5. 3. Of all the compensation plans in common use the least defensible is the "performance unit award plan" where the value of the award is not influenced by what happens to the market price of the company shares or to dividends. It is particularly dangerous when the plan and its rewards to management are determined by a formula set in advance and not subject to board discretion. This can conceivably result in increased rewards to the management of a company whose shares have declined in value and which has been substantially outperformed by its competitors. It is argued that the goals can be so set that their accomplishment will assure a true benefit to the shareholders. However, goal-setting is a risky business and subject to great error even where there are the best of intentions . There is little merit in the argument that performance units are justified because the stock option plans are "under water" or that the stock price has failed to reflect company performance. I suggest that one reason the stock option plans are "under water" in many cases is that in terms of constant dollars company earnings have not increased in real terms even though they may have increased considerably in current dollars. The market has made its own correction for the declining value of the unit of measurement, namely the dollar, by adjusting the price/earnings ratio. There are better ways to reward management that