5 Key Elements of Executive Compensation
Executive compensation refers to remuneration packages specifically designed for C-suite executives, senior management, and business leaders of a company. The package includes both cash and non-monetary benefits. Given these individuals are responsible for formulating policies, strategies, and making important business decisions on behalf of their shareholders, executive compensation aims to motivate CEOs and other executives to act in the best interest of the business at all times.
The five key elements of executive compensation include:
Also known as base pay, cash compensation refers to salaries and cash benefits that executive-level employees receive. Companies mostly use market pricing to determine the amount of cash compensation for their executives. This amount usually varies from one executive to another based on factors such as the company size, the number of shares owned, shareholders’ agreement, and responsibilities assigned. In 2020, for example, top executives in the U.S. raked in more than 351 times the amount the typical employee earned.
Companies use performance-based rewards to encourage CEOs to work harder to attain business goals and vision. Incentive rewards can either be short-term or long-term. Short-term incentives refer to the rewards that executives receive when they achieve short-term business goals. On the other hand, long-term incentives are those offered when executives achieve performance-based goals established on a long-term basis, say two or three years. Common performance-based rewards include annual bonuses, stock option packages, and executive stock ownership plans.
Some states require employers to provide basic employee benefit programs, including paid sick leave, workers’ compensation insurance, retirement plans, disability insurance, life insurance, health insurance, and job-protected, unpaid leave for certain medical and family reasons (FMLA). Unlike rank-and-file workers, though, CEOs usually receive enhanced benefits. For instance, a top-management executive can receive extra levels of life insurance, supplemental retirement plans, and fully-paid health insurance coverage.
These are the seemingly outlandish perquisites that top-level employees enjoy in a company. Employers use these perks to attract and retain top talent in executive management as well as motivate their executives. Executive perks include travel reimbursements, spousal travel, housing allowance, executive physicals, VIP treatment, club memberships, corporate jets, and company vehicles. However, with companies focusing more on budget cuts and PR management, executive perks have significantly declined in the last decade. In fact, this form of compensation has been deemed extravagant in certain economic conditions, triggering internal fights amongst company stakeholders.
While mergers and acquisitions can accelerate the growth of a business, they can also create chaos, uncertainty, and tension amongst employees. For instance, employees may find it difficult to adapt to new policies and practices and report to new bosses who are unfamiliar with their track records. Worse still, there is no guarantee of a job position after mergers and acquisitions, something that affects even the top-management employees. Difficulty adapting to the new company may also cause some executive employees to resign from their positions. That’s where change-in-control agreements come into play. These are plans to compensate executives who lose their job positions following a merger or sale of their company. Therefore, change-in-control agreements are designed to encourage chief executives to put shareholders’ interests first when dealing with merger and acquisition situations.
How McKnight Associates, Inc. Can Help
If you need a consulting firm for legal, salary, and other human resources issues, contact our experts at McKnight Associates, Inc. today. We are always willing and ready to offer hands-on human resources consulting to medical centers, colleges, universities, and organizations of all sizes.