Executive Compensation

By
Prof. Prasad Kulkarni
MBA@GIT, Belgaum.

Who is executive?

An

executive typically is
someone in the top two levels of
an organization, such as Chief
Executive Officer (CEO),
President, or Senior VicePresident.

What do you mean by executive

compensation?

Objectives of executive
compensation

Aligning the managerial interest

with organizational interest.
Bringing in the best executives.
Enhancing employee motivation,
involvement and commitment.
Promoting managerial efficiency.
Ensuring complete financial
security.
Encouraging progressive
learning.

FEATURES OF EXECUTIVE
COMPENSATION
Executive

compensation cannot be compared to the

wage and salary schemes meant for in other
employees in organizations.
Executives are denied the privilege of having
unionized strength.
Secrecy is maintained in respect of executive
compensation.
Executive pay is not supposed to be based individual
performance rather on organizational performance

PRIVATE SECTOR vs. PUBLIC

SECTOR
The

salary of top executives of

public sector are miserable
compared to private sector .
EXAMPLES:
S B I of India chief is paid 10%of
HDFC Bank Managing Director
BHELS chief is getting about 10 to
12 lakhs per annum as against ABB
S MD getting nearly 40 to 50 lakhs

Why managers should be paid more?

Managers

have intensive worth and hence command

hefty premiums .

The

managers drive himself to success in his or her

role is creating the mean by which certain
organizational goal is achieved . The financial
reward is a symbol of managers role itself , its power
, its dignity and its freedom .

The

class of people called manager are always in

short supply. One must pay heavenly if one has to
attract and retain talented and competent individual .

 Having

succeeded in retaining them , the manager

must be motivated for better performance and it is
the money which motivates employees and
managers are no exceptions .

The

lifestyle that fits his status and job, requires

considerable amount of money. To a worker , the
wage is a mean of living but for a manager financial
reward is a symbol of social prestige and position .

It

is to eliminate or at least minimize corruption .

The best of satisfying greed is to pay well .scams
and scandals cost the organization irreparably .

Methodologies-cum Strategies for

managerial compensation
Salary/basic

salary/consolidated salary continues

to remain a major component , though salary
scales are often discarded these days or used only
as guides. It is the performance contribution that
determines the pay and future revisions, which
vary widely from individual manager to individual
manager.

Grade

wise flats allowances are being consolidated

, except where tax exemption benefits are
available . Allowances may be linked to the salary
as a percentage or by slabs , but preferences is
for flats amounts , which do not increase
automatically and increase at the discretion and
therefore controllable

Reimbursement

of expenses incurred
on company's work has been limited ,
and that in line to conform to the tax
laws . Being actual in most cases ,
they are not considered as part of
compensation , unless it is provided
towards personal benefits .

Annual

payments
bonus
or
commission
and leave travel are
common features. Some tax relief
applied for the latter

 Benefits

generally comprises of furnished or

unfurnished
company
owned
or
leased
accommodation , use of company owned or leased
vehicle , medical coverage , covering PF, pension,
or superannuation and gratuity , post retiral
medical assistance , easy loan scheme on vehicle ,
furniture or utility items , etc, renting employees
owned housing , club
entrance fee
reimbursement , etc . Minor benefits could be
provision of security , drivers , gardening,
assistant, sales of products or assets at the
concessional rate , the relocation and transfer
expenses , including admission etc, fees for
children , credit card fees, phones etc.

 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 .

MNCs

try to keep tax low and maximize take

home amount

Some

companies also allow their managers to

design package keeping in view the total cost.
Performance linked pay is increasing.
Provision of life-style perks.

Phoenix Plan Compensable

factors:
1) Job related experience
2) Training time required
3) Frequency of review of work
4) Utilization of independent
choice
5) Frequency of reference to
guidelines
6) Frequency of work transferred
through supervisor

7) Analytical complexity
8) Time spent in processing information
9) supervisors reporting to position level
10) Travel outside work location
11) Salary grade to which this position
reports
12) Salary grade of positioning supervised
13) Management responsibility
14) Revenue size
15) Asset size

16) Employment size

17) Budget size
18) Payroll size
19) Time spent in planning
20) Contact with suppliers / customers
21) Impact on departmental budget
22) Directing of others
23) Training of staff / physical stress
experienced
24) Times spent working under deadlines
25) Time spent in hazardous conditions.

Factors of executive
compensation in India
job

complexity
employers ability to pay and
executive human capital.

Model of executive
compensation

Determinants of executive
compensation
External

advisers: auditors and

consultants.
Stock exchange analyst
Legislation: Should Not exceed
11% of total profits.
Media
Shareholders expectations.
Compensation committee.

Trade

unions
Benchmarking
Board of directors.
Financial success.

Elements of executive
compensation
Perquisites
Supplemental

Benefits
Long-Term incentives
Annual bonuses
Executive salaries
Stock grants

Perquisites ( Perks)

Spouse

Company

provided car
Accessible, No
cost parking.
Kidnapping and
ransom
protection.
Financial and
legal counseling
Professional
meeting and

travel
Use of company
plane and yacht
Home
entertainment
allowance.
Special living
accommodation
away from house
Club
membership

Contd..
Special

dining
previlages
Special tickets to
entertainment
events.
Special relocation
expenses.
Use of company
credit cards.
Medical expenses
reimbursement ( all0

Children

education
expenses.
No and low
interest loans
Extra vacation
Estate planning
Physical exercise
facility
Matched donation
to university

Contd..
Merchandise

discounts
Service awards
Motor insurance
Fuel for private
use.

Long term incentives

Stock

appreciation rights(SAR):
Increase in share price of company
results in payment to executive.
Phantom stock: without the ownership
of stock executive receive appreciation
value in stock plus bonus.
ESOP
ESOS ( employee stock option scheme)
Sweat equity : value addition, shares @
discount and other than cash.

Methods
Peer

grouping
Benchmarking.

Common Executive Compensation Issues

Case studies and

examples

Reliance

ING vysya

Infosys