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Executives are the seller of his or her services and receiving the compensation from the buyer of the services. Executive employees, includes chief executive officers (CEOs), chief financial officers (CFOs), presidents of any organization, and other top level managers compensated at different-different bases with compered to lower level personnel. Compensation of an executive includes basic pay, bonuses, incentives, fringe benefits, and perquisites. Compensation of the top management employees determined on the basis of size of and organization, it means organization performing large scale or small scale business, performance of the company in competitive market, profitability of the organization. More the profits earn by the organization higher the compensation package of executives and vice versa.
The industries that are more highly constrained by governmental regulation (banks, life insurance, railroads, public utilities) pay relatively less than those that are more free to carry on their business (private firms).
Executive Compensation or managerial remuneration states that compensation package received by them from the organizations in exchange of their services. Managers are very short in supply, therefore, organizations are competing with each other to attract, retain and motivate leader managers for their strategic requirement.
FEATURES OF EXECUTIVE COMPENSATION
The features of executive compensation are:
Compensation scheme can't be compared to the schemes which are followed for the other employees in the organization.
Executives are denied the privilege of having unionized strength.
Compensation of executive takes as secrete from other organizational employees.
Executive compensation is not influenced by the individual's performance but it is measured on the performance of specific unit or organizational performance.
Executive compensation is matter to statutory top limits in some situations.
Executive remuneration depends on competency level, experience towards their job, duration of performing these kind of service, commitment towards organization, specialized areas like Merger and Acquisition specialist, turnaround specialist etc.
Executive compensation may be guided by job evaluations.
TYPES OF EXECUTIVES
TYPES OF EXECUTIVES
Highly Compensated Employees
KEY EMPLOYEES: Internal revenue services defines three main conditions for the key employees:
Their annual salary must be greater than $1, 30,000.
5 percent ownership in the company's total profit.
1 percent ownership in the compensation system.
HIGHLY COMPENSATED EMPLOYEE: As per the internal revenue service conditions ,it includes:
1. Executive must receive the salary between $80,000 to $85,000.
2. 5 percent ownership in the company's profit
3. 1 percent ownership in the compensation system.
ELEMENTS OF EXECUTIVE COMPENSATION PACKAGE
CURRENT OR ANNUAL CORE COMPENSATION(A)
Discretionary Performance Pre-determined Target Plan
Bonus Contingent Bonus Bonus
SALARY: Salary is the first component of executive remuneration. Salary is supposed to be determined through evaluation and serves as the basis for other types of benefits. 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. Manager's compensation alter because employment type, scale of business affairs, location of the organization and the type of industry. Typically, compensation of CEOs and other executives is starts the completion with other executive compensation package in the market and thus may be very high in comparison to the remuneration of employees in their own organization. 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: Bonus is the master element of compensation package of any executive. Bonus offers to the executive on the basis of their performance and it fluctuates as per their performance. Bonus is used by the organization as like the motivational tool for the executive to achieve the specific predetermined objective. for example, specific profit levels, and reward them for reaching these goals. It is the one time payment to the executive by the organization or we can say that bonus is received once in a year. Amount of bonus is depends upon the analysis of executive's performance in the terms of market position and profitability of organization by the board of directors. Bonus includes following types:
Discretionary Bonus: Discretions states the ability to act or decide according to performance or executive judgment strength. As per the term, directors receive discretionary bonus depends on following terms:
Financial Condition of the Company
Overall Business Environment
Prospect of Company in Future
Performance Contingent: This kind of bonus is determined as per the performance of the executive in the organization and performance is evaluated by using the method of performance appraisal.
Pre-determined Bonus: In this method of bonus determination a fixed formula is used to determined bonus. Amount of bonus is depending on the company's profit and the pre-planned sum of money decided for the bonus.
Target plan Bonus: Executives bonus is always depend on the benchmarks and these benchmarks are set by the board of directors. Executives receive bonus only when if they performed up to mark and vie-versa.
