This excerpt taken from the DTV DEF 14A filed Apr 20, 2009.
How does the Committee minimize inappropriate business risks when setting performance goals and determining subsequent performance payouts?
The Committee is aware of the current economic conditions and the consequences to companies that have not appropriately balanced risk and reward in executive compensation. The Committee believes that the emphasis on long-term performance in the RSU program results in an overall compensation program that does not reward excessive risk-taking for the Company. The Company's compensation strategy is intended to mitigate risk by emphasizing long-term compensation and financial performance measures correlated with growing stockholder value rather than rewarding shorter performance and payout periods. Typically a third of our executive officers' total compensation is base salary, while the remaining two-thirds are tied to Company and individual performance; the emphasis on performance-based pay is greater for the CEO.
Of this performance or at-risk compensation, for most executives, only about one-third of the value is focused on annual bonuses, while over two-thirds is denominated in shares and based on achieving longer term performance goals that are typically measured over periods of three years or more. The long-term performance goals, in turn, are selected as financial or operating measures that increase the Company's value to stockholders if achieved. The long-term program's specific focus on share-based compensation over a multi-year period, in combination with executive share ownership guidelines set by the Committee, reflects the program's goals of risk assumption and sharing between executives and stockholders. Further, the emphasis on long-term compensation over annual bonuses mitigates risks associated with achieving short-term goals that could potentially be detrimental to stockholders over the longer-term, because this could be expected to diminish the potential value of the named executive officers' long-term incentive awards.
The Company also believes that the possibility of rewarding excessively risky short-term focused behavior is reduced by using a cash-flow based (rather than just accounting earnings) metric for funding the maximum annual bonus to executives, then adjusting downward based on the Committee's consideration of various operating and financial performance metrics. This approach does not reward executives for managing to specific pre-determined metrics which may not, in hindsight, be in the Company's best interest.