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Executive compensation is how top executives of business corporations are paid. A corporation is a legal person which, while being composed of natural persons, exists completely separately from them. ...
Compensation system
The compensation of every employee is decided by the company owners through the board of directors (in the case of the most highly compensated executive positions) and the management team (or "management committee") (for everyone else). The board of directors may have a personnel and compensation committee that deals specifically with labor compensation. In relation to a company, a director is an officer of the company charged with the conduct and management of the affairs of the company. ...
Workers union In some countries the employee compensation may be negotiated with a workers union. The workers union will in many cases deal with for example a minimum wage limit and will not deal with the management team compensation but instead leave that to the company.
Means of compensation In a typical modern US corporation, the CEO and other top executives are paid contractual salary plus contractual bonuses, which usually have some performance criteria attached depending on the role of the executive. For example, the Sales Director's performance related bonus may be based on incremental turnover; a CEO's could be based on incremental profitability. Executives may also be compensated with a mixture of cash and shares of the company which are almost always subject to vesting restrictions. 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 example a highly paid CEO would get 1 million in cash, and 1 million in company shares (and share buy options used). Chief Executive Officer (CEO) is the job of having the ultimate executive responsibility or authority within an organization or corporation. ...
This is a disambiguation page: a list of articles associated with the same title. ...
In law vesting is to give an immediately secured right of present or future enjoyment. ...
Perquisites ("perks") Other components of an executive compensation package may include such perks as generous retirement plans, a health insurance, a chauffered limousine, an executive jet, interest free loans for the purchase of housing, etc. A retirement plan is an arrangement to provide people with an income, or pension, during retirement, when they are no longer earning a steady income from employment. ...
This article or section does not cite its references or sources. ...
A chauffeur is one who drives an automobile as a job. ...
Jet aircraft with condensation trail Jet aircraft are aircraft with jet engines. ...
A loan is a type of debt. ...
Fortune 500 compensation During 2003, about half of Fortune 500 CEO compensation was in cash pay and bonuses, and the other half in vested restricted stock, and gains from exercised stock options according to Forbes magazine ([1]). Forbes magazine counted the 500 CEOs compensation to $3.3 billion during 2003 (which makes $6.6 million a piece) (notice that that includes gain from stock call options used, the options may have been rewarded many years before the option to buy is used). The Fortune 500 is a ranking of the top 500 United States corporations as measured by gross revenue. ...
In law vesting is to give an immediately secured right of present or future enjoyment. ...
Alternate meaning: For the Boston Brahmin family associated with John Forbes Kerry, see Forbes family. ...
Forbes categories of compensation The categories that Forbes use are (1) salary (cash), (2) bonus (cash), (3) other (market value of restricted stock received), and (4) stock gains from option exercise (the gains being the difference between the price paid for the stock when the option was exercised and that days market price of the stock). If you see someone "making" $100 million or $200 million during the year, chances are 90% of that is coming from options (earned during many years) being exercised.
Typical compensation The typical salary in the top of the list is $1 million - $3 million (Immelt). The typical top cash bonus is $10 million - $15 million (Henry R. Silverman). The highest stock bonus is $20 million (Fuld). The highest option exercise have been in the range of $100 million - $200 million (Reuben Mark).
Stock options Supporters of stock options say that they align the self-interest of the CEO to that of the company, since options are only valuable if the stock price remains above the option's strike price. Many critics have called for options to be counted as a corporate expense, which would impact a company's income statement and make the distribution of options accountable to shareholders. Detractors of stock options charge that they are granted excessively. Stock options have also been criticised because they cause a conflict of interest in which the CEO artificially raises the current stock price to cash in stock options at the expense of the long term health of the company. The strike price, or exercise price, is a key variable in a derivatives contract between two parties. ...
Income statements for companies indicate how Net Revenue (money received from the sale of products and services before expenses are taken out, also known as the top line) is transformed into Net Income (the result after all revenues and expenses have been accounted for, also known as the bottom line...
Restricted stock Executives are also compensated with restricted stock, which is stock given to an executive that cannot be sold until certain conditions are met and has the same value as the market price of the stock at the time of grant. Restricted stock is an equity instrument that is not fully transferable until certain conditions have ben met. ...
