Executive Compensation
Compensation or remuneration for the executive managers is different from compensation for other employees in most the organizations. Executive compensation covers employees that include presidents of company, chief executive officers (CEOs), chief financial officers (CFOs), vice presidents, occasionally directors of the company, and other upper-level managers. These high level employees are paid executive compensation.Usually only those members of your most senior management team qualify for executive pay. It is usual the members of the “C-Suite.” (A widely-used slang term used to collectively refer to a corporation's most important senior executives. C-Suite gets its name because top senior executives' titles tend to start with the letter C, for chief, as in chief executive officer, chief operating officer and chief information officer.)
What Are the Components of Executive Compensation?
- Base salary
- Incentive pay, with a short-term focus, usually in the form of a bonus
- Incentive pay, with a long-term focus, usually in some combination of stock awards, option awards, non-equity incentive plan compensation
- Enhanced benefits package that usually includes a Supplemental Executive Retirement Plan (SERP)
- Extra benefits and perquisites, such as cars and club memberships
- Deferred compensation earnings
Many organizations, especially large ones, administer executive compensation somewhat differently than compensation for lower-level employees. An executive typically is someone in the top two levels of an organization, such as Chief Executive Officer (CEO), President, or Senior Vice-President. As Figure shows, the common components of executive compensation are salaries, annual bonuses, long-term incentives, supplemental benefits, and perquisites.
Apple CEO Tim Cook's salary doubled in 2014
Apple CEO Tim Cook got a fat cash bonus that brought his total compensation to $9.2 million in 2013. That's more than double what he received in the previous year (2013), as the company enjoyed a upsurge in sales and profit fueled by the popularity of its new, over-sized iPhone 6 models.Cook's pay for fiscal 2014 included $1.7 million in salary and $6.7 million in incentive pay that was awarded by Apple's board after he beat the performance goals that directors had set for him, according to a regulatory filing. He also received $774,176 in other compensation, including a 401k contribution, company-paid insurance premiums and security expenses.
Apple reported $182.8 billion in revenue for the fiscal year that ended September 27 of 2014 and $39.5 billion in profit, after seeing record sales last fall. Sales of iPhones rose 21% in the company's fourth quarter, which made up for a decline in sales of iPads.
IndianTop executive pay chart in Indian corporate sector: 2012
-------------------------------------------------------------------------------------------------------------------------------- 2012-Sep: Naveen chairman and managing director of Jindal Steel and Power (JSPL) has topped the executive pay charts for listed companies in the country with a package of Rs 73.4 crore for the fiscal 2011-12, which grew by over Rs 6 crore from previous year. Jindal. He was followed by Sun TV Network's Kalanithi and Kavery Maran (Rs 57 crore each), Hero MotoCorp's Pawan Munjal (Rs 34.5 crore) and Brijmohan Lall Munjal (Rs 34.4 crore) among the five top-paid executives. These pay packages include
- salary,
- perquisites,
- profit-linked incentives or commissions and
- other benefits.
Jindal
remained the top-paid executive for the second consecutive year after
he dislodged Kalanithi Maran from the top slot in the year 2010-11. The
collective pay of the 10 top-paid executives rose by Rs 43 crore (over
12%) to Rs 387 crore in FY12, according to the data companies have so
far published their annual reports. The pay packages declined for only
two - Kalanithi and Kavery Maran - among these 10 in 2011-12.
- Madras Cements' P R R Rajha was ranked sixth (Rs 29.3 crore), followed by
- Maruti Suzuki's Shinzo Nakanishi (Rs 28.1 crore),
- BGR Energy's BG Raghupaty (Rs 26 crore),
- Tata Motors' former chief Carl-Peter Forster (Rs 24 crore) and
- Divi's Labs' Murali K Divi (Rs 23.2 crore).
- Bharti Airtel's Sunil Mittal (Rs 21.3 crore),
- Hindalco's D Bhattacharya (Rs 19.5 crore),
- JSW Steel's Sajjan Jindal (Rs 18.18 crore) and
- Amara Raja Batteries' Jayadev Galla (Rs 17.23 crore).