Incentive stock Non Statutory stock Restricted Stock Phantom stock
option plan option plan option plan option plan
Stock compensation refers to an agreement between executive and the organization to render payment to the executive at a future date after termination of the executive. It represents the total equity of the firm. It includes the following term:
Incentive stock option plan: It entitles that executives have to purchase the company's stock in the future at the pre-determined price and it is equal to the stock price at the time an executive receive the stock option. It gives income tax benefits to the executives
Non-Statutory stock option plan: It is same as like the incentive stock option plan, means executives purchase it at the pre-determined date and time. But it does not provide the tax benefit to the executive.
Restricted stock option plan: It states that executive do not have any hold or command on the company's stock, until and unless he does not obtain or get 5-10 year work experience in the same organization. And the executive must sell the stock option before the end of designated restriction period.
Phantom stock option plan: In this type of stock option plan board of director compensate executive hypothetically company stock, rather than actual share of the company. It is similar to restricted stock plan because executive must follow the following conditions:
He should remain in the organization between 5 to 20 years.
Executive must retire from the same company.
DEFERRED CORE COMPENSATION
Golden parachutes provide pay and benefit to executive after the termination which is to be done due to change in the ownership and corporate takeover. Golden parachutes extend the pay for 1 to 5 year.
Enhanced Protection plan
Fringe benefits are the part of non-monetary compensation. It includes following items:
Enhanced protection plan: Mainly it includes insurance and medical facility to whole family of the executive.
Perquisite: It includes lunch, pick and drop, separate cabin, accommodation and transport facility.
WHY MANAGERS SHOULD 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 is 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 minimum corruption. The best of satisfying greed is to pay well scans and scandals cost the organization irreparably.
GUIDEPOST FOR CEO COMPENSATION
A corporate governance aspect to CEO-remuneration
Revolves around the decision process involved in fixing a CEO's compensation; In some, corporate Head Quarters lays down the broad guidelines while the actual compensation is a function of local market conditions
In the Indian context it is the board of directors that decides the compensation of CEOs
Since most CEOs also chair the board, this means they write their own pay-cheques. However, some companies (especially the progressive ones) have compensation committees in place
Company's Act 1956
In India the Companies Act is the legislation that chiefly provides structure of the pay of top managerial personnel.
Until 1993, the Act offers for an upper limit in the amount of compensation to be paid.
It had been targeted at that the "ordinance of top managerial remuneration becomes necessary for several reasons, prominent among them being the prevention of diversion of corporate funds for personal use and the impact which an unduly high executive reward has upon the rest of society."
However, over the years, with the shift in India's economic policy towards a market-oriented capitalistic economy, this particular legislation has been amended to increase the maximum pay package limits that are payable to the managerial personnel. While other reforms have taken their time to be incorporated in to the Act, the maximum pay ceiling for CEOs has been increased systematically and more frequently.
One of the important cause to put forward for this regular increase has been the need to attract and retain talent at the top level.
Additionally, it has been argued that the risk and responsibility at the senior level needs to be compensated by a adequate increase in the remuneration packet. Needless to mention the risk and responsibilities at the CEO's level pertain to the uncertainty associated in fulfilling organizational objectives. This automatically indicates a strong relationship between the CEO's compensation and organizational performance.
Logically the CEO's job should be put at risk if the organizational objectives are not fulfilled.
Indian law does not require that the compensation commission have a charter. The scope of the organization remuneration commission includes determination of the Board's compensation and the Company's policy on specific remuneration packages for executive directors including pension rights and any other compensation payments.
TESTIMONIAL FOR CEO'S COMPENSATION
All organization should have entirely autonomous compensation commission that determines CEO remuneration or pay.
In the absence of such commission, there should at least be a peculiar sub-commission that determines CEO pay or remuneration.
Whichever pattern the commission selects, CEO remuneration should always be coordinating with the performance of the organization stock
The utilization of more cosmopolitan measures of financial performance, like Total Shareholder Returns (TSR) or Economic Value Added (EVA)
To use a proportionate measurement matrix that consist non-financial factor like customer satisfaction and employee engagement
Q1. What do you mean by executive compensation? Explain the nature of executive compensation.
Q2. Briefly explain the major factors of executive compensation.
Q3. Differentiate between Salary and Bonus.
Q4. Explain the guidepost for executive compensation?