EXECUTIVE COMPENSATION - HUMAN RESOURCE MANAGEMENT




EXECUTIVE COMPENSATION
BY
SMART LEARNING WAY

CONTENTS

Introduction of executive compensation 

Meaning and definition of executive compensation

Elements of executive compensation  

Benefits for executives

Unique features of Executive compensation

Why should the managers be paid more?

New way of pay

Conclusion 

Introduction

    Compensation  may be defined as money received in the performances of work, plus the many kinds of benefits and services that organizations provide their employees. ‘Money’ is included under direct compensation (popularly known as wages i.e., gross pay);while benefits come under indirect compensation .

 Executive Compensation or managerial remuneration is how top executives of business corporations are paid. 

 Managers are very short in supply , therefore, organizations are competing with each other to attract , retain and motivate leader managers for their strategic requirement. 

Meaning and definition 

Executive compensation is the total remuneration or financial compensation a top executive receives within a corporation. This includes a basic salary, any and all bonuses, shares, options, and any other company benefit. 

Executive compensation is different from compensation for lower-level employees. 

The salary and other benefits are negotiated and are documented in a customized employment contract. The contract spells out compensation, benefits, perquisites, performance bonuses and other special terms of employment.

Executive pay is financial compensation received by an officer of a firm, often as a mixture of salary, bonuses, shares of and/or call options on the company stock, etc. 

 Over the past three decades, executive pay has risen dramatically beyond the rising levels of an average worker’s wage. Executive pay is an important part of corporate governance, and is often determined by a company's board of directors.

 Compensation for executive managers is different from compensation for other employees in most organizations. Executive compensation covers employees that include company presidents, chief executive officers(CEOs), chief financial officers (CFOs), vice presidents, occasionally directors, and other upper-level managers. These high level employees are paid executive compensation.

It is the role of the chief executive (CEO) and other executives to oversee the company’s strategy and operations.  Obviously, these individuals require compensation for their work.  It is the responsibility of the compensation (or remuneration) committee of the board of directors to design executive compensation contracts. 

 The “right” amount to pay an executive is the minimum amount it takes to attract and retain a qualified individual.

 In addition, the compensation package should be designed so that it motivates the executive to perform in accordance with the company’s objectives and risk tolerance.   Executive compensation packages generally include a mix of short-term incentives (including salary, annual bonus, benefits, and perquisites) and long-term incentives (including stock options and restricted shares).  The package may also include guarantees such as a severance agreement, change in control provision (if the company is bought out), and pension.

Elements of executive compensation 

Higher managerial post like presidents, vise-presidents, directors, general manager etc.

The managerial  remuneration of such positions comprises of 4 elements . They are
   1)Salary
  2) Bonus
  3) Long Term Incentive
  4) perquisites 

SALARY 

 Salary is basically determined through job evaluation and serves as the basic for other types of benefits , but in managerial compensation job evaluation plays only a part and not represents the whole truth.

 A manager is paid for his capabilities and for the job he performs , rather than only job demands . This is the reason why the norms of wages and salary fixation are generally not observed while fixing the salary of the manager.

Salary of the managers varies by the type of job , size of organization, region of the country and type of industry .

Salary makes up of about 40 to 60 % of top managers annual compensation but it is not significant , as it is subject to deduction at source and is also kept by government regulation . In order to avoid such deductions and sealing , managers are offered incentives and attractive perks.

Bonus or profit sharing bonus 

This type of incentive is shortened (annual) and is based on performance or profit sharing. 

There are many bonus systems as there are companies using this form of managerial remuneration .

In some systems the annual bonus is tied by the formula to share returns on investments . Other bonus plans are based on the subjective judgments of the board of directors and Ceo’s. 

Managers deserve bonus because they have much more stakes to influence organizational success than non-managerial staff.

Long term incentives/Stock option

If bonus are short term benefits , stock options are long term benefits offered to managers .

Companies allow managers to purchase their shares at fixed position but Stock options are valuable as long as price of the share keeps increasing .

Perquisites 

Special benefits for executives that are usually non-cash items. For example: companies provide health club memberships with personal trainers; discounted company products; automobiles and leases; country club memberships; first class airfare or use of the corporate jet; executive health plans; personal car service; personal computers and cell phones etc.; entertainment; financial planning assistance etc.

