Executive Compensation
By
Prof. Prasad Kulkarni
MBA@GIT, Belgaum.
Who is executive?
An
executive typically is
someone in the top two levels of
an organization, such as Chief
Executive Officer (CEO),
President, or Senior VicePresident.
What do you mean by executive
compensation?
Objectives of executive
compensation
Aligning the managerial interest
with organizational interest.
Bringing in the best executives.
Enhancing employee motivation,
involvement and commitment.
Promoting managerial efficiency.
Ensuring complete financial
security.
Encouraging progressive
learning.
FEATURES OF EXECUTIVE
COMPENSATION
Executive
compensation cannot be compared to the
wage and salary schemes meant for in other
employees in organizations.
Executives are denied the privilege of having
unionized strength.
Secrecy is maintained in respect of executive
compensation.
Executive pay is not supposed to be based individual
performance rather on organizational performance
PRIVATE SECTOR vs. PUBLIC
SECTOR
The
salary of top executives of
public sector are miserable
compared to private sector .
EXAMPLES:
S B I of India chief is paid 10%of
HDFC Bank Managing Director
BHELS chief is getting about 10 to
12 lakhs per annum as against ABB
S MD getting nearly 40 to 50 lakhs
Why managers should be paid more?
Managers
have intensive worth and hence command
hefty premiums .
The
managers drive himself to success in his or her
role is creating the mean by which certain
organizational goal is achieved . The financial
reward is a symbol of managers role itself , its power
, its dignity and its freedom .
The
class of people called manager are always in
short supply. One must pay heavenly if one has to
attract and retain talented and competent individual .
Having
succeeded in retaining them , the manager
must be motivated for better performance and it is
the money which motivates employees and
managers are no exceptions .
The
lifestyle that fits his status and job, requires
considerable amount of money. To a worker , the
wage is a mean of living but for a manager financial
reward is a symbol of social prestige and position .
It
is to eliminate or at least minimize corruption .
The best of satisfying greed is to pay well .scams
and scandals cost the organization irreparably .
Methodologies-cum Strategies for
managerial compensation
Salary/basic
salary/consolidated salary continues
to remain a major component , though salary
scales are often discarded these days or used only
as guides. It is the performance contribution that
determines the pay and future revisions, which
vary widely from individual manager to individual
manager.
Grade
wise flats allowances are being consolidated
, except where tax exemption benefits are
available . Allowances may be linked to the salary
as a percentage or by slabs , but preferences is
for flats amounts , which do not increase
automatically and increase at the discretion and
therefore controllable
Reimbursement
of expenses incurred
on company's work has been limited ,
and that in line to conform to the tax
laws . Being actual in most cases ,
they are not considered as part of
compensation , unless it is provided
towards personal benefits .
Annual
payments
bonus
or
commission
and leave travel are
common features. Some tax relief
applied for the latter
Benefits
generally comprises of furnished or
unfurnished
company
owned
or
leased
accommodation , use of company owned or leased
vehicle , medical coverage , covering PF, pension,
or superannuation and gratuity , post retiral
medical assistance , easy loan scheme on vehicle ,
furniture or utility items , etc, renting employees
owned housing , club
entrance fee
reimbursement , etc . Minor benefits could be
provision of security , drivers , gardening,
assistant, sales of products or assets at the
concessional rate , the relocation and transfer
expenses , including admission etc, fees for
children , credit card fees, phones etc.
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 .
MNCs
try to keep tax low and maximize take
home amount
Some
companies also allow their managers to
design package keeping in view the total cost.
Performance linked pay is increasing.
Provision of life-style perks.
Phoenix Plan Compensable
factors:
1) Job related experience
2) Training time required
3) Frequency of review of work
4) Utilization of independent
choice
5) Frequency of reference to
guidelines
6) Frequency of work transferred
through supervisor
7) Analytical complexity
8) Time spent in processing information
9) supervisors reporting to position level
10) Travel outside work location
11) Salary grade to which this position
reports
12) Salary grade of positioning supervised
13) Management responsibility
14) Revenue size
15) Asset size
16) Employment size
17) Budget size
18) Payroll size
19) Time spent in planning
20) Contact with suppliers / customers
21) Impact on departmental budget
22) Directing of others
23) Training of staff / physical stress
experienced
24) Times spent working under deadlines
25) Time spent in hazardous conditions.
Factors of executive
compensation in India
job
complexity
employers ability to pay and
executive human capital.
Model of executive
compensation
Determinants of executive
compensation
External
advisers: auditors and
consultants.
Stock exchange analyst
Legislation: Should Not exceed
11% of total profits.
Media
Shareholders expectations.
Compensation committee.
Trade
unions
Benchmarking
Board of directors.
Financial success.
Elements of executive
compensation
Perquisites
Supplemental
Benefits
Long-Term incentives
Annual bonuses
Executive salaries
Stock grants
Perquisites ( Perks)
Spouse
Company
provided car
Accessible, No
cost parking.
Kidnapping and
ransom
protection.
Financial and
legal counseling
Professional
meeting and
travel
Use of company
plane and yacht
Home
entertainment
allowance.
Special living
accommodation
away from house
Club
membership
Contd..
Special
dining
previlages
Special tickets to
entertainment
events.
Special relocation
expenses.
Use of company
credit cards.
Medical expenses
reimbursement ( all0
Children
education
expenses.
No and low
interest loans
Extra vacation
Estate planning
Physical exercise
facility
Matched donation
to university
Contd..
Merchandise
discounts
Service awards
Motor insurance
Fuel for private
use.
Long term incentives
Stock
appreciation rights(SAR):
Increase in share price of company
results in payment to executive.
Phantom stock: without the ownership
of stock executive receive appreciation
value in stock plus bonus.
ESOP
ESOS ( employee stock option scheme)
Sweat equity : value addition, shares @
discount and other than cash.
Methods
Peer
grouping
Benchmarking.
Common Executive Compensation Issues
Case studies and
examples
Reliance
ING vysya
Infosys
