EXECUTIVE
COMPENSATION
BY
SMART
LEARNING WAY
CONTENTS
Introduction of executive compensation
Meaning and definition of executive
compensation
Elements of executive compensation
Benefits for executives
Unique features of Executive compensation
Why should the managers be paid more?
New way of pay
Conclusion
Introduction
Compensation may be defined as
money received in the performances of work, plus the many kinds of benefits and
services that organizations provide their employees. ‘Money’ is included under
direct compensation (popularly known as wages i.e., gross pay);while benefits
come under indirect compensation .
Executive Compensation or managerial
remuneration is how top executives of business corporations are paid.
Managers
are very short in supply , therefore, organizations are competing with each
other to attract , retain and motivate leader managers for their strategic
requirement.
Meaning and definition
Executive compensation is the total
remuneration or financial compensation a top executive receives within a
corporation. This includes a basic salary, any and all bonuses, shares,
options, and any other company benefit.
Executive compensation is different from
compensation for lower-level employees.
The salary and other benefits are negotiated
and are documented in a customized employment contract. The contract spells out
compensation, benefits, perquisites, performance bonuses and other special
terms of employment.
Executive pay is financial compensation
received by an officer of a firm, often as a mixture of salary, bonuses, shares
of and/or call options on the company stock, etc.
Over
the past three decades, executive pay has risen dramatically beyond the rising
levels of an average worker’s wage. Executive pay is an important part of
corporate governance, and is often determined by a company's board of
directors.
Compensation for executive managers is
different from compensation for other employees in most organizations.
Executive compensation covers employees that include company presidents, chief
executive officers(CEOs), chief financial officers (CFOs), vice presidents,
occasionally directors, and other upper-level managers. These high level
employees are paid executive compensation.
It is the role of the chief executive (CEO)
and other executives to oversee the company’s strategy and operations.
Obviously, these individuals require compensation for their work. It is
the responsibility of the compensation (or remuneration) committee of the board
of directors to design executive compensation contracts.
The
“right” amount to pay an executive is the minimum amount it takes to attract
and retain a qualified individual.
In
addition, the compensation package should be designed so that it motivates the
executive to perform in accordance with the company’s objectives and risk
tolerance. Executive compensation packages generally include a mix
of short-term incentives (including salary, annual bonus, benefits, and
perquisites) and long-term incentives (including stock options and restricted
shares). The package may also include guarantees such as a severance
agreement, change in control provision (if the company is bought out), and
pension.
Elements of executive compensation
Higher managerial post like presidents, vise-presidents,
directors, general manager etc.
The managerial
remuneration of such positions comprises of 4 elements . They are
1)Salary
2)
Bonus
3)
Long Term Incentive
4)
perquisites
SALARY
Salary
is basically determined through job evaluation and serves as the basic for
other types of benefits , but in managerial compensation job evaluation plays
only a part and not represents the whole truth.
A
manager is paid for his capabilities and for the job he performs , rather than
only job demands . This is the reason why the norms of wages and salary
fixation are generally not observed while fixing the salary of the manager.
Salary of the managers varies by the type of
job , size of organization, region of the country and type of industry .
Salary makes up of about 40 to 60 % of top
managers annual compensation but it is not significant , as it is subject to
deduction at source and is also kept by government regulation . In order to
avoid such deductions and sealing , managers are offered incentives and
attractive perks.
Bonus or profit sharing bonus
This type of incentive is shortened (annual)
and is based on performance or profit sharing.
There are many bonus systems as there are
companies using this form of managerial remuneration .
In some systems the annual bonus is tied by
the formula to share returns on investments . Other bonus plans are based on
the subjective judgments of the board of directors and Ceo’s.
Managers deserve bonus because they have much
more stakes to influence organizational success than non-managerial staff.
Long term incentives/Stock option
If bonus are short term benefits , stock
options are long term benefits offered to managers .
Companies allow managers to purchase their
shares at fixed position but Stock options are valuable as long as price of the
share keeps increasing .
Perquisites
Special benefits for executives that are usually non-cash items. For example: companies provide health club memberships with personal trainers; discounted company products; automobiles and leases; country club memberships; first class airfare or use of the corporate jet; executive health plans; personal car service; personal computers and cell phones etc.; entertainment; financial planning assistance etc.
