Executive Compensation

Presented by: ASHISH

Introduction

Executive Compensation is the compensation paid to executives of business corporations.

Managers in short supply.

Organizations competing with each other to attract, retain and motivate managers for their strategic requirement

Elements of Executive Compensation

Higher managerial post are - presidents, vise-presidents, directors, general manager, etc

Managerial remuneration of such positions comprises of 4 elements:

1) Salary 2) Bonus 3) Long Term Incentive 4) Perquisites

SALARY

Salary determined through job evaluation and serves as basis for other benefits

Job evaluation plays only a part for managerial compensation

Manager is paid for his capabilities and for job he performs

Norms of wages and salary fixation are generally not observed while fixing salary of manager

SALARY Salary of 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

To avoid such deductions managers are offered incentives and attractive perks

BONUS or PROFIT SHARING

This type of incentive is annual and based on company performance or profit sharing

There are many bonus system as there are companies using this form of managerial remuneration

In some system annual bonus tied to share returns on investments

Other bonus plans are based on subjective judgments of 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 OPTIONS

If bonus are short term benefits , stock options are long term benefits offered to managers

Companies allow managers to purchase their shares at fixed price

Stock options valuable as long as price of share keeps increasing

PerquisitesSpecial benefits for executives usually non-cash items: - Companies provide health club memberships with

personal trainers- Discounted company products- Automobiles - Country club memberships - First class airfare or use of the corporate jet- Executive health plans- Personal car service- Personal computers and cell phones- Entertainment- Financial planning assistance

BENEFITS FOR EXECUTIVES Retirement benefits Health insurance Vacations Health plans with no payments by

executive and no limitations are popular among small and middle sized business

Trust may be designed to help executives to deal with estate issues

Deferred compensation offers another possible means of helping executives to overcome tax liabilities

Unique Feature of Managerial Remuneration

Managerial remuneration cannot be compared to wage & salary schemes meant for non-managerial employees

Managers 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.

No two managers in private sectors, in same grade receive same pay

Compensation and reward depends upon such factors as competence , length of service , contributions, and loyalty to the company

Unique feature of managerial remunerationManagerial pay is based organizational

performance Manager’s own performance directly reflected in

corporate performance Managers compensation is subjected to statutory

sealingMonthly salary may vary from Rs 40,000 to

100000 subject to limit fixed per annumExorbitant amounts are paid to executives in

some organizations.annual salary of CEOs’ range from Rs 50 lakhs to

few crore

Why Managers Should Be Paid MoreManagers can have considerable worth , hence

command hefty premiums Manager’s success is the means by which

organizational goal is achievedFinancial reward is a symbol of manager’s role, its

power , its dignity and its freedom Organisation pay heavily to attract and retain talented

and competent manager Manager may be motivated sometimes for better

performance through money Lifestyle of manager needs considerable amount of

money For manager financial reward is symbol of social

prestige and position High compensation is made to manager to eliminate or

minimise corruption .

Mythologies cum Strategies for Managerial Compensation

Salary/basic salary/consolidated salary continues to remain a major component of compensation

Performance determines pay and future revisions for individual managers

Grade wise flat allowances are consolidated , except where tax exemption benefits are available .

Allowances linked to basic salary as a percentage or by slabs and those increase at discretion

Reimbursement of expenses incurred for company's work are paid to executives

Expenses is not considered as part of compensationAnnual payments, such as, bonus, commission and

leave travel concession may be paid to executives Some tax relief is applied for the later

BenefitsBenefits generally comprises of : - Furnished or unfurnished company owned or

leased accommodation- Use of company owned or leased vehicle - Medical coverage - Provident fund - Pension- Superannuation gratuity- Post retirement medical assistance - Easy loan scheme for utility items , vehicle or

furniture - Renting employee owned housing- Club entrance fee reimbursement

BenefitsMinor benefits could be: - Provision of security - Drivers- Gardening assistant- Sales of products or assets at the concessional

rate- Relocation and transfer expenses including

admission fees for children - Credit card fees, - Phones

Benefits

Most of the companies are now moving away from traditional compensation package: basics, DA, HRA etc. to cost to company basis

Companies are talking in terms of gross salary and asking managers to do their own tax planning

BenefitsSome companies give executives freedom to

design package keeping in view of total cost Flexibility is given to executives to choose their

lifestyles within certain parameters Performance linked payments , bonus, generous

increments and merit pay are given Trend is to move away from seniority and

hierarchy system and attach value to performers Concept of star performers are gaining ground Lifestyle perks (good accommodation, club

membership, liberal furnishing, holiday abroad with family ) continues to be the practice

New Way of Pay Organizations are increasingly linking their

variable pay plans to individuals, teams and organizational performance

Individual/team performance based profit sharing, productivity based individual/team profit sharing, productivity based incentives, stock options and ownership and other customized schemes

Organizations with strategically aligned variable compensation have experienced a positive impact on individual as well as organizational performance

Companies have leveraged the variable pay to aggressively position their top performer at the top end of the market

New Way of Pay

Companies are experimenting with “cost to company "concept , with focus on high compensation structure

New & emerging sectors like retail , telecom, aviation & IT/ITES with younger employees adopt ing simplified pay structures

With flexible pay structure employee can choose from defined items of pay and optimize his own tax planning

This has gained acceptance and providing flexibility to employee and tax compliance to organization

INDIAN PRACTICES

Executive compensation in India built around three important factors:

Job complexity

Employers ability to pay.

Executive human capital

PRIVATE SECTOR vs. PUBLIC SECTORThe salary of top executives of public sector

are miserable compared to private sector:

S B I chief is paid 10 % of HDFC Bank Managing Director

BHEL’S chief is getting about 10 to 12 lakhs perannum as against Asea Brown Boveri’s (ABB) MD getting nearly 40 to 50 lakhs

EXECUTIVE COMPENSATION OF ORACLE

Basic salary Conveyance Special allowances Gratuity Provident fund HRA (House Rent Allowances) Traveling Allowances Medical claim Bank facility

IBM EXECUTIVE COMPENSATION PACKAGE Two main components of executive compensation package Base salary and Cash Incentive/BonusLong-term Incentive CompensationThree main elements drive compensation package Competitive marketplaceComplexity of leading IBM &Gerstner performance - Pay for performance not loyalty or tenure- Differentiate pay based on the marketplace - Differentiate increases based on individual performance pay

in marketplace- Differentiate bonuses based on business performance and

individual contributions- Differentiate stock-option awards based on critical skills of

individual and risk of loss to competition

Executive Compensation at Disney

Base SalaryPerformance based annual bonusNet Income, Return on Equity (ROE), Return

on Assets (ROA), Earning per Share (EPS) Stock or cash awards Stock options

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