CEO Compensation: Has American Express Figured it Out?

Fortune has an interesting article about the new compensation package awarded to CEO Ken Chenault. It is a massive option grant, but Chenault has to jump some pretty high hurdles to hit the mark.

To receive the full grant, he must beat several goals over the next six years, an unusually distant time horizon. AmEx's earnings per share must grow at least 15% a year on average, revenues must grow at least 10% a year, return on equity must average at least 36% per year, and total return to shareholders must beat the S&P 500 average by at least 2.5% a year. Chenault can receive a fraction of the grant for lesser performance, but below certain limits, which are still quite high, he gets nothing.

Now consider a couple of scenarios. Chenault misses all the targets but the market booms, returning 10% a year, and AmEx stock matches it. After their full term of ten years, his options would be in the money by $258 million – but he wouldn't get any of that. Why? Well, AmEx's stock presumably rode a rising tide, and his shareholders could have done just as well with an index fund while exposed to less risk. Alternatively, the market returns just 6% a year, in line with what many experts predict, but under Chenault's leadership AmEx hits all the targets and the stock returns 9% a year. Chenault collects a pretax gain of $222 million after a decade – an awful lot, but his shareholders are $35 billion richer than if they had chosen an index fund, and he's a hero.

American Express figured out how to incorporate some key ideas into the compensation package.

1. Performance is relative. If you do well because everyone is doing well, you shouldn't get a ton of money for that.

2. Performance is not one dimensional. Too many pay packages focus only on stock price, which can provide the wrong incentives. Good to see someone being measured with multiple yardsticks.

3. Pay should be kept in perspective to shareholder gains.

Based on what I've seen so far, I like it. Maybe Michelle Leder will dig into the details in the next SEC filing and if this is really as good as it sounds.

  • I really like that there are different levels of success here — the fact that he can get a portion of the grants if he partially reaches the goals is actually good in my mind. Too often you see reward packages that are all or nothing for meeting a specific number. Then everything becomes about reaching that one specific number — through any means, ethical or not.

  • Adam

    I agree with you, that if everything is as it seems, this is a very progressive move for executive compensation and governance.

    Despite the long-term 6 year time horizon, however, there is still a fatal flaw in the growth requirements with these incentives in that are inherently designed to serve the street. Possessed to meet his goals and attain the wealth and glory that comes with it, will this package simply set up Chenault to be the next Ken Lay? I smell a faint hint of accounting issues and/or the increase in mysterious services charges to AMMEX customers in the coming years. But maybe I’m just a pessimist on these things?

    It’ll be interested to see what happens.

  • Lord

    The other question is how much this is modified later. Recession? Lower the targets. Poor performance? Golden parachute it to him on his way out anyway.

  • On the surface, the AmEx CEO compensation appears to be topnotch. It includes a relatively long time horizon with multiple parameters taken into consideration.

    My biggest area of concern relate to the impact on employees. Will employees also be focused on similar goals? Will their compensation receive similar rewards? Will the average employees compensation be such a small fraction of the CEOs that a royalty / peasant relationship is promoted?

    The package also appears to promote an all or nothing mentality. I recommend more levels of reward plateaus.

    Overall, the AmEx package does appear to be on the right track.