Executive compensation
Executive compensation is how top execut-
ives of business corporations are paid. This
includes a basic salary, bonuses, shares, op-
tions and other company benefits. Over the
past three decades, executive compensation
has risen dramatically beyond the rising
levels of an average worker’s wage.[1]
Types of compensation
See also: Employee stock option, Golden
parachute, and Performance-related pay
There are five basic tools to compensation or
remuneration.
• a base salary
• short-term incentives, or bonuses
• long-term incentive plans (LTIP)
• employee benefits
• perquisites, or perks
In a typical modern US corporation, the CEO
and other top executives are paid salary plus
short-term incentives or bonuses. This com-
bination is referred to as Total Cash Com-
pensation (TCC). Short-term incentives usu-
ally are formula-driven and have some per-
formance criteria attached depending on the
role of the executive. For example, the Sales
Director’s performance related bonus may be
based on
incremental
revenue growth
turnover; a CEO’s could be based on incre-
mental profitability and revenue growth. Bo-
nuses are after-the-fact (not formula driven)
and often discretionary. Executives may also
be compensated with a mixture of cash and
shares of the company which are almost al-
ways subject to vesting restrictions (a long-
term incentive). To be considered a long-term
incentive the measurement period must be in
excess of one year (3-5 years is common).
The vesting term refers to the period of time
before the recipient has the right to transfer
shares and realize value. Vesting can be
based on time, performance or both. For ex-
ample a CEO might get 1 million in cash, and
1 million in company shares (and share buy
options used). Other components of an exec-
utive compensation package may include
such perks as generous retirement plans,
health insurance, a chauffered limousine, an
executive jet[2], interest free loans for the
purchase of housing, etc.
Stock options
Supporters of stock options say they