- Among these, Mittal and Sajjan Jindal saw their packages decline during the year 2011-12.
Two objectives influence executive compensation:
Elements of Executive Compensation
At the heart of most executive compensation plans is the idea that executives should be rewarded if the organization grows in profitability and value over a period of years. Because many executives are in high tax brackets, their compensation often is provided in ways that offer significant tax savings. Therefore, their total compensation packages are more significant than their base pay. Especially when the base salary is $1 million or more, the executive often is interested in the mix of items in the total package, including current and deferred compensation.
EXECUTIVE SALARIES
Salaries of executives vary by type of job, size of organization, region of the country, and industry. On average, salaries make up about 40-60% of the typical top executive's annual compensation total. At times publicly traded company to hike or reduce the salary of executive based on performance, approval may be needed from directors and shareholders .
EXECUTIVE BONUS PLANS
Because executive performance may be difficult to determine, bonus compensation must reflect some kind of performance measure if it is to be meaningful. As an example, a retail chain with over 250 stores ties annual bonuses for managers to store profitability. The bonuses have amounted to as much as 35% of a store manager's base salary.
Bonuses for executives can be determined in several ways. A discretionary system whereby bonuses are awarded based on the judgments of the chief executive officer and the board of directors is one way. However, the absence of formal, measurable targets is a major drawback of this approach. Also, as noted, bonuses can be tied to specific measures, such as return on investment, earnings per share, or net profits before taxes. More complex systems create bonus pools and thresholds above which bonuses are computed. Whatever method is used, it is important to describe it so that executives trying to earn bonuses understand the plan; otherwise, the incentive effect will be diminished.
PERFORMANCE INCENTIVES-LONG TERM VS. SHORT TERM
Performance-based incentives attempt to tie executive compensation to the long-term growth and success of the organization. However, whether the emphasis is really on the long term or merely represents a series of short-term rewards is controversial. Short-term rewards based on quarterly or annual performance may not result in the kind of long-run-oriented decisions necessary for the company to continue to do well.
A stock option gives an individual the right to buy stock in a company, usually at an advantageous price. Different types of stock options have been used depending on the tax laws in effect. Stock options have increased in use as a component of executive compensation during the past 10 years, and employers may use a variety of very specialized and technical approaches to them, which are beyond the scope of this discussion. However, the overall trend is toward using stock options as performance-based long-term incentives.
Where stock is closely held, firms may grant "stock equivalencies" in the form of phantom stock or share appreciation rights. These plans pay recipients the increased value of the stock in the future, determined by a base valuation made at the time the phantom stock or share appreciation rights are given. Depending on how these plans are established, the executives may be able to defer taxes or be taxed at lower capital-gains tax rates.
BENEFITS FOR EXECUTIVES
As with benefits for non-executive employees, executive benefits may take several forms, including traditional retirement, health insurance, vacations, and others. However, executive benefits may include some items that other employees do not receive. For example, executive health plans with no co-payments and with no limitations on deductibles or physician choice are popular among small and middle-sized businesses. Corporate-owned life insurance on the life of the executive is popular and pays both the executive's estate and the company in the event of death. Trusts of various kinds may be designed by the company to help the executive deal with estate issues. Deferred compensation is another possible means used to help executives with tax liabilities caused by incentive compensation plans.
EXECUTIVE PERQUISITES
In addition to the regular benefits received by all employees, executives often receive benefits called perquisites. Perquisites (perks) are special executive benefits—usually noncash items. Perks are useful in tying executives to organizations and in demonstrating their importance to the companies. It is the status enhancement value of perks that is important to many executives. Visible symbols of status allow executives to be seen as "very important people (VIPs)" both inside and outside their organizations. In addition, perks can offer substantial tax savings because many perks are not taxed as income.
