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Executive compensation or executive pay is composed of the financial compensation and other non-financial awards received by an executive from their firm for their service to the organization. It is typically a mixture of salary, bonuses, shares of or call options on the company stockbenefitsand perquisitesideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance. Observers differ as to whether this rise is a natural and beneficial result of competition for scarce business talent that can add greatly to stockholder value in large companies, or a socially harmful phenomenon brought about by social and political changes that have given executives greater control over their own pay.
Executive pay is an important part of corporate governanceand is often determined by a company's board of directors. There are six basic tools of compensation or remuneration : In a modern corporation, the CEO and other top executives are often paid salary plus short-term incentives or bonuses. This combination juztapose referred to as Total Cash Compensation TCC. Short-term incentives usually are formula-driven and have some performance criteria attached depending on the role of the executive.
For example, the Sales Director's performance related bonus may be based on incremental revenue growth turnover; a CEO's could be based on incremental profitability and revenue growth. Bonuses are after-the-fact not formula driven and often discretionary. Executives may also be compensated with a mixture of cash xall shares of the company which are almost always subject to vesting restrictions a long-term incentive. To be considered a long-term incentive the measurement period must be in excess of one year 3—5 years is common.
The vesting term refers to the period of time before the recipient has the right to transfer shares and realize value. Vesting can be based on time, performance or both. For example, a CEO might get 1 million in cash, and 1 million in company shares and share buy options used. Vesting can occur in two ways: "cliff vesting" vesting occurring on one dateand "graded vesting" which occurs over a period of time and which maybe "uniform" e.
Other components of an executive compensation package may include such perks as generous retirement planshealth insurancea chauffeured limousine, an executive jetand interest-free loans for the purchase of housing. Executive stock option pay rose dramatically in the United States after scholarly support from University of Chicago educated Professors Michael C. Jensen and Kevin J. Due to their publications in the Harvard Business Review and support from Wall Street and institutional investors, Congress passed a law [ citation needed ] making it cost effective to pay executives in equity.
Supporters of stock options say they align the interests of CEOs to those of shareholders, since options are valuable only if the stock price remains above the option's strike price. Stock options are now counted as a corporate expense non-cashwhich impacts a company's income statement and makes the distribution of options more transparent to shareholders.
Critics of stock options charge that they are granted without justification as there is little reason to align the interests of CEOs with those of shareholders. Juxtapoae, executive stock options contributed to the accounting manipulation scandals of the late s and abuses such as the options backdating of such grants. Finally, researchers have shown [ citation needed ] that relationships between executive stock options and stock buybacks, implying that executives use corporate resources to inflate stock prices before they exercise their options.
Stock options also incentivize executives to engage in risk-seeking behavior. This is because the value of a call option increases with increased volatility see options pricing. Stock options also present a potential up-side gain if the stock price goes up for the executive, but no downside risk if the stock price goes down, the option simply isn't exercised. Stock options therefore can incentivize excessive risk seeking behavior that can lead to catastrophic corporate failure.
Executives are also compensated with restricted stockwhich is stock given to an executive that cannot be sold until certain conditions are met and has the same value as the market price of the stock at the time of grant. As the size of stock option grants have been reduced, the number of companies granting restricted stock either with stock options or instead of, has increased. Restricted stock has its detractors, too, optionz it has value even when the stock price falls.
As an alternative to straight time vested restricted stock, companies have been adding performance type features to their grants. These grants, which could be called performance shares, do optilns vest or are not granted until these conditions are met. These performance conditions could be earnings per share or internal financial targets. The levels of compensation in all countries has been rising dramatically over the past decades. Not only is it rising in absolute terms, but also in relative terms.
Inthe world's highest paid chief executive officers and chief financial officers were American. They made times more than average workers—a gap 20 times bigger than it was in According to one estimate the U. According to economist Paul Krugman"Today the idea that huge paychecks are part of a beneficial system in which executives are juxtaapose an incentive to perform well has become something of a sick joke. A article in Fortune"The Great CEO Pay Heist" encapsulated the cynicism: You might have expected it to go like this: The stock isn't moving, so the CEO shouldn't be rewarded.
But it was actually the opposite: The stock isn't moving, so we've got to find some other basis for rewarding the CEO. But now even I'm troubled. For example, while in conservative Japan a senior executive has few alternatives to his current employer, in the United States it is acceptable and even admirable for a senior executive to jump to a competitor, to a private equity firm, or to a private equity portfolio company. Portfolio company purchase of call and put options definition juxtapose take a pay cut but are routinely granted stock options for ownership of ten percent of the portfolio company, contingent on a successful tenure.
Rather than signaling a conspiracy, defenders argue, the increase in executive pay is a mere byproduct of supply and demand for executive talent. Securities and Exchange Commission SEC has asked publicly traded companies to disclose more information explaining how their executives' compensation amounts are determined. The SEC has also posted compensation amounts on its website  to make it easier for investors to compare compensation amounts paid by defniition companies.
It is interesting to juxtapose SEC regulations related to executive compensation with Congressional efforts to address such compensation. Between andMutual Fund founder John Bogle estimates total CEO compensation grew 8. Scott Armstrongfound opposing results. In particular, the authors conclude that "the notion that higher pay leads to the selection of better executives is undermined by the deefinition of poor recruiting methods.
Moreover, higher pay fails to promote better performance. Purchase of call and put options definition juxtapose, it undermines the intrinsic motivation of executives, inhibits their learning, leads them to ignore other stakeholders, and discourages them from considering the long-term effects of their juxtzpose on stakeholders"  Another study by Professors Lynne M. Andersson and Thomas S. Batemann published in the Journal of Organizational Behavior found that highly paid executives are more likely to behave cynically and therefore show tendencies purchase of call and put options definition juxtapose unethical performance.
Instead the shareholders can sack some or all of the board members. Its report described the pay of executives as "corrosive". The simple truth is purchase of call and put options definition juxtapose remuneration schemes have become too complex and, in some cases, too generous and out of line with ootions interests of investors. Singapore and Hong Kong stock exchange rules are purcnase most comprehensive, closely followed by Japan's, which has stepped up its requirements since From Opttions, the free encyclopedia.
For compensation of executive in the US, see Executive pay in the United States. See also: Employee stock optionGolden parachuteand Performance-related pay Main article: Executive pay in the Puh States. A model capturing ethics and executive compensation. Retrieved 18 August And Juxtapoe Tales from the World of Executive Compensation Reform, 76 Fordham Law Review Bogle Academy of Management May Jennifer Carpenter and David Yermack Boston: Kluwer Academic Publishers, p.
Bebchuk, Lucian; Grinstein, Yaniv April Harvard University: John M. Olin Center for Law, Economics and Business. Updated 31 March Tax Return Data Jon Bakija, Adam Cole, Bradley T. University of Florida News. Archived from the original on An Evidence Based Review". Retrieved 10 March optionns Retrieved 16 August Accessed 30 December Evidence from Unique Legislation By Menachem Meni Abudy and Efrat Shust, 30 September Outline of business management.
Index of management articles. Association of Technology, Management, and Applied Engineering. Bachelor of Business Administration. Master of Business Administration. Model of Managerial Discretion. Not logged in Talk Contributions Create account Log in. Main page Contents Featured content Current events Random article Donate to Wikipedia Wikipedia store.
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