Executive Pay: The Plan Video The What + When + Why of Executive Pay


Download 461 b.
Sana02.05.2017
Hajmi461 b.


Executive Pay: The Plan

  • Video

  • The What + When + Why of Executive Pay

  • Components of Executive Pay

  • The Take Home Message


The term Executive applies to: (IRS Guidelines)

  • Key Employees

    • One of 10 employees owning the largest % of the firm
    • Owns  5% of the firm
    • Earns more than $150K/year + owns  1% of firm
    • Officers whose pay  $45K/year are excluded
  • Highly Paid Employees

    • Owns  5% of the firm
    • Earns  $75K/year
    • Earns  $50K/year & salary in top 20% of all employees


Do they deserve it?”

  • Social/Ethical: “do they deserve it?”

    • Annual pay packages reach 8, 9, 10 digit figures
    • McCaw (Cellular Comm., 1989): $54 million, while his company was losing money…
    • 1990: CEOs’ pay increased 17.4% = 3 times inflation rate or 3 times middle managers’ pay
    • 1995: CEOs/Non-execs = 7/1
    • $ of CEOs / $ employees: 200/1 (US) vs. 17/1 (Japan)
    • Example: $50K  $10 million


Is Executive Pay Important? And if so, why?

  • Strategic Issues

    • CEOs set standards/examples for subordinates to follow (e.g., “domino effect” that starts with the CEO and ultimately impacts the entire workforce)
    • Pay systems impact CEOs’ thinking, behaviors, & decision-making
    • CEOs lead the whole organization
    • Pay = Communication tool (i.e., the what & how of pay systems send a strong msg. to entire organization)
  • Why do executives get other incentive in addition to salaries?



What are some of the components of Executive Pay?

  • Current or Annual Pay:

    • Salary (lame, old, bureaucratic, non-performance pay)
    • Bonuses (short-term performance base)
  • Deferred Pay:

    • Stocks (long-term performance pay)
    • Golden parachutes (“separation” pay)
  • Fringe Compensation

    • Benefits
    • Perquisites


Current or Annual Pay Systems

  • 1. Salary: Base pay (…just for showing up…)

  • Why do CEO jobs not fall within formal pay structures?

    • Work is highly complex& unpredictable; responsibilities are broad, high visibility
  • 2. Bonuses: Pay-for-Performance (for achieving specific goals)

  • How many types of bonuses are there? Examples?



Current or Annual Pay: Types of Bonuses

  • 1. Discretionary Bonus:

    • Awarded on elective basis, for making exceptionally smart/strategic moves
  • 2. Performance-contingent Bonus:

  • 3. Predetermined Allocation Bonus:

    • Based on formula and company profits
  • 4. Target Plan Bonus:

  •  = there are many types of bonuses and all of them are (or should be) performance-related



Current or Annual Pay



What are Deferred Pay Systems

  • Rendering payment at a future date

  • Main form of CEOs’ deferred pay:

  • What does deferred pay supposed to do?

    • Create a sense of ownership, aligning the interest of the CEO with those of the firm (shareholders)
    • Why?
    • B/c most CEOs are agents, not owners


Deferred Pay Systems

  • What is another advantage of using deferred pay?

    • Provide tax advantages to CEOs
  • How?

    • CEOs do not pay tax on payment until they receive it. Presumably, their income tax rates will be substantially lower during retirement, when their total income is at lower bracket
    • Options: 1) exercise & sell -> income tax @ 39% 2) exercise & hold -> capital gain @ 20%


Deferred Pay Systems

  • 1. Incentive Stock Options:

    • “options to buy” stocks (in the future) at discounted rates
  • 2. Non-statutory Stock Options:

    • CEOs pay tax on the nce b/w the discounted price & market price
  • 3. Restricted Stocks:

    • CEOs get the stock, but not ownership (limited time frame)
  • 4. Phantom Stocks:

    • Entrepreneurial firms, pre IPO




Fringe Benefits

  • Enhanced Protection Benefits:

    • Life insurance, health benefits, favorable tax treatments, retirement plans (tailored for the CEO)
  • Perquisites = Perks:

    • Company car, jet, financial & legal planning/advice,
    • Events: meals, clothing, travel, tickets to events,
  • Is it really necessary?



The Take Home?

  • 1 = Know that there are many types of deferred pay systems

  • 2 = Try to understand why & when companies use stocks as incentives

  • 3 = Know the advantages & disadvantages of stock options and other deferred payments

  • 4 = Know some of the perks executives get (& employees don’t)

  • 5 = Size, not performance, is the strongest (not best) predictor of CEOs’ pay




Do'stlaringiz bilan baham:


Ma'lumotlar bazasi mualliflik huquqi bilan himoyalangan ©fayllar.org 2017
ma'muriyatiga murojaat qiling