Executive Compensation

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Definition Executive Compensation. Description

Executive Compensation (EC) is dealing with the pay or remuneration of directors, officers, and executives of a firm in return for fulfilling their often complex, strenuous and important duties. EC should be considered as one, though important, mechanism of Corporate Governance.

Executive CompensationComponents of Board Remuneration / Executive Compensation Categories

The following main remuneration types or categories can be distinguished:

  • Fixed (base) components:
    • Salary
      • Often benchmarked by comparing the salary with a reference group (peer group) of similar companies.
    • Perquisites (paid expenses), including:
      • Retirement plan
      • Health insurance
      • Limousine with chauffeur
      • Private usage of company buildings
      • Private usage of company airplane
      • Private usage of company boat
      • Loans with a low interest rate
      • Luxurious office furnishings
      • Personal security
      • Memberships (golf club)
      • Removal expenses
      • Compensation for personal tax advice
      • Various other allowances
    • Insurance (e.g. Directors and Officers Liability Insurance)
    • Welcome Scheme
    • Exit Scheme
  • Variable (pay per performance) components:
    • Short-term Incentives
      • Bonuses
        • Mostly paid at end of book year.
        • Based on performance criteria that have been established beforehand:
        • The minimum and maximum size of the bonus can be some percentage of the fixed salary (for example from 0% - 250% of the target performance)
        • Mostly a tiered bonus system is used, meaning that there has to be some minimal performance before any bonus will be paid and that higher performances are paid progressively.
        • Payment can be in cash, shares or options
    • Long-term Incentives
      • Call Options
        • These give the executive the right to buy a certain amount of shares against a predetermined strike price (typically the actual share price at the moment of giving the call options.
        • The length of the option contract can vary. Typically 10 years. After this period the options have no value.
        • If at some point in the future the share price exceeds the strike price, then the executive may exercise his options.
        • Often there is a non-exercise period (vesting restriction) during which the options may not yet be exercised. For example 3 years.
      • Shares
        • Ordinary shares: the executive receives some number of ordinary shares.
        • Time Vested Restricted Stock: often there is a restriction that the executive has to wait a number of years (10) before he receives the shares, or before he may sell them.
        • Performance Restricted Stock: a form of restricted stock in which the executive only receives the shares if he achieves some target (such as some level of stock prices increase plus dividends over a number of years).
        • Stock Appreciation Rights: the executive receives in cash the difference between the stock price at the end of the period minus the stock price at the beginning of the period.

Pay per Performance?

  • Proponents of stock options claim variable pay (and in particular options) align the interests of the executives with those from the shareholders, thus diminishing the agency problem.
  • Critics claim that stock options contribute to accounting manipulation (earnings management) and gaming (taking excessive risk). This effect is strongest if the value of the variable pay is extremely high and if the performance criteria are not sophisticated enough.
  • A problem with variable pay (in particular with options) is that there is no 'bonus malus'. There is only a potential up-side gain (if the stock price goes up) for the executive, but no downside risk (if the stock price goes down, the option simply isn't exercised). .

  • The performance criteria are sometimes adjusted during the period to compensate the board in case of unfavorable circumstances.
  • Likewise, sometimes bonuses are rewarded even if the performance criteria have not been met.
Executive Compensation Forum
  Fixed Component of Compensation of Directors
How is the fixed component of the compensation of a director calculated? Is there any standard formula or thought process or any practice.
I've read somewhere such compensation is nearly 20 times the minimum daily wages?...
  Why Long-Term Incentive Plans (LTIP) Donít Work Well
A Long-Term Incentive Plan (LTIP) is designed to improve employees' long-term performance by providing rewards that are usually not tied to the companyís share price. LTIPs have been a key component of pay packages for executives for a long time. How...
  Severance Pay Factors in Case of Organizational Downsizing
If you are a manager in the current economic conditions, you may find that your job can and will be eliminated, for example in sectors hard hit by the oil prices...
If you lose your job due to organizational downsizing, what factors do you need ...
  From Traditional Bonuses towards Sustainable Bonuses
Traditional Bonuses
A common way to reward employees and especially executives for outstanding performance and the achievements of set standards/targets has been the use of bonuses. These bonuses were supposed to increase efficiency and t...
  CEO Compensation
On Dec 17, 2013, the Huffington Post (Canada) reported: "In the wake of a new study detailing soaring CEO compensation, the corporations whose executives pocketed the highest annual earnings appear reluctant to discuss a trend that critics say has go...

Executive Compensation Special Interest Group

Special Interest Group


Best Practices - Executive Compensation Premium

Expert Tips - Executive Compensation Premium

Stock Buybacks as a Means of Value Extraction

According to Prof. Lazonick, in the USA the increased corporate profitability over the last couple of years did not lead to higher economic prosperity...
Usage (application): Stock Buybacks, Stock Repurchases, Corporate Profitability, Economic Prosperity, Executive Compensation, EPS

Resources - Executive Compensation Premium

The Issues Around CEO Compensation in the US

This presentation deals with the issues arising when setting rewards for CEOís and includes the following sections:
1. Introduction
2. Conte...
Usage (application): Executive Compensation, Executive Performance Management, Executive Pay

Long-term Performance Based Incentives for Executives

This presentation provides an overview of the different types of long-term incentives for executives in businesses. The presentation includes the foll...
Usage (application): Executive Compensation, Incentives

Social-Exchange Theory and Organizational Support Theory and their Role in Employee Motivation

Lecture about Social Exchange Theory and Organizational Support Theory and the role they play in Employee Motivation.

Social Exchange Theor...
Usage (application): Initial Understanding of Perceived Organizational Support

Ways to Handle Agency Theory Issues in Executive Compensation

This presentation elaborates on the agency problem in CEO compensation and how to best deal with and mitigate those issues. The presentation includes ...
Usage (application): Executive Compensation, Performance Management, Corporate Governance, Agency Theory

Executive Compensation: Risk Factors and Ways to Manage Them

Presentation about CEO compensation with special attention to dealing with risks and its influence on those packages. The presentation includes the fo...
Usage (application): Executive Compensation, Performance Management, Corporate Governance

Controlling as a Management Function

Presentation about controlling as a management activity includes the following sections:
1. Why Management Controlling?
2. A Cybernetic Cont...
Usage (application): Controlling, Management Control


Executive Compensation


Executive Compensation


Executive Compensation


Executive Compensation

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