Benefits for executives
As with benefits for non-executive employees ,
executive benefits may take several forms , including traditional retirement ,
health insurance vacations and others .
Executive compensation may include other
benefits which other employee do not receive
Executive health plans with no co-payments and
with no limitations on deductible or physical choice are popular among small
and middle sized business
Trust of various kinds may be designed by the
help the executive’s to deal with estate
issues.
Differed compensation offers another possible
means of helping executives with tax liabilities caused by incentives
compensation plans.
Unique feature of executive Compensation
Managerial remuneration cannot be compared to
wage and salary schemes meant for non-managerial employees in organization .
Factors and variable are more numerous in managerial jobs and simple
comparisons and ratings are not possible .
Managerial are denied the privilege of having
unions and collective bargaining . Their competence and contribution are the
strengths for determining their pay package .
Secrecy is maintained in respect of managerial
remuneration . This is done because no two managers in the private sectors, in
the same grade receive the same pay. Compensation and reward depends upon such
factors as competence , length of service , contributions, and loyalty to the
company.
Managerial pay is not supposed to be
individual performance measure but rather on the unit of organization
performance . This is because a managers own performance is assumed to be
directly reflected in measure of units of corporate performance
Managers compensation is subjected to
statutory sealing. As per the latest guidelines , monthly salary varies from Rs
40,000 to 87,500 subject to an overall limit fixed per annum including perquisites .
Finally theoretically, remuneration of
managerial personnel is supposed to be guided by job description , job
evaluation, salary grades with ranges of pay in each grade and salary surveys
.But in practice norms seem to have thrown to winds and exorbitant amounts are
paid to decision makers in organizations. The annual salary of Ceo's range from
Rs 50 lakhs to few corer.
Why should the managers be paid more?
Managers have intensive worth and hence
command hefty premiums .
The
managers drive himself to success in his or her role is creating the mean by
which certain organizational goal is achieved . The financial reward is a
symbol of managers role itself , its power , its dignity and its freedom.
The class of people called manager are always
in short supply. One must pay heavenly if one has to attract and retain
talented and competent individual.
Having succeeded in retaining them , the
manager must be motivated for better performance and it is the money which motivates
employees and managers are no exceptions .
The lifestyle that fits his status and job
requires considerable amount of money. To a worker , the wage is a mean of
living but for a manager financial reward is a symbol of social prestige and
position .
It is to eliminate or at least minimize
corruption. The best of satisfying greed is to pay well. Scans and scandals
cost the organization heavily.
New
way of pay
Against changing patterns , organization are increasingly linking their variable pay plans to individuals , teams and organizational performance. the extent of linkage and the nature ( short/long term) varies for different levels within the organization . Some of the variable pay plans(VPPs) that organizations have successfully implemented include individual/team performance based gain profit sharing , productivity based business individual /team performance , based gained profit sharing , productivity based business incentives , stock options , and ownership and other customized schemes.
While long term incentive plan is a good
mechanism to link organizational objectives to individual rewards . The
feedback is that organizations with strategically aligned variable compensation
have experienced a positive impact on individual as well as organizational
performance .
Increasingly , companies are experimenting
with the “cost to company "concept , with focus on higher rich
compensation structure. New and emerging
sectors like retail , telecom, aviation and IT/ITES which have the
advantage of no legacy issues and also have younger employee population . Tend
to adopt simplified structures at the outset.
Another concept gaining popularity due to
changing tax environment is the flexible salary structures where the employee
has the freedom to choose from the defined menu of items of pay and optimize
his/her own tax planning .
This works in a win-win manner and has
increasingly gained acceptance as it provides flexibility to the employee and
tax compliance to the organization.
Conclusion
For
higher management, salaries are influenced by the size of the company. The
bigger the firm, the greater is the compensation paid to the executives. The
industries that are more highly constrained by governmental regulations pay
relatively less than those that are more free to carry on business.
Straight salaries, bonuses, stock purchase
plans and profit sharing are used to compensate major executives. Of these,
salaries is the most common method. The salary is determined by mutual
agreement between the individual and the employer.
Bibliography
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