What is Executive Compensation?

What is Executive Compensation?

Compensation is an important aspect of hiring. It includes basic salary, incentives, employee benefits, and other components that make up the remuneration of an employee. Here, we'll talk about the types of executive compensation.
Any smart executive understands that to find the best talent she has to explore new territory that lies beyond familiar geography. That applies not only to gender, but also to race, religion, background and age.
―Madeleine M. Kunin

When hiring a top class executive, the compensation is considered to be of much importance, both to the executive as well as the company. The task of finding and hiring an executive who would prove to be an asset to the company is a challenging one. The compensation offered by the company helps attract the best candidates, and also to further retain them.

There are different ways, besides basic salary, in which an employee in a company can be compensated for the services he offers. Different organizations have different ways in which they attract the best executives, and then hold on to them.

Executive Compensation

Executive compensation is a collective term for all the components that make up the remuneration package of chief executive officers and top level managers in a business corporation. The components are a base salary, long-term and short-term incentives/bonuses, shares and options, employee benefits, and perquisites. The basic salary is a definite component, while the other components may vary depending upon company policies and performance.

Types of Executive Compensation

Salary is termed as the 'single largest component' of compensation. The salary offered to an executive is decided on the basis of his/her educational qualifications, experience, skills, and type of organization. Salary increments, also known as performance appraisals, depend upon the executive's performance and contribution towards the growth of the company.

Total Cash Compensation (TCC)
Total cash compensation is the long-term and/or short-term incentives that complement an executive's base salary.

Long-term Incentive plans (LTIPs): These are performance-oriented incentives, and are taxable as per federal law. LTIPs can be offered in the form of stock grants or options.

Equity, Stock Options, and Restricted Stock
Since compensation paid in cash is taxable at high individual rates, many executives prefer to opt for compensation in the form of equity or stock options. The amount of stock given to the executives depends upon the value of the company's stock, performance of the company, and shareholder returns.

Deferred Compensation
Deferred compensation consists of the incentives that are held back for a certain term, and paid at the end of the term. It is usually given after every three to five years. This type of compensation can be very useful in retaining executives, but is less popular. It is a form of investment, as it defers payment of taxes on the contribution and also on the earned assets.

Other Benefits
Other benefits that can be a part of an executive's compensation are retirement plans, life insurance and health insurance, car allowances, health-club membership, travel reimbursements, paid holidays and vacations, etc.

Legal aspects of Executive Compensation
As per Federal law, it is mandatory for companies to provide the U.S. Securities and Exchange Commission with a crystal clear disclosure regarding the compensation packages given to top-level executives and managers. This includes the policies and procedures that were adopted while deciding the executive's compensation package. However, the decision regarding the amount and components of an executive's remuneration package is at the sole discretion of the company, without the commission's influence. Another purpose of this disclosure is to provide shareholders with information regarding the company's finance and investment-related decisions.

Executive compensation plays an important role in the recruitment and retention of the best talents in the industry, which ultimately determines the growth and success of the company.