Executive Compensation

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 CompensationThe 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.

The Principles of the Executive Compensation are:Clear focus on profits generationLong-term orientation of the compensation

schemeMotivation of manager by high bonusesNon-cash focus of the compensation (stock

options, shares, share phantom schemes)Risk ManagementBalanced Scorecard implemented into the

Compensation Scheme

The executive compensation consists usually from two main parts:

Short Term PayLong Term Pay

The Short Term PayThe 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 PayThe 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.