Executive TO EXECUTIVE COMPENSATION 2.1 Hiring The Best

Executive Compensation is a broad term
for the financial compensation awarded to a firm’s executives. Executive
Compensation packages are designed by a company’s Board of Directors, typically
by the Compensation Committee consisting of independent directors, with the
purpose of incentivizing the executive team, who have a significant impact on
company strategy, decision-making, and value creation (Pay for Performance) as
well as enhancing Executive Retention. Corporate executives have been receiving
immense compensation packages specifically in the form of stock options. The
purpose of the incentives is to align the goals of executives and stakeholders.
Although theory encourages desirable behaviour, many a time executives take
advantage of their governing position and engage in fraudulent activity to
increase personal wealth at the expense of the corporations’ shareholders.


Organizations approach decisions about
executive compensation in their own ways, and the way an organization does so
depends on its circumstances, what it can afford, and the values and beliefs
that drive its decisions about executive pay. Trustees and CEOs make decisions
they think are best for their organizations.

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2.1 Hiring The Best

The intentions begin with the board’s decision to hire
exceptionally talented, highly experienced executives and continue with the board’s
willingness to pay the salary required to hire and retain them. External
recruiting tends to drive pay up. When organizations recruit seasoned
executives from other, similarly sized organizations, they generally need to pay
well above average, more than they would need to pay to promote an internal


2.2 Retention Factor

The intent to pay competitively drives up salary even
for internally promoted executives and incumbents, however. Organizations whose
policy is to pay at median increase pay faster than the rate of inflation for
any executive paid less than median, and organizations whose policy is to pay
at the 75th percentile continuously increase executives’ pay to stay ahead of
the pack.

2.3 Performance Factor

The intent to pay above average in expectation of
above-average performance drives up pay for all executives, whether or not they
.Standard salary administration practices call for bringing salaries up to the
intended level within a few years, as long as the incumbent performs reasonably
well. Furthermore, incentive plans tend to reward institutional performance
more than individual performance, so even average performers end up being paid
above average.


3.1 Pay Packages

Executive pay packages differ substantially from
typical salaried or hourly employee compensation because unlike typical
employee pay, the vast majority of an executive’s pay is contingent
compensation and structured only to reward the executive for actual, positive
company performance and growth in shareholder value. To this end, executive
compensation packages typically utilize six distinct compensation components
includes base Salary, Short-Term Incentive, Long-Term Incentive, Employee Benefits,
Perquisites and Severance/Change-in-Control Payments. A company’s Compensation
Committee will structure their executive’s pay packages utilizing a combination
of the above components to help achieve the company’s Pay for Performance
and/or Retention objectives.

3.2 Vesting

A core attribute of most Equity
Compensation is the concept of vesting, which conditions the full ownership of
the equity awards on the employee’s compliance with certain covenants. The
vesting terms reinforce the incentive objective of equity awards by promoting
retention while providing the employee with a disincentive to engage in certain
detrimental behaviors during a set time period. These covenants typically come
in two forms. The first form requires an employee to retain all or a portion of
awarded shares until the employee reaches prescribed levels of stock ownership
(ownership guidelines), reinforcing the link to shareholders. The second
covenant requires a forfeiture of the shares if the employee elects to engage
in certain detrimental behaviors during a specified period of time. (Perel,
2003).  The most common of these are the conditions
on restricted stock, which require employees to remain employed with the
company for a certain period of time after the shares are awarded, but before
the shares vest and provide full ownership. If an employee voluntarily leaves
the company during the restriction period to work elsewhere, typically, the
employee forfeits the opportunity to obtain full ownership of the shares. The
result is different for an employee who retires from a company and continues to
honor the covenants during the vesting period. In retirement, the company may prorate
the vesting of unvested shares based on the amount of time since the award was
granted or allow all outstanding restricted stock to continue to vest in
retirement, giving the retiring employee greater ownership after the restricted
period. (Bebchuk & Fried, 2003).


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