Benefits for executives  

As with benefits for non-executive employees , executive benefits may take several forms , including traditional retirement , health insurance vacations and others .

Executive compensation may include other benefits which other employee do not receive 

Executive health plans with no co-payments and with no limitations on deductible or physical choice are popular among small and middle sized business

Trust of various kinds may be designed by the help the executive’s to  deal with estate issues. 

Differed compensation offers another possible means of helping executives with tax liabilities caused by incentives compensation plans. 

Unique feature of executive Compensation 

Managerial remuneration cannot be compared to wage and salary schemes meant for non-managerial employees in organization . Factors and variable are more numerous in managerial jobs and simple comparisons and ratings are not possible .

Managerial are denied the privilege of having unions and collective bargaining . Their competence and contribution are the strengths for determining their pay package .

Secrecy is maintained in respect of managerial remuneration . This is done because no two managers in the private sectors, in the same grade receive the same pay. Compensation and reward depends upon such factors as competence , length of service , contributions, and loyalty to the company.

 Managerial pay is not supposed to be individual performance measure but rather on the unit of organization performance . This is because a managers own performance is assumed to be directly reflected in measure of units of corporate performance 

Managers compensation is subjected to statutory sealing. As per the latest guidelines , monthly salary varies from Rs 40,000 to 87,500 subject to an overall limit fixed  per annum including perquisites .

Finally theoretically, remuneration of managerial personnel is supposed to be guided by job description , job evaluation, salary grades with ranges of pay in each grade and salary surveys .But in practice norms seem to have thrown to winds and exorbitant amounts are paid to decision makers in organizations. The annual salary of Ceo's range from Rs 50 lakhs to few corer.

Why should the managers be paid more?

Managers have intensive worth and hence command hefty premiums .

 The managers drive himself to success in his or her role is creating the mean by which certain organizational goal is achieved . The financial reward is a symbol of managers role itself , its power , its dignity and its freedom. 

The class of people called manager are always in short supply. One must pay heavenly if one has to attract and retain talented and competent individual. 

Having succeeded in retaining them , the manager must be motivated for better performance and it is the money which motivates employees and managers are no exceptions .

The lifestyle that fits his status and job requires considerable amount of money. To a worker , the wage is a mean of living but for a manager financial reward is a symbol of social prestige and position .

It is to eliminate or at least minimize corruption. The best of satisfying greed is to pay well. Scans and scandals cost the organization heavily. 

New way of pay

Against changing patterns , organization are increasingly linking their variable pay plans  to individuals , teams and organizational performance. the extent of linkage and the nature ( short/long term) varies for different levels within the organization . Some of the variable pay plans(VPPs) that organizations have successfully implemented include individual/team performance based gain profit sharing , productivity based business individual /team performance , based gained profit sharing , productivity based business incentives , stock options , and ownership and other customized schemes. 

While long term incentive plan is a good mechanism to link organizational objectives to individual rewards . The feedback is that organizations with strategically aligned variable compensation have experienced a positive impact on individual as well as organizational performance . 

Increasingly , companies are experimenting with the “cost to company "concept , with focus on higher rich compensation structure. New and emerging  sectors like retail , telecom, aviation and IT/ITES which have the advantage of no legacy issues and also have younger employee population . Tend to adopt simplified structures at the outset. 

Another concept gaining popularity due to changing tax environment is the flexible salary structures where the employee has the freedom to choose from the defined menu of items of pay and optimize his/her own tax planning . 

This works in a win-win manner and has increasingly gained acceptance as it provides flexibility to the employee and tax compliance to the organization. 

Conclusion

 For higher management, salaries are influenced by the size of the company. The bigger the firm, the greater is the compensation paid to the executives. The industries that are more highly constrained by governmental regulations pay relatively less than those that are more free to carry on business.

Straight salaries, bonuses, stock purchase plans and profit sharing are used to compensate major executives. Of these, salaries is the most common method. The salary is determined by mutual agreement between the individual and the employer.

Bibliography

1.)    Human resource management
               S.S.Khanna
              Sultan chand company ltd.( new delhi)

2.)    Human resource management
                Dr. C.B. Gupta
               Sultan chand & sons Educational publishing New Delhi

3.)     Human resource management
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4.)    Human Resource Management & Personnel    Management Text & cases.
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        5.)    Essential of Human Resource Management & Industrial relations. Text cases & games.
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