Within organizations today, one of the most delicate balancing acts that boards of directors and compensation committees must perform involves setting executive compensation packages. Over the past decade, seemingly lavish executive compensation plans have faced significant scrutiny from the public, media outlets, shareholders, regulators, and politicians.
What is executive compensation?
Executive compensation includes both the financial payments and non-monetary benefits provided to officers, members of the C-suite, and other executives in exchange for their work on behalf of the organization.
A recent study from the Rock Center for Corporate Governance at Stanford Universityfound that 86% of Americans believe the CEOs of large, public U.S. companies are overpaid. Yet what some critics don’t understand is that being competitive with executive compensation is crucial for attracting the best and brightest talent. The advantages of executive compensation packages are that they play a critical role in attracting, motivating, and retaining highly qualified leaders who help the company achieve its goals.
Executive compensation packages: examples
Organizations have a wide range of arrangements. However, according to the Center on Executive Compensation, executive compensation package examples typically include six components:
Federal law currently limits the amount of compensation that companies can deduct for tax purposes to $1 million. This includes base salary as well as performance-based incentives paid to the CEO, CFO, and the three other highest paid executives. However, there are exceptions for companies with binding contracts in effect before November 2, 2017.
Performance-based annual incentives (bonuses)
These compensate executives for achieving the company’s short-term business strategy. Examples include increasing revenue or market share, improving profit margins, implementing a new corporate strategy, developing new products, expanding into new markets, and completing critical projects.
Performance-based long-term incentives
Long-term incentives are often the largest component of executive pay. They are usually provided in the form of stock, stock options, restricted stock, and performance-vested stock or stock options. Long-term incentives are designed to reward executives for maximizing shareholder value.
Benefit packages typically include many of the same programs available to salaried employees, including vacation and holiday pay, severance, life insurance, and medical insurance. Executives are often eligible to participate in special retirement plans.
Perks are designed to recognize the value the executive brings to the company and the demands on their time. They may receive a driver to and from work, convenient parking, home communications systems, financial planning, security personnel, and the use of company aircraft for business and personal travel.
Often, when an executive is recruited from outside the company, the organization will offer contingent pay. This may provide severance payment in the case of involuntary termination, or “golden parachutes” if the executive loses their job due to a sale or merger.
Executive Compensation Package Structure
According to the Stanford study, the median total compensation among S&P 500 companies is $12 million. Yet because these programs are often structured to reward performance, the executives only receive many aspects of their pay packages if the executive and the company perform well. Executives only benefit if shareholders benefit.
No matter your company’s size or industry, executive compensation is not a “one size fits all” solution. Each organization has unique challenges and goals. Its compensation packages provide an opportunity to differentiate itself in order to attract and retain talent that can increase shareholder value.