Executive

Compensation
 Introduction
● Executive Compensation is the
compensation paid to executives of
business corporations.
● 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
 Perquisit
es
● 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
 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

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

 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 .
 Mythologies cum
Strategies for
Managerial
remain a major Compensation
● Salary/basic salary/consolidated salary continues to
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
 Benefi
ts
● 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
 Benefi
ts
● 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.
 Benefi
●
ts
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
 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 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
 EXECUTIVE
COMPENSATION OF
ORACLE
● Basic salary
● Conveyance
● Special allowances
● Gratuity
● Provident fund
● HRA (House Rent
Allowances)
● Traveling Allowances
● Medical claim
● Bank facility
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
Employee Stock Ownership Plan (ESOP)

• An ESOP is a defined contribution employee

benefit plan that allows employees to become
owners of stock in the company they work for.
• It is an equity based deferred compensation
plan.
• ESOP is required by law to invest primarily in
the securities of the sponsoring employer.
• ESOP is unique among qualified employee
benefit plans in its ability to borrow money.
 Advantages

• Capital Appreciation
• Incentive Based Retirement
• Tax Advantages
• Company reduces it's tax liability
 Disadvantages

• Dilution
• Fiduciary Liability
• Liquidity
• Stock Performance
THANK
YOU