- Ensuring that the total compensation packages for executives are competitive with the compensation packages in other firms that might employ them, and
- Tying the overall performance of the organization over a period of time to the compensation that is paid to executives. It is the second objective that critics of executive compensation believe is not being met. In many organizations, it appears that the levels of executive compensation may be unreasonable and not linked closely to organizational performance.
Elements of Executive Compensation
At the heart of most executive compensation plans is the idea that executives should be rewarded if the organization grows in profitability and value over a period of years. Because many executives are in high tax brackets, their compensation often is provided in ways that offer significant tax savings. Therefore, their total compensation packages are more significant than their base pay. Especially when the base salary is $1 million or more, the executive often is interested in the mix of items in the total package, including current and deferred compensation.
EXECUTIVE SALARIES
Salaries of executives vary by type of job, size of organization, region of the country, and industry. On average, salaries make up about 40-60% of the typical top executive's annual compensation total. At times publicly traded company to hike or reduce the salary of executive based on performance, approval may be needed from directors and shareholders .
EXECUTIVE BONUS PLANS
Because executive performance may be difficult to determine, bonus compensation must reflect some kind of performance measure if it is to be meaningful. As an example, a retail chain with over 250 stores ties annual bonuses for managers to store profitability. The bonuses have amounted to as much as 35% of a store manager's base salary.
Bonuses for executives can be determined in several ways. A discretionary system whereby bonuses are awarded based on the judgments of the chief executive officer and the board of directors is one way. However, the absence of formal, measurable targets is a major drawback of this approach. Also, as noted, bonuses can be tied to specific measures, such as return on investment, earnings per share, or net profits before taxes. More complex systems create bonus pools and thresholds above which bonuses are computed. Whatever method is used, it is important to describe it so that executives trying to earn bonuses understand the plan; otherwise, the incentive effect will be diminished.
PERFORMANCE INCENTIVES-LONG TERM VS. SHORT TERM
Performance-based incentives attempt to tie executive compensation to the long-term growth and success of the organization. However, whether the emphasis is really on the long term or merely represents a series of short-term rewards is controversial. Short-term rewards based on quarterly or annual performance may not result in the kind of long-run-oriented decisions necessary for the company to continue to do well.
A stock option gives an individual the right to buy stock in a company, usually at an advantageous price. Different types of stock options have been used depending on the tax laws in effect. Stock options have increased in use as a component of executive compensation during the past 10 years, and employers may use a variety of very specialized and technical approaches to them, which are beyond the scope of this discussion. However, the overall trend is toward using stock options as performance-based long-term incentives.
Where stock is closely held, firms may grant "stock equivalencies" in the form of phantom stock or share appreciation rights. These plans pay recipients the increased value of the stock in the future, determined by a base valuation made at the time the phantom stock or share appreciation rights are given. Depending on how these plans are established, the executives may be able to defer taxes or be taxed at lower capital-gains tax rates.
BENEFITS FOR EXECUTIVES
As with benefits for non-executive employees, executive benefits may take several forms, including traditional retirement, health insurance, vacations, and others. However, executive benefits may include some items that other employees do not receive. For example, executive health plans with no co-payments and with no limitations on deductibles or physician choice are popular among small and middle-sized businesses. Corporate-owned life insurance on the life of the executive is popular and pays both the executive's estate and the company in the event of death. Trusts of various kinds may be designed by the company to help the executive deal with estate issues. Deferred compensation is another possible means used to help executives with tax liabilities caused by incentive compensation plans.
EXECUTIVE PERQUISITES
In addition to the regular benefits received by all employees, executives often receive benefits called perquisites. Perquisites (perks) are special executive benefits—usually noncash items. Perks are useful in tying executives to organizations and in demonstrating their importance to the companies. It is the status enhancement value of perks that is important to many executives. Visible symbols of status allow executives to be seen as "very important people (VIPs)" both inside and outside their organizations. In addition, perks can offer substantial tax savings because many perks are not taxed as income.
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