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Executive Compensation
Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)
                     Professor
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
Executive compensation
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
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
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 competence , length of service , contributions, and
 loyalty to the company
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 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
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
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
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
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
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
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
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
THANK YOU

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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