, he must meet some hefty performance goals over the next six years. You heard it right, six years. In a world where performance is often measured on a quarterly basis, the distant time horizon enforces Chenault to focus on the big picture, rather than having a relentless short-term focus on "making the numbers."

For the option grant to kick in and be worth anything, here's what Chenault must accomplish:

  • Earnings must grow no less than 15% per year on average.
  • Revenue must grow at least 10% per year.
  • Return on equity must equal 36% on average.
  • Total return to shareholders must outperform the S&P 500 by 2.5% per year, on average.

It's the last portion of these performance goals that caught my attention. As the Fortune article points out, if the stock market as a whole booms and AmEx simply matches the index, Chenault doesn't get a penny. After all, as the saying goes, a rising tide lifts all boats. With such massive amounts of money on the line, average performance just simply won't do. When investors hold shares of an individual stock, they certainly take on an extra layer of risk over holding an index fund that entails mass-diversification. There isn't much sense in earning the same return as an index fund as you did from holding an individual stock that contained more concentrated risk, and in AmEx's case, Chenault would be compensated accordingly. It isn't just performance, but market-beating performance, that scores the big payday.

Chenault certainly has his work cut out for him. While being highly regarded as one of the most honest and loyal managers in the business; a trait that led AmEx through a tumultuous time after Sept. 11, he wouldn't have met his goals had they been in place over the past three years. Revenue remains at nearly the same levels it was at the end of 2004, and earnings growth has fallen well short of the 15% target goal. Since January 2007, AmEx lost 17.2% of its value, compared to a nearly flat performance from the S & P 500 and a 50% decline for rival Discover Financial (NYSE: DFS).

Hats off to AmEx for taking the lead in promoting a truly responsible and shareholder-aligned compensation package.

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