Tad Folsom, the newly appointed chair of the audit committee of Peloton Industries, is preparing for his third meeting with the board of directors since being elected to it six months earlier, in July 2010. Bill Pelo, Peloton's CEO, is retiring soon, and the board is eager to have the right management team in place. Folsom is aware that some board members want a drastic change in Peloton's approach to executive compensation and expects input from him. Peloton has never issued stock options before. In general, the practice is not common for medical manufacturing companies, although it is more so in the overall healthcare sector. Folsom remembers his four years as CFO for Healthsource Home Care Inc. (HHC), a multihospital and long-term care system based in the Northwest. HHC had granted stock options as part of its executive compensation package, and Folsom had witnessed several negative changes in behavior as a result. He is eager to avoid similar issues at Peloton while, at the same time, encouraging the adoption of the proper alignment of incentives between management and the shareholders he represents.