A Business Encyclopedia

Executive Compensation

Definition: The Executive Compensation refers to the financial payment and other non-monetary rewards given to the top executives in exchange for their services to the organization.

In other words, the executive compensation is the remuneration package given to the higher management of the firm for their work on the behalf of the organization. The kind of employees that are entitled to the executive compensation are corporate presidents, vice-presidents, chief executive officers, chief financial officers and other senior executives.

Often the key elements in the executive pay are:

  • Base Salary
  • Executive Bonuses
  • Long-term incentives, such as stock options
  • Retirement packages
  • Deferred compensation
  • Executive perks
  • Other benefits and perquisites.

The following are the main objectives of executive compensation policy:

  • The manager should be incentivized so that they adopt those strategies, investments, and actions that result in the increase in the shareholder value. Thus, an executive aligns his interest with the interest of the shareholder.
  • The remuneration package should be designed such a way that it motivates the executives to work harder, take risks and take unpleasant decisions such as termination or retrenchment, aimed at increasing the shareholder’s wealth.
  • The executive compensation is often designed with the intent to retain the executives during the bad times caused due to the adverse market and industry factors.
  • The cost of the executive pay must be limited to the extent where the shareholder’s wealth does not get affected and, in fact, maximizes.

Generally, the executive compensation packages are designed by the board of directors, particularly the compensation committee, which is comprised of the independent directors. The purpose for which the committee is created is to pay incentives to the executive team who play a significant role in decision making and is responsible for the corporate strategy and the overall value creation of the company.

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