Executive Compensation Plan - Term Paper Example

According to the principal-agent theory, there is a difference of interest between shareholders as principals and senior managers as agents. The best way to optimize performance of senior managers is to link their pay to the performance of the firm (McKnight & Tomkins, 1999). At McDonald's, the members of the top management are paid according to a reasonable salary, performance-based annual bonus, cash incentives, stock options and other perquisites or fringe benefits. Annual base salary takes into account the competitive market of managerial talents, individual performance, tenure in position and internal equity.

The annual bonus is designed to reward growth in operating income as well as individual performance, which is measured against qualitative performance goals. The cash incentives focus on the company's performance measures that are important for success. Stock options and restricted stock units (RSUs) are given either at initial employment, during promotion, renewal or fully vested. (McDonald's Corporation, 2010) The table below summarizes the executive compensation program at McDonald's as well as the corresponding financial performance measure where such compensations were based. . Growth in operating incomeDetermined primarily on annual growth in operating income that focuses on revenue growth, recurring strong profit margins and high level of cash flowAnnual BonusCash IncentivesReturn on total assetsOperating income divided by average assets.

Designed to measure the overall health of the business and measures the success of strategic decisionsCash IncentivesEarnings per ShareCompound annual growth indicates the effectiveness of strategic growthRSUsShare priceAligns the incentives of executives with the interest of the shareholder in increasing their investment valueStock OptionsRSUsTotal Shareholder ReturnTies the payouts to the overall shareholder return an investor would have received from investing in the company's stock. It rewards above-market performance and holds top executives accountable for below-market performanceCash IncentivesRecommendations for Effective Strategy ImplementationOn business growthThe success of implementing the strategy depends on the company's ability to anticipate and respond effectively to the global trends in the fast-food industry such as consumer spending patterns, demographic changes, consumer tastes and preferences.

It is recommended that McDonald's regularly evaluate their menu choices, physical restaurant atmosphere and activity, and nutritional awareness programs in order to effectively communicate the values that the company promotes as well as inspire trust and confidence from the consumers. It is also recommended that the company improve its existing products and to promote new product lines in order to attain sustainable growth and system-wide sales.On operational excellenceThe strategies are designed and developed in order to make McDonald's