Assignement Executive Remuneration

8/3/2019 Assignement Executive Remuneration

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COMPENSATION MANAGEMENT ASSIGNMENT NO:1

PREPARED BY: TONMOY BORAH 3RD YEAR MBA (PT) ROLL NO:21 Page 1

EXECUTIVE REMUNERATION SYSTEMS

Executive remuneration can be defined as the totalcompensation a top executive receives within a corporation.This includes basic salary, bonuses, options and othercompany benefits. Many people consider pay for performancesystems along with private ownership, as the hall marks ofcapitalism. To these people good organization simply will not

function effectively without good pay for performance systems.

Pay for performance include such examples as, sharing in profits of tradingvoyager, piece rate pay used since at least the industrial revolution, and profitsharing in the modern corporation; hare cropping, in which the worker shares inthe output created on the land owners property.

Can either be a motivational tool encouraging executives to pursuestrategic decisions that are in the best interest of shareholders or it canbe designed to reinforce the wrong strategic choices

The Role of Risk in the Executive Compensation Contract

Employment risk

the possibility that the executive will be terminated either due tounsatisfactory performance or due to change in control

Compensation risk

the potential unpredictability in the executives future pay representedmainly by the proportion of stock options in the total pay package

Business risk

the uncertainty surrounding the firms competitive environment


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Salary

Salary as a component of total remuneration is not significant as it is subject tovarious deductions.

Bonus is a short-term incentive and is based on performance. In someorganizations bonus is tied to the share price.

Other bonus plans are based on the subjective judgment of the board of directorsand the CEO.Some organizations establish certain targets,e.g.a 10% increase in corporateearning and then a bonus pool after the target is achieved.

Commission

Companies pay to their executives and going by the figures, commissionconstitutes a major share in executive remuneration.

The CMD of Raymond received a total remuneration of Rs.1.98 crore in 2003.ofwhich commission was 1.4 crore 70.54 percent common practice in privatesector.

Long term Incentives(ESOP)

Companies allow executives to purchase their shares at fixed prices.Stockoptions are valuable as long as the price of share keep increasing

During 2003, about half of Fortune 500 CEO compensation was in cash pay andbonuses, and the other half in ESOP.

Perquisites


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Perks constitute a major source of income for executives.

PF,Gratuity,Special parking, vacation travel,memebership in clubs andwell furnished houses.

Executives are rarely required to spend money from their pockets.

FEATURES OF EXECUTIVE COMPENSATION

Executive compensation cannot be compared with

wage.

Executives are denied of having the unions.

Executive pay is based on corporate performance

rather than individual.

Executive remuneration may be subject to statutory ceilings.

It is based on competence,loyality, non-substitutability.


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Features of ER in India

1. Norms of wage and salary fixation such as job evaluation are generally ignored.

2. There is a tendency to link remuneration to performance.HCL,Titan and Modi,Xeroxare reported to link salaries to performance.

3. Holidaying abroad is gaining increasing acceptance. In year executive works 10 months 1 month holiday abroad 1 month training.

4. Relatively higher salaries are paid during the foreign assignments. Once they comeback the same executives receive less pay to ensure parity. Ranbaxy reportedly followsthis practice.

5. Competition among the companies to attract competent executives is resulting invirtual hijacking of competent.

Pepsi did and took away quite a few executives from HLL & Nestle. Kelloggs and Coke did the same to Pepsi.

6. Executives in the public sector stand nowhere in comparison to their counterparts inthe private sector in respect of remuneration.


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therefore there is movement of executives from government to pvt sector

enterprises. SAIL alone lost 50 to Essar,Tisco. BEL BPL SBI too lost quite a few GMs.

7. As the ABC consultants study reveals, executives are offered composite' salariesinstead of menu salaries.

The Theories:


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Reinforcement Theory:

A theory that says that behavior is a function of the consequence.

Features-Reinforcement Theory:

Equity Theory

It states that individuals compare their job inputs and outcomes with those of others andthen respond to eliminate any inequities.


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Features-Equity Theory:

Employees are motivated when perceived outputs(i.e., pay) are equal toperceived inputs (e.g., effort, work, behaviors).

A disequilibrium in the output-to-input balance causes discomfort. If the employees perceive that others are paid more for the same effort, they will

react negatively to correct the output-to-input balance.

Agency Theory

The Agency Theory says that the principal must choose a contracting scheme that

helps align the interest of the agent with the principals own interest.

A theory that states that both sides of the exchange will seek the most favorableexchange possible and will act opportunistically if given a chance.

Executive/Employee-The Agents Shareholders-Principals Remuneration payable-Agency cost


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Factors

Factors can be categorized by :

1 External Factors

2 Internal Factors

External Factors

Labour Market going rate productivity Cost of Living

Labour Union

Internal Factors

Business Strategy Job Evaluation and Performance Appraisal The Employee Skill Based Pay Pay Reviews Pay Secrecy Comparable worth International Pay


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References

1. S Koplan and A.A. Atkinson; Advanced management Accounting 3rd edition Prentice

Hall New Jersey.

2. www.mercer.com.

3. CIMA

4. Christine A. Mallin, Corporate governance; Oxford University

5. Ulrich Streger. Et. Al 2004, Mastering corporate governance

6. Thomas A. Lee, 2004,Financial reporting and corporate governance

7. The Mcgrawlfill Executive, corporate governance, MBA series, 2003
http://www.mercer.com/http://www.mercer.com/http://www.mercer.com/

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Assignement Executive Remuneration