Executive Compensation in Organizations
UNIT-7
Executive
compensation
or
executive
pay
is
composed
of
the
financial compensation
and
other
non-financial
awards
received
by
an
executive
from
their
firm
for
their
service
to
the
organization.
It
is
typically
a
mixture
of
salary,
bonuses,
shares
of
or
call
options
on
the
company
stock,
benefits
,
and
perquisites
,
ideally
configured
to
take
into
account
government
regulations,
tax
law,
the
desires
of
the
organization
and
the
executive, and
rewards
for
performance
Executive
Compensation
The
compensation
program
serves
three
main
purposes.
It
must
attract
executives
with the
skills,
experiences,
and
behavioral
profile
necessary
to
succeed in
the
position.
It
must
be
sufficient
to
retain
these
individuals,
so
they do
not
leave
for
alternative
employment.
It
must
motivate
them
to
perform
in
a
manner
consistent
with the
strategy
and risk-profile
of
the
organization
and
discourage
self-interested
behavior.
Th
e
Principles
o
f
the
E
x
ecuti
v
e
Compensation
are:
Clear
focus
on
profits
generation
Long-term
orientation of
the
compensation
scheme
Motivation
of
manager
by
high
bonuses
Non-cash
focus
of
the
compensation
(stock
options,
shares, share
phantom
schemes)
Risk
Management
Balanced Scorecard
implemented
into
the
Compensation
Scheme
The
executive
compensation
consists
usually
from
two
main
parts:
Short
Term
Pay
Long
Term
Pay
The Short
Term
Pay
The
short
term
pay
of
the
executives
is
about
the
base
salary
and
short
term bonuses
,
which
are
paid
on
the
basis
of
the
immediate
performance
of
the
organization.
The
bonuses
are
usually deferred
over
a
period
of
time.
The
short
term
pay
is
usually
fully
cash
based
executive
compensation
component.
The Long
Term
Pay
The long
term
pay
is
about
the
stock
options,
shares,
restricted
stocks
and
pay
based
on
the
performance
against
the
index.
The
shareholders
use
these
long
term
compensation
components
to
protect
the
value
of
the
organization
and
betting
of
the
top
executives
on
the
growing
value
of
the
organization
on
the
market.
The long
term
compensation
components
can
be
realized
just
in
case,
the
stock
price
of
the
organization
grows.
The long
term
pay
component
is
usually
non-cash
based
.
Types
of
Executive
Compensation
There
are
many
different
forms
of
executive
compensation
that
offer
a
variety
of
tax
benefits
and
performance incentives.
Below
are
the
most common
forms:
Cash
Compensation
–
This
is
the
sum
of
all
standard
cash
salary
compensation
that
the
executive
receives
for
the
year.
Deferred
Compensation
–
This
is
compensation
that
is
deferred
until
a
later
date, typically
for tax
purposes.
However,
changes
in
regulations
have
lessened
the
popularity
of
this
type
of
compensation.
Examples
of
deferred
compensation
include
pensions,
retirement
plans
etc
Long-Term
Incentive Plans
(LTIPs)
–
Long-term
incentive
plans
encompass
all
compensation
that
is
tied
to
performance
for
tax
purposes.
Current
tax
laws
favor
pay
for
performance-type
compensation.
Stock
options-
An
employee
stock
option
(
ESO
)
is
commonly
viewed
as a
complex
call
option
on
the
common
stock
of
a
company,
granted
by
the
company
to
an
employee
as
part
of
the
employee's
remuneration
package
Restricted
stock-
Outright
grant
of
shares
that
are
restricted in
transferability and
are
subject
to
vesting.
Once
vested,
they
are
economically equivalent
to
outright
ownership
of
stock
.
Retirement
Packages
–
These
are
packages given
to
executives
after
they
retire
from
the
company.
These
are
important
to
watch
because
they
can contain so-called
"golden
parachutes"
for
corrupt
executives.
Executive
Perks
–
These
are
various
other
perks
given
to
executives,
including
the
use
of
a
private
jet,
travel
reimbursements
and
other
rewards.
Executive
Compensation
Benefits
Employee
Benefits
is
a
term
used
to
indicate
the
non-wage
part
of
remuneration
consisting
of
a
broad
range
of
special
payments
or
benefits
in
kind.
Typical
Employee
Benefits
are:
Insurance,
Pension/retirement
benefits,
Income
protection/social
security,
Maternity
pay/daycare/child
care,
Profit
sharing/Employee
Stock
Ownership
Plan,
Holiday/vacation,
relocation
assistance/benefits,
Legal assistance, company
car,
company
computer/internet
access,
Company
mobile phone,
Membership
of
sport
and
health
clubs/leisure
activities
during
work
time,
Education/personal
development,
staff
discounts,
industry-related
benefits.
Golden
Handcuff
is
a
form
of
employee
benefits
or
executive
compensation, in
which
a
(substantial)
bonus
is
built
into
an
executive's
contract,
subject
to
continuous
employment
for
a
certain number
of
years.
In
case
of
leaving
the
employment
premature
there
would
be
substantial financial penalties or
the
entire
amount
may have
to
be
repaid.
Golden
Handshake
is
a
form
of
employee
benefits
or
executive
compensation,
wherein
a
large
payment
made
by
a
company
to
a
senior
executive
is
done
upon
termination
of employment
(retirement)
before
his/her
contract
ends.
