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Executive compensation


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Executive Compensation

Published in: Business, Economy & Finance

Executive compensation

  1. 1. Executive CompensationDr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt) Professor
  2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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 .
  13. 13. 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 companys 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. INDIAN PRACTICESExecutive compensation in India built aroundthree important factors:Job complexityEmployers ability to pay.Executive human capital
  21. 21. 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
  22. 22. EXECUTIVE COMPENSATION OF ORACLEBasic salaryConveyanceSpecial allowancesGratuityProvident fundHRA (House Rent Allowances)Traveling AllowancesMedical claimBank facility
  23. 23. IBM EXECUTIVE COMPENSATION PACKAGETwo main components of executive compensationpackage Base salary and Cash Incentive/Bonus Long-term Incentive CompensationThree 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
  24. 24. 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
  25. 25. THANK YOU