Executive Compensation Plans

The challenge of coming up with the best executive compensation today stems from two factors. The first one has to do with the difficulties involved in scouting for capable senior executives, who can be able to motivate people and communicate the company’s vision clearly to other employees. The second factor has to do with the fact that most investors are closely concerned with the company’s performance and thus give a high priority to retention of highly qualified executives once they have brought them into their fold. Any other company desiring to hire such executives will have to face up to the challenge of coming up with an executive plan with terms that surpass the one the employee enjoys in the current company. However, it is a generally observed trend in today’s business world that most executives have a preference for opportunities that are challenging and unique more than the compensation package (Schleifer, 2006). Therefore companies with unique ideas and better products are more attractive to executives at all levels.

The importance of compensation should however not be overlooked in today’s job market. Flexibility is a major issue when drawing up a compensation plan at an executive level. One way of achieving this is by making a comparison with what is being offered by the competition. Extra incentives also play a significant role in attracting highly effective executives to a company. There are several alternative compensations that have become a standard in negotiations with senior-level executives.

Equity has emerged as one of the most common alternative compensation many executives ask for instead of cash. It should be noted that the stock options offered to senior-level employees largely depends on the industry and value of the stock. It is still advisable to compare the company’s stock option offers to what other companies in the same league are offering. Other considerations include flexible work schedules, performance incentives, and other allowances like a company car, signing bonuses, life insurance, access to company-owned vacation premises and health club memberships among others (Allbusiness.com, 2010).

An analysis of what executives earn on average today would require an examination of a proxy statement which contains details on the conditions under which managers are paid. An analysis of any proxy statement must examine several factors. The first one is base pay which consists of the base salary for senior-level management. These are executives like the CEOs, Chief Financial Officers, directors and other divisional heads. Proxy statements on executive compensations in most industries can be accessed at places like the Standard & Poor’s 500 Index an at other company profiles in the same industry. Sites like HYPERLINK “http://www.sec.gov” www.sec.gov also provide proxy statements for the past years.

Besides base salaries, stock options which are used to motivate or inspire management can provide an insight into the amount of compensation earned by most executives. However, this form of payment depends on the way the company is performing in the stock market. Curtis (2010) gives an example of two Chief Financial Officers working for two companies; Tome at HD and Hull at Lowe. In the example Tome hardly gets any incentive at HD whose stock opened at $42.17 in 2005 and closed at $40 yet Hull does better at Lowe which opened at above $58 and ended the year at $63 (Curtis, 2010). There are also other perks like the $100,000 raked in by Wal-Mart’s Lee Scott in 2005 for personal expenses (Curtis, 2010).

The proxy statement of a company will also involve length of service contracts and golden parachutes which are severance packages worth millions of dollars. An example is Michael Ovitz who was once a president of Walt Disney Company before he left with a severance pay of $140 million, roughly 10% of Walt Disney’s annual income (Curtis, 2010). With such huge payments, investors need to be aware of how company money is being spent and examine if the management is working for the company’s benefit or their own.

References

Allbusiness.com. (2010). Executive Compensation and Benefits. Retrieved December 5, 2010,from http://www.allbusiness.com/human-resources/compensation/1386-1.html

Curtis, G. (2010). Executive Compensation: How Much Is Too Much? Retrieved December 5,2010, from http://www.investopedia.com/articles/fundamental-analysis/08/executivecompensation.asp

Schleifer, J. (November 2, 2006). 10 Steps to an Executive Compensation Plan That Works.Retrieved December 5, 2010, fromhttp://hrdailyadvisor.blr.com/archive/2006/11/02/Executive_compensation_pay_benefitsperks.aspx.