Tax issues Salary is taxable to an individual at a high individual rate. If part of that income can be converted to capital gain, for example by granting stock options to executives, a more advantageous tax treatment may be obtained. An income tax is a tax levied on the financial income of persons, corporations or other legal entities. ...
In finance, a capital gain is profit that is realized from the sale of an asset that was previously purchased at a lower price. ...
Main article: Option A stock option is a specific type of option that uses the stock itself as an underlying instrument to determine the options pay-off (and therefore its value). ...
Criticism There are many controversies about executive compensation:
Charges that CEOs are overpaid Many people believe that CEOs are paid too much for the services they provide, while others believe that a good CEO can have a positive effect on the company's performance and, therefore, that high compensation is needed to attract the best talent. Some argue that since the CEO's pay is set by the board of directors, with the CEO determining the selection, tenure, and committee assignments of directors and most often selecting the compensation consultants as well, an unhealthy conflict of interest occurs and prevents effective price competition (see http://www.theyrule.net). In Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, Harvard Business School professor Rakesh Khurana documents the problem of excessive CEO compensation, showing that the return on investment from these pay packages is very poor compared to other outlays of corporate resources. In relation to a company, a director is an officer of the company charged with the conduct and management of the affairs of the company. ...
A conflict of interest is a situation in which someone in a position of trust, such as a lawyer, a politician, or an executive or director of a corporation, has competing professional and/or personal interests. ...
Judging which CEO's are overpaid is a complex issue. Many articles focusing on high CEO pay simply survey the executives who received the most overall money in a particular year even though the vast majority of that might be from selling stock or exercising options that were obtained over many years and were never sold before (unlike other CEO's who might regularly sell stock or exercise options). The articles often rely on analysis from corporate governance firm The Corporate Library and its editor, Nell Minow. In addition many indirect corporate perquisites are possibly not included in these figures. Stock options for example, allow the CEO to buy the stock at a certain value later down the road. If the CEO makes his company do well the going price down the road can be much higher and the CEO could buy shares for his option price. If this hurdle looks sufficient many critics are assuaged, but there is an additional, more hidden factor that the options may be "repriced", that is the hurdled lowered halfway through the game.
Defenders of high executive pay say that the global war for talent and the rise of private equity firms can explain much of the increase in executive pay. For example, while in conservative Japan a senior executive has few alternatives to his current employer, in the United States it is acceptable and even admirable for a senior executive to jump to a competitor, to a private equity firm, or to a private equity portfolio company. Portfolio company executives take a pay cut but are routinely granted stock options for ownership of ten percent of the portfolio company, contingent on a successful tenure. Rather than signaling a conspiracy, defenders argue, the increase in executive pay is a mere byproduct of supply and demand for executive talent. Private equity is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market. ...
A portfolio company is a company or entity in which a venture capital firm or buyout firm invests. ...
In 2005, the issue of executive compensation at American companies has been harshly criticized by columnist and Pulitzer Prize winner Gretchen Morgenson in her Market Watch column for the Sunday "Money & Business" section of the New York Times newspaper. The gold medal awarded for Public Service in Journalism The Pulitzer Prize is an American award regarded as the highest honor in print journalism, literary achievements, and musical compositions. ...
Gretchen Morgenson Gretchen C. Morgenson (born January 2, 1956 in State College, Pennsylvania) is a Pulitzer Prize-winning journalist who writes the Market Watch column for the Sunday Money & Business section of the New York Times newspaper. ...
The New York Times is an internationally known daily newspaper published in New York City and distributed in the United States and many other nations worldwide. ...
See also A golden handshake or golden parachute is a clause in an executive employment contract that provides the executive with a significant severance package in the case that the executive loses their job through firing, restructuring, or even scheduled retirement. ...
A Golden Parachute is a clause in the contract of a CEO or other executive officers of a corporation, that if the corporation is acquired it pays them a certain amount of money, or stock options. ...
Remuneration is pay or salary, typically monetary compensation for services rendered, as in a employment. ...
External links - US income tax treatment of compensation paid to executives and business owners.
- Forbes.com - Executive Pay (updated with 2004 pay)
- 19 May, 2004 - FORTUNE ANNOUNCES FIRST ANNUAL LIST OF EUROPE'S 25 HIGHEST-PAID CEOS
- The Guardian, August 4, 2005, "US executive pay goes off the scale"
- The Guardian, August 4, 2005, "Chief executives' pay rises to £2.5m average" in United Kingdom
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