Golden
Hello
is
a
form
of
employee
benefits
or
executive
compensation,
wherein
a
signing
bonus
is
given
to
an
executive
to
induce
him
to
leave
a
previous
employment in
order
to
take
up
a
new
employment
by
the
payment
of
a
large
sum
of
money
or
other
considerable
remuneration.
Such
welcome
arrangement
could
be
in
cash or
in
shares
or
in
options.
Golden
Parachute
is
a
form
of
employee
benefits
or
executive
compensation,
wherein
the
executive
is
provided
with
a
lucrative
severance
package
in
the
event
of
job
termination,
for
example
in
case
of
a
takeover
by
an
acquiring
company.
A
GP
may
include
a
continuation of
salary,
bonus
and/or
certain
benefits
and
perquisites,
as
well
as
accelerated
vesting
of
stock
options.
Executive compensation, a crucial aspect of corporate governance, comprises financial and non-financial rewards given to executives for their service. The compensation program aims to attract, retain, and motivate executives to align with the organization's strategy. It includes elements like salary, bonuses, stock options, and long-term incentives. The principles of executive compensation focus on profits generation, long-term orientation, high bonuses, non-cash components, risk management, and balanced scorecard implementation. Short-term pay is based on base salary and immediate performance bonuses, while long-term pay includes stock options and performance-based incentives.
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Presentation Transcript
Executive compensation or executive pay is composed of the financial compensation andother non-financial awards received by an executivefrom their firm for their service to theorganization. It is typically a mixture of salary, bonuses, shares of or call options on the company stock,benefits, and perquisites, ideally configured to take intoaccount government regulations, tax law, the desires of the organization and the executive, and rewards for performance
Executive Compensation The compensation program serves three main purposes. It must attract executives with the skills, experiences, and behavioral profile necessary to succeed in the position. It must be sufficient to retain these individuals, so they do not leave for alternativeemployment. It must motivate them to perform in a manner consistent with the strategy and risk-profile of the organization and discourage self-interested behavior.
The Principles of the Executive Compensation are: Clear focus on profitsgeneration Long-term orientation of the compensationscheme Motivation of manager by high bonuses Non-cash focus of the compensation (stockoptions, shares, share phantomschemes) RiskManagement Balanced Scorecard implemented into the Compensation Scheme
The executive compensation consistsusuallyfromtwo mainparts: Short TermPay Long TermPay
The Short TermPay The short term pay of the executives is about thebase salary and short term bonuses, which are paid on the basis of the immediate performance of the organization. The bonuses are usually deferred over a period of time. The short term payisusually fully cash based executive compensationcomponent.
The Long TermPay The long term pay is about the stock options,shares, restricted stocks and pay based on the performance against the index. The shareholders use these long term compensation components to protect the value of the organization and betting of the top executives on the growingvalue of the organization on themarket. The long term compensation components can be realized just in case, the stock price of the organization grows. The long term pay componentis usually non-cash based.
Types of Executive Compensation There are many different forms of executive compensation that offer a variety of tax benefits and performance incentives.Below are the most commonforms: Cash Compensation This is the sum of all standardcash salarycompensation that theexecutivereceives fortheyear. Deferred Compensation This is compensation that is deferred until a later date, typically for tax purposes. However, changes in regulations have lessened the popularity of this type of compensation. Examples of deferred compensation include pensions, retirement plansetc
Long-Term Incentive Plans (LTIPs) Long-term incentive plans encompass all compensation that is tied to performance for tax purposes. Current taxlaws favor pay for performance-typecompensation. Stock options- An employee stock option (ESO) iscommonly viewed as a complex call option onthe common stock of a company, granted by the company to an employee as part of the employee'sremuneration package
Restricted stock- Outright grant of shares that are restricted in transferability and are subjecttovesting. Once vested,they are economically equivalent to outright ownership ofstock. Retirement Packages These are packages given to executives after they retire from the company. Theseare important to watch because they can contain so-called "golden parachutes" for corruptexecutives. Executive Perks Thesearevariousotherperksgivento executives, including the use of a private jet, travel reimbursements and otherrewards.
Executive Compensation Benefits Employee Benefits is a term used to indicate the non-wage part of remuneration consisting of abroad range of special payments or benefits inkind. Typical Employee Benefits are: Insurance, Pension/retirement benefits,
Income protection/social security, Maternity pay/daycare/childcare, Profit sharing/Employee Stock Ownership Plan, Holiday/vacation, relocationassistance/benefits, Legal assistance, company car, company computer/internet access, Company mobile phone, Membership of sport and health clubs/leisure activities during worktime, Education/personal development, staff discounts, industry-related benefits.
Golden Handcuff is a form of employee benefits or executive compensation, in which a (substantial) bonus is built into an executive's contract,subjecttocontinuousemploymentfora certain number ofyears. In case of leaving the employment premature there would be substantial financial penalties or theentire amount may have to berepaid.
Golden benefits or executive compensation, whereinalarge payment made by a company to a senior executive is done upon termination of employment (retirement) before his/her contractends. Handshake is a form of employee
Golden Hellois a form of employee benefits or executive compensation,wherein a signing bonusisgiventoanexecutive to inducehim to leavea previous employment in order to take up a new employment by the payment of a large sum of money or other considerableremuneration. Such welcome arrangement could be in cash orin shares or inoptions.
Golden Parachute is a form of employee benefits or executive compensation, whereinthe executive is provided with a lucrativeseverance package in the event of job termination, for examplein case of a takeover by an acquiring company. A GP may include a continuation of salary, bonus and/or certain benefits and perquisites, as well as accelerated vesting of stockoptions.
