Executive compensation

1. Executive Compensation
Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)
Professor

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

21. INDIAN PRACTICES
Executive compensation in India built around
three important factors:
Job complexity
Employers ability to pay.
Executive human capital

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

23. EXECUTIVE COMPENSATION OF ORACLE
Basic salary
Conveyance
Special allowances
Gratuity
Provident fund
HRA (House Rent Allowances)
Traveling Allowances
Medical claim
Bank facility

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

26. THANK YOU