Executive compensation refers to the monetary and non-monetary benefits given to senior management, business leaders, and company executives. Executive compensation packages may include salary, personal benefits, stock options, bonuses, perks, insurances, incentives, and other benefits related to compensation.
What's the importance of executive compensation?
Executive compensation is a vital aspect of human resource management and business at large. Executive-level employees and senior management are involved in decision-making and making the strategies for the company's success. Setting a suitable package for them will keep them motivated and satisfied.
What to ask in an executive compensation package depends on the employer and the position, but the most common components include:
The base salary for executives is stated as an annual salary even though it is paid monthly or weekly like the other salaried staff. The pay for the chief executive officer varies depending on the industry, company, and executive tenure. In most cases, CEOs receive a base salary of $1 million or more.
The purpose of short-term incentives is to reward executives for achieving short-term business goals. These incentives are paid in cash and are mainly expressed as a percentage of the executive's salary.
Most executive pay packages are in equity, mostly company stock or a derivative form of company stock. Equity compensation is based on the company's stock price, so as the value of the stock increases, the equity value increases. The three types of equity in executive compensation include:
Stock Options: Companies use stock options to link executives' financial interests with that of shareholders. In stock options, the holder is given the right to purchase the company's share at a particular price for a specified time. Companies also offer other incentive plans under stock options like Stock Purchase and Deferral Plan (SPDP).
Restricted Stock: Though restricted shares may be awarded to executives as compensation, they are not sellable before the vesting schedule is complete. However, owners enjoy other benefits that come along with shares, like dividends and voting rights.
Restricted Stock Units (RSUs): This compensation type is similar to performance compensation. An employer promises an executive staff to pay a specified number of company shares after completing a vesting schedule. RSUs have several distinct advantages compared with restricted stock.
Executive benefits programs are similar to the ones offered to other salaried employees. They include statutory benefits like workers' compensation, Medicare, Social Security, and unemployment insurance. Executives also enjoy other company benefits like holidays, vacation, severance pay, medical and life insurance. They also participate in retirement plans like 401(k), deferred compensation plans (DCP), employee stock purchase plans (ESPP), cash deferral plans (CDP), among other benefits.
Negotiating your pay is a vital step in the hiring process. Of course, you want to make sure the company is fairly compensating you for your value. Follow these steps to increase your chances of receiving excellent compensation as an executive:
Executive compensation is calculated as the total sum of base salary, bonuses, stock option awards, and other compensation, including perquisites and benefits. Companies use the pay vs. performance concept to determine if the executives are overpaid. This method compares executive pay and the stock performance of the company.
Another popular method of evaluating executive compensation is peer comparison. The company compares the compensation of one executive to the other peers in the industry.
At Padilla Wealth Management, we assist you in navigating compensation plans complexities. Contact us today and learn more about executive compensation planning.