Executive

Compensation

Executive compensationorexecutive

payis composed of thefinancial

compensationand 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
companystock,benefits, andperquisites,
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 selfinterested behavior.

The Principles of the Executive 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

Theexecutive compensationconsists 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
compensationincludepensions,retirement plans etc

Long-Term Incentive Plans (LTIPs)Long-

term incentive plansencompass all

compensation that is tied to performance for
tax purposes. Current tax laws favor pay for
performance-type compensation.
Stock optionsAnemployee stock option(ESO) is
commonly viewed as a complexcall optionon
the commonstockof a company, granted by
the company to an employeeas part of the
employee'sremuneration 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 Benefitsis a term used to

indicate the non-wage part

ofremunerationconsisting 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 Handcufis a form ofemployee

benefitsorexecutive 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 Handshakeis a form ofemployee

benefitsorexecutive compensation, wherein a

large payment made by a company to a
senior executive is done uponterminationof
employment (retirement) before his/her
contract ends.

Golden Hellois a form ofemployee

benefitsorexecutive 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
considerableremuneration.
Such welcome arrangement could be in cash
or in shares or in options.

Golden Parachuteis a form ofemployee

benefitsorexecutive compensation, wherein

the executive is provided with a lucrative
severance package in the event of
jobtermination, 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.