Executive Compensation

CEO Compensation

Indian Institute of Foreign TradeEPGDIB-2013-15

Group-7Swapan Koley

Ranajit PanIndrojyoti Mondal

Introduction

Executive Compensation is the compensation paid to executives of business corporations

Short supply of good executivesOrganizations competing with each other to

attract, retain and motivate managers for their strategic requirement

Elements of Executive Compensation

Higher managerial post are – CEO,presidents, vise-presidents, directors, general manager, etc

Managerial compensation of such positions comprises of 4 elements:

1) Salary 2) Bonus 3) Long Term Incentive 4) Perquisites

SALARY Salary determined through job evaluation and

serves as basis for other benefits Job evaluation plays only a part for managerial

compensationManager is paid for his capabilities and for job he

performs Norms of wages and salary fixation are generally

not observed while fixing salary of manager Salary of managers varies by the type of job , size

of organization, region of the country and type of industry .

BONUS or PROFIT SHARING

This type of incentive is annual and based on company performance or profit sharing

There are many bonus system as there are companies using this form of managerial remuneration

In some system annual bonus tied to share returns on investments

Other bonus plans are based on subjective judgments of board of directors and CEO’s

Managers deserve bonus because they have much more stakes to influence organizational success than non-managerial staff

LONG TERM INCENTIVES/STOCK OPTIONS

If bonus are short term benefits , stock options are long term benefits offered to managers

Companies allow managers to purchase their shares at fixed price

Stock options valuable as long as price of share keeps increasing

PerquisitesSpecial benefits for executives usually non-cash items: - Companies provide health club memberships with

personal trainers- Discounted company products- Automobiles - Country club memberships - First class airfare or use of the corporate jet- Executive health plans- Personal car service- Personal computers and cell phones- Entertainment- Financial planning assistance

Unique Feature of Executive compensation Executive remuneration cannot be compared

to wage & salary schemes meant for non-managerial employees

Executive are denied the privilege of having unions and collective bargaining

Their competence and contribution are the strengths for determining their pay package

Secrecy is maintained in respect of executive remuneration.

No two executives in private sectors, in same grade receive same pay

Compensation and reward depends upon such factors as competence , length of service , contributions, and loyalty to the company

Unique feature of executive compensationexecutive pay is based on organizational

performance

Executive’s own performance directly reflected in corporate performance

Monthly salary may vary from Rs 50,00,000 to 100,00,000 subject to limit fixed per annum

Exorbitant amounts are paid to executives in some organizations.

annual salary of CEOs’ range from Rs 50 lakhs to few crore

Why Executive Should Be Paid MoreExecutive’s success is the means by which

organizational goal is achievedFinancial reward is a symbol of executive’s role, its

power , its dignity and its freedom Organisation pay heavily to attract and retain

talented and competent manager Manager may be motivated sometimes for better

performance through money Lifestyle of executive needs considerable amount

of money For manager financial reward is symbol of social

prestige and position High compensation is made to executive to

eliminate or minimize corruption .

BENEFITS FOR EXECUTIVES Retirement benefits Health insurance Vacations Health plans with no payments by

executive and no limitations are popular among small and middle sized business

Deferred compensation offers another possible means of helping executives to overcome tax liabilities

BenefitsBenefits generally comprises of : - Furnished or unfurnished company owned or

leased accommodation- Use of company owned or leased vehicle - Medical coverage - Provident fund - Pension- Superannuation gratuity- Post retirement medical assistance - Easy loan scheme for utility items , vehicle or

furniture - Renting employee owned housing- Club entrance fee reimbursement

BenefitsMinor benefits could be: - Provision of security - Drivers- Gardening assistant- Sales of products or assets at the concessional

rate- Relocation and transfer expenses including

admission fees for children - Credit card fees, - Phones

New Trend

Most of the companies are now moving away from traditional compensation package: basics, DA, HRA etc. to cost to company basis

Companies are talking in terms of gross salary and asking managers to do their own tax planning.

Trend is to move away from seniority and hierarchy system and attach value to performers

New TrendSome companies give executives freedom to

design package keeping in view of total cost ( assuming Y/N??)

Flexibility is given to executives to choose their lifestyles within certain parameters

Performance linked payments , bonus, generous increments and merit pay are given

Concept of star performers are gaining ground Lifestyle perks (good accommodation, club

membership, liberal furnishing, holiday abroad with family ) continues to be the practice

New Way of Pay Organizations are increasingly linking their

variable pay plans to individuals, teams and organizational performance

Individual/team performance based profit sharing, productivity based individual/team profit sharing, productivity based incentives, stock options and ownership and other customized schemes

Companies have leveraged the variable pay to aggressively position their top performer at the top end of the market

New Way of Pay

Companies are experimenting with “cost to company "concept , with focus on high compensation structure

New & emerging sectors like retail , telecom, aviation & IT/ITES with younger employees adopt ing simplified pay structures

With flexible pay structure employee can choose from defined items of pay and optimize his own tax planning

This has gained acceptance and providing flexibility to employee and tax compliance to organization

INDIAN PRACTICES

Executive compensation in India built around three important factors:

Job complexity

Employers ability to pay.

Executive human capital

PRIVATE SECTOR vs. PUBLIC SECTORThe salary of top executives of public sector

are miserable compared to private sector:S B I chief is paid 10 % of HDFC Bank

Managing Director BHEL’S chief is getting about 25 to 30 lakhs

perannum as against Asea Brown Boveri’s (ABB) MD getting nearly 60 to 70 lakhs

Top 5 Indian CEO’s Salary

Name of Exect. Salary ( Rs. Crore) Company

Naveen Jindal 69.757 Jindal Steel & Power

Kalanithi Maran 37.08Sun TV Network Limited and SpiceJet.

Pawan Munjal 30.88 Hero Honda.

Onkar Kanwar 29.69 Apollo Tyres.

Kumar Mangalam Birla 28.467 Aditya Birla Group.

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