HUMAN RESOURCE MANAGEMENT

PROJECT ON EXECUTIVE COMPENSATION

PREPARED BY: TANMOY NASKAR

SECTION: “C”
ROLL NO: P/MN/R/09/129.
INTRODUCTION ON EXECUTIVE COMPENSATION

Undisputed escalation in chief executive officer (CEO) compensation.

Second is the populist attack on wealth that followed the so-called
“excesses of the 1980s,” associated with the perception that high CEO
salaries are coupled to layoffs, plant closings, and corporate downsizing
Third is the bull market of the 1990s, creating windfalls for CEOs
whose pay is
increasingly tied to company stock-price performance.

The modern history of executive compensation research began in the

early 1980s and paralleled the emergence and general acceptance of
agency theory.
 EFFECTIVE EXECUTIVE COMPENSATION

Compensation can align the interests of a company’s CEO with those of its
shareholders.
Michael Dennis Graham, Thomas A. Roth and Dawn Dugan in their insightful
book on effective executive pay, a package they call the “Total Reward
Strategy.”
They explain how to use compensation to get great executive performance,
instead of just handing out hefty paychecks and hoping for the best.
They demonstrate how each piece of a pay package can focus top executives
on the tasks that matter most.
 NEW INCISIVE MEDIA STUDY REPORTS CHIEF
LEGAL OFFICERS COMPENSATION ROSE 13% IN
2008.

NEW YORK -- U.S. chief legal officer total cash compensation salaries plus
bonuses increased by more than 13 percent this year to $467,100, according
to the 2008 Law Department Compensation Benchmarking Survey.
While median salaries rose just seven percent, median bonuses grew by
almost 27 percent.
 COMPONENTS OF EXECUTIVE COMPENSATION

Although there is substantial heterogeneity in pay practices across firms and

industries, most executive pay packages contain four basic components:

A base salary, An annual bonus tied to accounting performance, stock options, and
long-term incentive plans (including restricted stock plans and multi-year
accounting-based performance plans).
In addition, executives participate in “broad-based” employee benefit plans and
also receive special benefits, including life insurance and supplemental executive
retirement plans (SERPs).
In contrast to mid-level management “employment at will” arrangements, top
executives increasingly negotiate formal employment contracts. These formal
contracts typically last five years and specify minimum base salaries, target bonus
payments (with or without guarantees), and severance arrangements in the event
of separation or change in corporate control.
 WHO SETS CEO’S PAY?

Part of the controversy over CEO compensation reflects a perception that CEOs
effectively set their own pay levels. In fact, in most companies, ultimate decisions
over executive pay are made by outside members of the board of directors who are
keenly aware of the conflicts of interest between managers and shareholders over
the level of pay.
There is no doubt, however, that CEOs and other top managers exert at least
some influence on both the level and structure of their pay.
Most large US corporations have a compensation committee consisting of two or
more “outside” directors. Although all major decisions related to top-level pay are
passed through this committee, the committee rarely conducts market studies of
competitive pay levels or initiates or proposes new incentive plans, and only seldom
retains its own compensation experts.
 WHO SETS CEO’S PAY

Rather, initial recommendations for pay levels and new incentive plans
typically
emanate from the company’s human resource department, often working
in conjunction with outside accountants and compensation consultants.
These recommendations are usually sent to top managers for approval and
revision before being delivered to the compensation committee for
consideration.
The CEO typically participates in all committee deliberations, except for
discussions specifically dealing with the level of the CEO’s pay. The
committee either accepts the recommendations or sends them back for
revision. If accepted, the committee passes its recommendations for the
approval of the full board of directors.
 THE IMPLICIT RELATION BETWEEN PAY AND
SHAREHOLDER WEALTH

An executive’s wealth is explicitly (and mechanically) tied to the principal’s

objective (creating shareholder wealth) through his holdings of stock, restricted
stock, and stock options.
In addition, CEO wealth is implicitly tied to stock-price performance through
accounting-based bonuses (reflecting the correlation between accounting returns
and stock price performance) and through year-to-year adjustments in salary levels,
target bonuses, and option and restricted stock grant sizes.
 CONCLUSION

The analysis has shown that:

levels of pay are higher, and pay-performance sensitivities are lower, in larger
firms;
levels of pay and pay-performance sensitivities are lower in regulated utilities than
in industrial firms;
levels of pay and pay-performance sensitivities are higher in the US than in other
countries.

The analysis also documents that pay-performance sensitivities are driven primary
by stock options and stock ownership and not through other forms of
compensation.
THANK YOU