Professional Documents
Culture Documents
Key Employees
One of 10 employees owning the largest % of the firm Owns 5% of the firm Earns more than $150K/year + owns 1% of firm Officers whose pay $45K/year are excluded Owns 5% of the firm Earns $75K/year Earns $50K/year & salary in top 20% of all employees
Annual pay packages reach 8, 9, 10 digit figures McCaw (Cellular Comm., 1989): $54 million, while his company was losing money 1990: CEOs pay increased 17.4% = 3 times inflation rate or 3 times middle managers pay 1995: CEOs/Non-execs = 7/1 $ of CEOs / $ employees: 200/1 (US) vs. 17/1 (Japan) Example: $50K $10 million
Strategic Issues
CEOs set standards/examples for subordinates to follow (e.g., domino effect that starts with the CEO and ultimately impacts the entire workforce) Pay systems impact CEOs thinking, behaviors, & decision-making CEOs lead the whole organization Pay = Communication tool (i.e., the what & how of pay systems send a strong msg. to entire organization)
Salary (lame, old, bureaucratic, non-performance pay) Bonuses (short-term performance base) Stocks (long-term performance pay) Golden parachutes (separation pay) Benefits Perquisites
Deferred Pay:
Fringe Compensation
1. Salary: Base pay (just for showing up) Why do CEO jobs not fall within formal pay structures?
2. Bonuses: Pay-for-Performance (for achieving specific goals) How many types of bonuses are there? Examples?
1. Discretionary Bonus:
Awarded on elective basis, for making exceptionally smart/strategic moves For attaining certain performance goals Based on formula and company profits Ties bonus to firm performance
s s s
2. Performance-contingent Bonus:
= there are many types of bonuses and all of them are (or should be) performance-related
Slide Number 7 out of 14
Bonuses
$ = Variable Contingent
Profit/Gain Shar.
$ = Variable Contingent
Stocks = Long-term incentives Create a sense of ownership, aligning the interest of the CEO with those of the firm (shareholders) Why? B/c most CEOs are agents, not owners
Provide tax advantages to CEOs CEOs do not pay tax on payment until they receive it. Presumably, their income tax rates will be substantially lower during retirement, when their total income is at lower bracket Options: 1) exercise & sell -> income tax @ 39% 2) exercise & hold -> capital gain @ 20%
How?
options to buy stocks (in the future) at discounted rates CEOs pay tax on the nce b/w the discounted price & market price CEOs get the stock, but not ownership (limited time frame)
3. Restricted Stocks:
4. Phantom Stocks:
Entrepreneurial firms, pre IPO
Rates are far below market, pre-IPO, early stage Income is available only at the end of the designated period Pay & benefits after retirement
7. Golden Parachute:
Fringe Benefits
s
Life insurance, health benefits, favorable tax treatments, retirement plans (tailored for the CEO) Company car, jet, financial & legal planning/advice, Events: meals, clothing, travel, tickets to events,
Perquisites = Perks:
Is it really necessary?