Executive Compensation

AuthorMarcia Simmering

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Executive employees, such as chief executive officers (CEOs), chief financial officers (CFOs), company presidents, and other upper level managers are often compensated differently than those at lower levels of an organization. Executive compensation consists of base salary, bonuses, long-term incentives, benefits, and perquisites. In addition to understanding the components of executive compensation, there are issues of pay equity and ethics associated with pay for these types of employees.


Base salary is the regular annual salary of the executive. While job evaluation is typically used to set employee pay in organizations, executive base salary levels are often more influenced by the opinion of the compensation committee (which consists of some or all of the members of the company's board of directors), which is often dependent on information from salary surveys of similar companies. Typically, pay of CEOs and other executives is set to be competitive with other executive salaries in the market and thus may be very high in comparison to the pay of employees in their own company. Recent data indicates that salaries for executives are on the rise. A survey of 100 major U.S. corporations conducted by Mercer Human Resource Consulting indicates that median total direct compensation for the chief executive officers in these corporations was $4,419,300 in 2004.


In the base salary of executives, most receive variable pay, a compensation that fluctuates according to some level of performance. The use of compensation beyond base salary is intended to motivate executives to reach certain organizational performance goals, for example, specific profit levels, and reward them for reaching these goals. One very popular type of variable pay is the executive bonus, which is a one-time payment tied to some short-term performance goal. The bonus may be based on any number of performance outcomes, ranging from judgments of executive performance by the board of directors, to levels of company profits or market share. Nearly all executives now receive some sort of bonus as a part of their compensation package. The Mercer study, described above, indicates that the CEOs of 100 major American corporations had a median bonus of $1.14 million in 2004, which equaled 141 percent of their annual salaries. In other words, bonuses accounted for more money than the CEO's annual salary in this sample.


In recent years, incentives have become important for rewarding the performance of executives, and now make up about one half of total executive compensation. Incentives are rewards that are linked to

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>specific long-term goals of the organization. The most common long-term incentive is the stock option, which either gives the executive free company stock, or allows him or her to purchase company stock at a reduced price for a period of time. These stocks become more valuable as the company improves financially, and therefore...

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