2. 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
4. 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
5. 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
6. 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
7. 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
8. 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
9. Perquisites
Special 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
10. 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
11. 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
12. Unique feature of managerial remuneration
Managerial pay is based organizational performance
Manager’s own performance directly reflected in corporate
performance
Managers compensation is subjected to statutory sealing
Monthly salary may vary from Rs 40,000 to 100000 subject
to limit fixed per annum
Exorbitant amounts are paid to executives in some
organizations.
annual salary of CEOs’ range from Rs 50 lakhs to few crore
13. Why Managers Should Be Paid More
Managers can have considerable worth , hence command
hefty premiums
Manager’s success is the means by which organizational
goal is achieved
Financial 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 .
14. 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 compensation
Annual payments, such as, bonus, commission and leave
travel concession may be paid to executives
Some tax relief is applied for the later
15. Benefits
Benefits 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
16. Benefits
Minor 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
17. 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
18. Benefits
Some 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
19. 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
20. 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
22. PRIVATE SECTOR vs. PUBLIC SECTOR
The 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 per
annum as against Asea Brown Boveri’s (ABB) MD
getting nearly 40 to 50 lakhs
24. IBM EXECUTIVE COMPENSATION PACKAGE
Two main components of executive compensation
package
Base salary and Cash Incentive/Bonus
Long-term Incentive Compensation
Three main elements drive compensation package
Competitive marketplace
Complexity 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
25. Executive Compensation at Disney
Base Salary
Performance based annual bonus
Net Income, Return on Equity (ROE), Return on
Assets (ROA), Earning per Share (EPS)
Stock or cash awards
Stock options