Executive

Compensation

It Starts with the CEO

Chief executive officers (CEOs) get paid lots of money for

being the top employees in the company. Why do they
get paid so much? Like athletes and actors, CEOs provide
a level of talent that is required to produce the desired
product - in this case, a strongly
performing company. The skills and Chief Executive
responsibilities that come with the job Officer
of CEO are extreme and the number of Plans and directs
people who can fill these roles is all aspects of an
limited. That is why the market has organization's
determined that people with these policies,
skills are worth a lot of money to their objectives, and
companies. initiatives. May
require a
Only about 20 percent of a CEO's pay bachelor's degree
is base salary; the rest is made up of with at least 15
incentives based on the company's years of
performance. The rationale is that if experience in the
the company is performing well and field. Relies on
the shareholders are making money, experience and
then the CEO should share in that judgment to plan
success. and accomplish
CEO pay sets a ceiling for the goals. May
company preside over
board of
directors.

Source:
Salary.com.
A CEO's compensation package affects everyone within a
company. Often it can be considered the yardstick by
which all other employee benefits and bonuses are
measured and negotiated. Moreover, the CEO's
compensation may be an indicator of how well the
company is performing. This performance, in turn, could
translate into a more generous compensation package for
individual employees who are savvy negotiators.

When companies establish pay structures, they define the

compensation for the highest- and lowest-paying jobs
before filling in the compensation for the jobs that fall in
between. In the traditional internal equity method of
establishing a pay structure, the CEO's compensation sets
a ceiling for the company, and each level below is
compensated at a comparably lower level. If you know
how well the CEO is compensated, you can get a sense for
how generous the company is likely to be toward other
employees as well.

CEOs make most of their money through incentives

As a general rule, base salary accounts for just 20 percent
of a CEO's pay. The other 80 percent comes from
performance-based pay.

 Base pay for the core role and responsibilities of the

day-to-day running of the organization. This amount
is very often less than $1 million because the IRS has
imposed tax restrictions on "excessive"
compensation.
 Annual bonuses for meeting annual performance
objectives.
 Long-term incentive payments for meeting
performance objectives to be achieved for a two- to
 five-year period. These awards are sometimes
described as performance shares, performance units,
or long-term cash incentives.
 Restricted stock awards as an incentive to assure
the executives are strongly aligned with the interests
of shareholders. Because restricted stock awards
have an actual cash value when they are granted, the
proxy table shows these in dollars, not in shares.
 Stock options and stock appreciation rights
(SARs) for increasing share price and increasing the
shareholders' returns. Options have very favorable
accounting treatment for the company, which is why
they are so common. Option grants are always shown
as a number of shares underlying the option. In a
subsequent table in the proxy is an estimation of the
present value of each option grant assuming a 5
percent and a 10 percent increase per year in the
stock price, or using a mathematical model (e.g.,
Black-Scholes) to predict the value of the option.

Total compensation for CEOs goes beyond cash and

stock
Although typically excluded from pay calculations,
executive benefits and perquisites are disclosed in the
summary compensation table and the retirement plan
section of the proxy. They include the following.

 Supplemental executive retirement plans

(SERPs), which may keep the executive whole (that
is, make up the difference) or better from a tax
regulation that prevents the executive from receiving
a pension benefit that exceeds ERISA limits
($135,000 per year or less based on the pension
 plan). For a CEO making $2 million a year, a
$135,000 benefit may be inadequate for maintaining
a comparable lifestyle.
 Executive insurance plans that provide a source of
retirement income and a richer death benefit to the
executive's family. These plans are used to guarantee
retirement benefits from bankruptcy. Unlike standard
retirement plans that receive protection from
bankruptcy by the federal government, SERP benefits
can be lost in the event of bankruptcy.
 Miscellaneous executive perquisites and other
compensation for various programs or negotiated
deals that don't properly fit into the above categories,
including perks such as country club dues and
financial planning. These are often small numbers
that disclose imputed income amounts for those
additional special benefits, but can also include some
very large amounts for items such as loan
forgiveness, special insurance programs, relocation
expenses, etc.

At most companies, most of a CEO's pay comes from

stock or stock option gains. At investment banks, most of
it comes from annual bonuses. Companies that pay the
lion's share of compensation in the form of stock options
may pay little or no retirement. You can tell by looking for
a retirement table in the proxy statement. If the words
"SERP," "ERISA-excess plan" or "Top Hat plan" appear in
the proxy, then retirement is an important part of the
executive's remuneration. If not, then the executives are
expected to retire on their ability to make and save
money on their cash and equity earnings.
Pay philosophies often tie pay to company
performance
The company's Compensation Committee Report on
Executive Compensation contains specifics about your
company's compensation philosophy, which affects all
employees. It covers the following.

 How well your company pays relative to its peers.

 Who the company sees as its peers.
 How the company's stock has performed relative to
its peers and to the stock market as a whole.
 How the company prefers to reward its executives
through its total pay practices, i.e., what proportion
of an executive's total pay comes from salary, bonus,
stock options, and long-term cash plans.
 How the company measures its performance - net
income (NI), earnings per share (EPS), return on
equity (ROE), return on assets (ROA), revenue
growth, etc.
 What criteria are used for determining the size of
bonus payments: corporate results, divisional results,
individual goals; or whether payments are
discretionary.

The degree to which your company is a success may be

answered in the annual and long-term incentive payout
columns in the summary compensation table. If you see
large bonus payments, then it is likely that your company
is successful. Stock option grants and gains are also
important to look at. This information can be gleaned
from three tables in the proxy statement: the stock option
grants table; the aggregate option exercises in the last
fiscal year and fiscal year-end option value table; and the
total return to shareholders table. If there are large gains
from stock option exercises and substantial amounts in
both vested and unvested stock options, it may be an
indicator that the company is well managed in the opinion
of shareholders. Good five-year shareholder returns in the
total return to shareholders table would certainly validate
this opinion.

Cash compensation is the norm in nonprofits

Nonprofit organizations typically offer compensation
weighted heavily toward base salary. In response to
competitive concerns, bonuses are becoming more