Tuesday, March 25, 2008

Executive compensation schemes

There is no doubt that you have to be smart to be a CEO. In fact, according to the WSJ, you have to be a math wiz just to understand a CEO's bonus compensation.

For example, for Adobe the bonus formula is:

"Target Bonus x Unit Multiplier x Individual Results."

But then comes the definition of unit multiplier. Adobe says it is:

Derived from aggregating the target bonus of all participants in the Executive Bonus Plan multiplied by the funding level determined under the funding matrix, and allocating a portion of the funding level to each business or functional unit of Adobe based on that unit's relative contribution to Adobe's success, and then dividing the allocated funding level by the aggregate target bonuses of participants working within each such unit.
(source WSJ)

Before this era of "transparency" I bet bonuses were just decided in a smoke filled room. Now that companies are expected to reveal their methods, they are opting to make the method as opaque as possible.