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Executive Compensation

Executive Compensation

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Published by Durga Prasad Dash

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Published by: Durga Prasad Dash on May 18, 2010
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09/29/2010

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1
Executive Compensation
Introduction 
For the higher management, salaries are influenced by thesize of a company, performance of the company, by thespecific industry, and in party by the contribution of theincumbent to the process of decision-making. The moreprofitable the organization is the firm, the better is thecompensation paid to the executives. The industries that are more highly constrained bygovernmental regulation (banks, life insurance, railroads,public utilities) pay relatively less than those that are morefree to carry on their business (private firms).
Executive remuneration has certain unique features,such as:
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(1) It cannot be compared to the wage and salaryschemes meant for other employees in organization.2
3
(2) Executives are denied the privilege of havingunionized strength.
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(3) Secrecy is maintained in respect of executiveremuneration5(4) Executive pay is not supposed to be based onindividual performance measure but rather on unit ororganizational performance.6(5) Executive remuneration is subject to statutoryceilings in some respects
Executive remuneration generally comprises fourelements: -
1(i) Salary and allowance2(ii) Benefits
3
(iii) Incentives (Bonus and Stock Option)
 
4(iv) Perquisites
Description of each element:Salary
is the first component of executive remuneration.Salary is supposed to be determined through evaluation andserves as the basis for other types of benefits.
Bonus
plays an important role in today's competitiveexecutive payment programmes.There are almost asmany
bonus
systems as there are companies using thisform of executive remuneration. If bonus constitutesshort-term benefit, stock options are long-term benefitsoffered to executives. Stock options are attractive toshareholders too. 
Perquisites
contribute a major source of income forexecutives.Bonuses related to performance are also aid to executives ata certain percentage of the profits. The bonuses mayaverage from 30 per cent- to 50 per cent of the basic salary.
These bonuses operate most effectively in increasingmotivation when the following conditions exist:
 The amount paid is closely related to the level of individual performance;
 The amount paid after taxes represent a clearlynoticeable rise above the base salary level.
 The amount paid is closely related to the level of company performance;
 The amount paid is tied into the base salary in such away that the combined earnings are equitable both inrelation to internal and external standards;
 The amount paid is reduced drastically whenever anindividual experiences a real and continuing decreasein performance effectiveness;
 The amount paid is based on an easily understandablesystem of allocation, and the individual is provided withcomplete information on the relationship betweenbonus and performance.

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