Executive Compensation - Explained
What is Executive Compensation?
Written by Jason Gordon
Updated at April 16th, 2022
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Table of Contents
What is Executive Compensation?Types of Executive CompensationAcademic Research on Executive CompensationWhat is Executive Compensation?
Executive compensation is the incentive offered to executives to attract and retain them and to encourage them to work in the best interest of shareholders. Executive compensation may be offered in cash on non-cash forms. It is often reported that executives who are not offered any from of executive compensation are more likely to underperform, to quit the company, and to not perform in the best interest of shareholders to achieve corporate objectives.
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Types of Executive Compensation
Executive compensation has many types:
- Cash compensation- The company may offer monetary rewards to its executive employees to keep them motivate and committed to the company goals. Cash compensation generally comes in the form of salaries and performance bonuses.
- Option grants- A company may also compensate its executive members by offering non-cash incentives, such as the employee stock option. A stock option is the right to buy a specific number of shares of stock at at specific price (the strike price) for a given time period. The executive will exercise the stock option if the stock prices goes up. This will result in gains, as the company will pay them the difference between the strike price and market value of share. This method of compensation is more tax-friendly to the executive than cash compensation.
- Long-term incentive plans (LTIPs)- An LTIP is an incentive reward system that is offered to improve employee performance in long term. Generally, employees are required to meet some conditions to show they maximize shareholders value with their performance. This could be a cash or stock award based upon achieving performance milestones or improving upon existing metrics.
- Retirement packages- A company may offer retirement benefits to executive employees to motivate them and keep them committed to corporate goals. The executives may pensions, deferred compensation, health benefits, earn-outs, and other perks upon retirement. Executive Perks- Executive may enjoy many privileges given to them by the company. Executive perks may include a company car, accommodations, private planes, travel compensation, dining reimbursements, and many more.
