Compensation for the Executives

Compensation for the Executives

Introduction

Compensation refers to the total amount of payments an employee receives for offering his or her services to a company or organization. It entails base salary plus any other benefits and bonuses, including both monetary and non-monetary that the employer pays an executive or employee during the employment period. Compensation plays an integral role in human resources management because it assists in keeping the workforce motivated at workplaces.  A comprehensive compensation plan for both the executive and employees create a good relationship between employees and employers, thus enhances the smooth running of organizational activities (Davis & Hausman, 2018). The main goal of this paper is to explore the compensation layout of the executives in an organization. The article discusses the effects of compensation layout on the performance of both employees and the company at large. In doing so, the paper will consider both intrinsic and extrinsic compensations as well as focusing on the global variation of types of pay to the executives in different industries.

Basics of Executive Compensation Layout

An executive compensation plan is primarily designed to outline employment salaries and benefits that should be paid to senior management in an organization such as the Chief Executive Officer, Chief Financial Officer and directors of different departments of a company. The compensation packages for these high profile employees are designed based on a company’s philosophy, size and performance in the industry (Davis & Hausman, 2018).

Compensation plan for the executive comprises of various components that are structured based on the compensation philosophy and guidelines. First, the base salary is the main component of the executive compensation plan. It is set upon consultation between the shareholders and the recruitment agency of an organization (Davis & Hausman, 2018). Other components include annual incentives, perquisites, long-term incentives, monetary and non-monetary benefits, perquisites and perks and severance agreements. .

Base Salary for the Executives

The base salary is commonly known as the basic salary.  The base salary for the executive is drafted as an annual salary, even though most companies pay it monthly akin to other salaried staff members of the company. The basic pay for an executive like the Chief Executive Officer for S&P companies varies depending on the industry the company operates in, the organizational performance and the tenure of the executive (Fisch et al., 2018).

In most companies, the basic salary for the Chief Executive Officer is set by a mutual agreement among the Board of directors, the shareholders and other key stakeholders of the company. The basic salary paid to the CEO of most companies is usually pegged on the market rate, the organizational performance and the size of the firm. However, this pay is limited under the federal law of 1993 which set an exception of $ 1 million caps for some reward plans which involves performance-based for the executives of a company (Fisch et al., 2018). Nevertheless, the performance-based exclusion was rescinded in 2017 under the Tax Cuts, and Job Act which made the reward for the Chief Executive Officer, Chief Financial Officer and other three top-reward executives capped at $ 1 million where the reward is performance-based or not. Additionally, the provision of 2017 Tax Cuts states that once an executive is considered under the rule of Section 162(m), he or she will be entitled to the $ 1 million caps for all compensation received for the remaining period of tenure with the employer or the company.

Annual incentives and bonuses

In most cases, a more significant percentage of the executive compensation plan is made up of incentives and rewards. The composition of incentives and bonuses paid to the executives of a company differ depending on the nature of activities and their performance of the company.

Most companies award the executive both short and long-term incentives for their performance and achievements in the line of their duties. The Board of directors sets these benefits based on the general performance of the executives (Keller & Olney, 2017). However, the nature and aim of incentives and bonuses vary from business to business based on the company’s philosophies and performance. For instance, Walmart one of the top-performing companies in the world pays its executives massive amounts bonuses and incentive yearly based the previous year to motivate them to perfectly coordinate all strategic functions of the company to increase its performance. As a result, this has been one of the main factors that contribute to the success of Walmart Company.

In most instances, incentives given to the executives are paid in cash but are expressed as a percentage of the base annual pay. Mainly, there are two types of executive incentives that the motivating incentives and performance-based incentives. The motivator incentives and bonuses are paid to the executives such as the Chief Operating Officer to encourage them to adopt strategies that aim to improve efficiency in operation to achieve goals of the company (Keller & Olney, 2017). Conversely, performance-based bonuses are paid to the executives as an appreciation of the excellent performance of the company over the previous year of income.

Benefits

Benefits are another significant component of the executive compensation plan.  It encompasses both monetary and non-monetary privileges pays to the executive for being part of the company. These benefit s constituent of statutory rights such as insurance cover, mediocre, social security funds, pension benefits, housing benefits and hardship allowances. Such benefits are non-discriminatory benefits because they are also paid to employees of the company.

The federal laws protect most of the benefits to the executives, and the Board of directors of the company must set a good plan for the executives. However, some of the benefits such as retirement benefits are not secured the federal laws and pension benefits guidelines because the amount to pay to the executives is determined by the company (Keller & Olney, 2017). However, companies are required to have better retirement and detailed plans for their executives and employees to motivate them to commit to all organizational activities. In doing so, companies have been able to enjoy better performance of

Perquisites and perks

These are extra compensations that are only offered to C-suites members but not paid to other employees of a company. The amount provided to executives depends on the position the C-suite member holds within the company such as the President, the Vice-President and Chief Executive Officer. Such compensation includes amounts to cater to an executive member personal life, time spent at the workplace and travelling and relocation cost when in line of duties (Obermann & Velte, 2018).

Besides normal perquisites, some company award advanced perks to members of C-suite to maximize the services to the company. However, such compensation plans depend on the nature of the business and the size of the company. For example, multinational corporations such as Walmart and Apple Inc. offer their executives with compensation plans such as convenient parking spaces at their workplace, driver to and from workplaces and personal effects and travel benefits (Obermann & Velte, 2018). Ultimately, this has helped to improve the executives’ commitment and contribution to the company they serve to achieve its business goals.

Performance measurement consideration among the executives

The performance of the executives is one of the critical determinants of compensation plan offered by companies. Statistically, most multinational corporations are using performance-based policy to pay their executive members. For example, the top-performing executive member of the company receives more employment benefits, perquisites and perk and annual incentives and bonuses. However, most global companies have minimum wage rate set to pay that is offered to the executives regardless of the performance (Obermann & Velte, 2018). The latter implies that the top-performing executive members receive massive amounts than less performing executives of a company.

Conclusion

Conclusively, a compensation plan is an essential tool that assists in fueling the performance of a company. Compensation packages offered to employees of an organization differ depending on the level of services in an organization. The executives are the group that are offered an advanced compensation plan the many components. A comprehensive compensation plan of most multinational companies comprises the base pay, benefits, incentives and bonuses and perquisites and perks. These plans differ depending on the nature of organizational activities, market value and performance of an organization. The Federal law secures some of these packages while some are not.

References

Davis, L. W., & Hausman, C. (2018). Are Energy Executives Rewarded For Luck? (No. w25391). National Bureau of Economic Research.

Fisch, J., Palia, D., & Solomon, S. D. (2018). Is Say on Pay All About Pay: The Impact of Firm Performance. Harv. Bus. L. Rev., 8, 101.

Keller, W., & Olney, W. W. (2017). Globalization and executive compensation (No. w23384). National Bureau of Economic Research.

Murphy, K. J., & Jensen, M. C. (2018). The politics of pay: The unintended consequences of regulating executive compensation. USC Law Legal Studies Paper (18-8).

Obermann, J., & Velte, P. (2018). Determinants and consequences of executive compensation-related shareholder activism and say-on-pay votes: A literature review and research agenda. Journal of Accounting Literature, 40, 116-151.