EXECUTIVE

COMPENSATION
 CEO Compensation
Two rival theories:
One theory:
The result of CEO compensation is due to
Economic factors such as Globalization
Another theory:
Failure of compensation committees of boards
of directors to consistently use “ best
practices
Other factors of high compensation for CEOs:
• Social comparisons- especially between CEO’s
salary and that of the board of directors’
• Political motivations- hiring an executive
compensation consultant.
Agency theory- Executive compensation should
be designed to ensure executives have the
best interests of stockholders in mind
 Components of Executive Compensation Package

• Base Salary
• Bonuses
• Long term incentive and Capital Appreciation
Plans
• Executive Benefits-( cover a broad cross-section, definitely determinable
benefits, non discrimination requirements)

• Executive perquisites
 Considerations in designing Executive
Compensation
• Should be motivating
• Benchmarking with peer group companies
• Explain Executive Compensation to
shareholders (through“ Compensation Discussion and Analysis ” )
 Employee Stock Options
A stock option gives an employee the right to
buy a certain number of shares in the
company at a fixed price for a certain number
of years. The price at which the option is
provided is called the "grant" price and is
usually the market price at the time the
options are granted.
• Stock option plans can be a flexible way for
companies to share ownership with employees,
reward them for performance, and attract and
retain a motivated staff
• For growth-oriented smaller companies, options
are a great way to preserve cash while giving
employees a piece of future growth
• For public firms whose benefit plans are well
established, but who want to include employees in
ownership
 Stock options and ownership
Two different views:
1. Proponents feel that options are true ownership because employees do not
receive them for free, but must put up their own money to purchase shares.
2. Others, however, believe that because option plans allow employees to sell
their shares a short period after granting, that options do not create long-term
ownership vision and attitudes.

The ultimate impact of any employee ownership plan, including a stock option
plan, depends a great deal on the company and its goals for the plan, its
commitment to creating an ownership culture, the amount of training and
education it puts into explaining the plan, and the goals of individual
employees (whether they want cash sooner rather than later)
 ESOPs in India
•ESOPs were the harbinger of good times in the 1990s, when a
large number of IT companies allotted them to employees and
helped them take part in their growth, making many of them
millionaires.

•Infosys, the first Indian company to issue ESOPs. The company, started in 1981, is
known to have given away Rs 50,000 crore worth of ESOPs to employees since
inception. In the 1990s, it allotted ESOPs in three tranches, at Rs 50 a share. By
2000s, thousands of employees had become millionaires by encashing these when
the stock was at Rs 7,000.

•The dot.com bubble triggered a dramatic fall in IT stocks and ESOPs worth millions
became dud. Infosys, too, discontinued the scheme in 2003-2004 citing lack of
employee participation and difficulties in account reconciliation
•
SEBI regulations on ESOPs
Amendment of the ESOP Guidelines to prohibit acquisition of securities from the secondary
market:
New clause 22B has been included in the ESOP Guidelines stipulating that employee stock
option scheme or stock purchase scheme shall not involve acquisition of own securities from
the secondary market.
• Amendment of the Equity Listing Agreement:
Clause 35C has been included in the Equity Listing Agreement to require:
The issuer to ensure compliance with the revised SEBI Guidelines with respect to all new
employee benefit schemes involving the securities of the company; and
The issuer shall also ensure that all existing employee benefit schemes, i.e., schemes framed
and implemented by the company involving dealing in the securities of the company in the
secondary market, before 17 January, 2013 are aligned with and made to conform to the
revised SEBI Guidelines by 30 June 2013.
• Disclosure requirements:
Companies which have existing employee benefit schemes that do not conform to the ESOP
Guidelines (as amended by the Circular) are now required to inform the details of their
schemes to the stock exchanges, in the prescribed format, within 30 days of the date of issue
of the Circular, i.e., February 16, 2013 and disseminate the prescribed information on their
website
Long term incentives for executives
Incentive Stock Nonqualified Stock Stock Appreciation Performance Share/
Options Option Plans Rights Unit Plans
A right granted by A right granted by A right granted to Awards of contingent
employer to an employer to employee to realize shares or units are
employee to purchase stock at appreciation in granted at beginning
purchase stock at a stipulated price value of specified of specified period.
stipulated price over a specifi c number of shares of Awards are earned
during a specified period of time stock. No employee out during the period
period of time in investment that certain specified
accord with Section required. Time of company performance
422 of Internal exercise of rights is goals are
Revenue Code. at employee’s attained. Price of
discretion. company stock at
end of performance
period (or other
valuation criteria)
determines value of
payout
Option price is not May be granted May be granted Awards earned
less than fair at price below alone or in are directly
market value on fair market conjunction with related to
date of grant. value.* stock options achievement
during performance
period.
Restricted Stock Phantom
Plans Stock Plans
Shares of stock are Employee is
subject to restrictions awarded units (not
on transferability any ownership
with a interest) corresponding
substantial risk of in number
forfeiture, and and value to a
shares are granted specified number of
to employee shares of stock.
without cost (or at a
bargain price).
Shares become Award may be
available to equal to value of
employee as shares of
restrictions lapse generally phantom stock or
upon just the appreciation
completion of a portion
period of continuous
employment
 Case study
BMW Links Executive Pay to That of its Line Workers
While the salaries of UK FTSE-100 chief executives are
rising twice as fast as salaries for shopfloor workers, in Germany, BMW has
become the first major company to link the bonuses of its top managers to
those of its assembly line workers.

The company stated that creating a fairer work environment was its reason
for adopting this approach. Given BMW's size and weight in the global
business market, other firms seem set to take notice.

Starting in 2010, the company will use a common formula to ascertain and
award bonuses to its upper and lower level employees, based on the
company's performance as measured by profit, sales and other factors.
That means that upper level management could potentially lose more
money than their lower level counterparts for bad performance.
A spokesman for BMW said the company's goal was to create fair
and transparent compensation practices and to prevent a gap
between management and the workers, as the underclass, from
developing. "We don't just want to build sustainable cars. We also
want to have sustainable personnel politics. We think this is good
for the company culture," said the spokesman during an interview
with Spiegel Online.

BMW Links Executive Pay to That of its Line Workers

What are your view on such an approach?
How do you think that this approach will be viewed by (a) senior
managers and (b) lower level employees?
Do you think that this approach is likely to spread beyond Germany?