Executive Compensation
Introduction For the higher management, salaries are influenced by the size of a company, performance of the company, by the specific industry, and in party by the contribution of the incumbent to the process of decision-making. The more profitable the organization is the firm, the better is the compensation paid to the executives. The industries that are more highly constrained by governmental regulation (banks, life insurance, railroads, public utilities) pay relatively less than those that are more free to carry on their business (private firms). Executive remuneration has certain unique features, such as:

(1) It cannot be compared to the wage and salary schemes meant for other employees in organization. (2) Executives are denied the privilege of having unionized strength. (3) Secrecy is maintained in respect of executive remuneration



5 (4) Executive pay is not supposed to be based on individual performance measure but rather on unit or organizational performance. 6 (5) Executive remuneration is subject to statutory ceilings in some respects Executive remuneration generally comprises elements: 1 (i) Salary and allowance 2 (ii) Benefits 3 (iii) Incentives (Bonus and Stock Option) four

4 (iv) Perquisites Description of each element: Salary is the first component of executive remuneration. Salary is supposed to be determined through evaluation and serves as the basis for other types of benefits. Bonus plays an important role in today's competitive executive payment programmes.There are almost as many bonus systems as there are companies using this form of executive remuneration. If bonus constitutes short-term benefit, stock options are long-term benefits offered to executives. Stock options are attractive to shareholders too. Perquisites contribute a major source of income for executives. Bonuses related to performance are also aid to executives at a certain percentage of the profits. The bonuses may average from 30 per cent- to 50 per cent of the basic salary. These bonuses operate most effectively in increasing motivation when the following conditions exist: • The amount paid is closely related to the level of individual performance; • The amount paid after taxes represent a clearly noticeable 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 a way that the combined earnings are equitable both in relation to internal and external standards; • The amount paid is reduced drastically whenever an individual experiences a real and continuing decrease in performance effectiveness; • The amount paid is based on an easily understandable system of allocation, and the individual is provided with complete information on the relationship between bonus and performance.

Moreover, executives are compensated for the various expenses incurred by them, for taxation takes away a major portion of their salary. Such payments are in the form of – (a) Medical care; (b) Counsel and accountants to assist in legal, tax and financial problems; (c) Facilities for entertaining customers and for dining out; (d) Company recreational area (swimming pool and gymnasium); (e) The cost of the education and training of executives, scholarships for their children, and allowances for business magazines and books; and (f) Free well-furnished accommodation, conveyance and servants. All these go under the head of perquisites.

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