Executive compensation

From Academic Kids

Executive Compensation is how top executives of business corporations are paid.

Contents

Means

Salary is taxable to an individual at a high individual rate. If part of that income can be converted to capital gain, for example by granting stock options to executives, a more advantageous tax treatment may be obtained.

In a typical modern US corporation, the CEO and other top executives are paid with a mixture of cash and shares of the company which are almost always subject to vesting restrictions. 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 highly paid CEO would get 1 million in cash, and 1 million in company shares (and share buy options used).

Other components of an executive compensation package may include such perks as generous retirement plans, a dental plan, a chauffered limosine, an executive jet, interest free loans for the purchase of housing, etc.

Stock compensation

During 2003, about half of Fortune 500 CEO compensation was in cash pay and bonuses, and the other half in vested restricted stock, and gains from exercised stock options according to Forbes magazine ([1] (http://www.forbes.com/lists/2004/04/21/04ceoland.html)). Forbes magazine counted the 500 CEOs compensation to $3.3 billion during 2003 (which makes $6.6 million a piece) (notice that that includes gain from stock call options used, the options may have been rewarded many years before the option to buy is used).

The categories that Forbes use are (1) salary (cash), (2) bonus (cash), (3) other (market value of restricted stock received), and (4) stock gains from option exercise (the gains being the difference between the price paid for the stock when the option was exercised and that days market price of the stock). If you see someone "making" $100 million or $200 million during the year, chances are 90 % of that is coming from options (earned during many years) being exercised.

The typical salary in the top of the list is $1 million - $3 million (Immelt (http://www.forbes.com/static/execpay2004/LIR67G5.html?passListId=12&passYear=2004&passListType=Person&uniqueId=67G5&datatype=Person)). The typical top cash bonus is $10 million - $15 million (Henry R. Silverman (http://www.forbes.com/static/execpay2004/LIR7VML.html?passListId=12&passYear=2004&passListType=Person&uniqueId=7VML&datatype=Person)). The highest stock bonus is $20 million (Fuld (http://www.forbes.com/static/execpay2004/LIRA9P0.html?passListId=12&passYear=2004&passListType=Person&uniqueId=A9P0&datatype=Person)). The highest option exercise have been in the range of $100 million - $200 million (Reuben Mark (http://www.forbes.com/static/execpay2004/LIR27R3.html?passListId=12&passYear=2004&passListType=Person&uniqueId=27R3&datatype=Person)).

Stock options

Supporters of stock options say that they align the self-interest of the CEO to that of the company, since options are only valuable if the stock price remains above the option's strike price. Many critics have called for options to be counted as a corporate expense, which would impact a company's income statement and make the distribution of options accountable to shareholders. Detractors of stock options charge that they are granted excessively.

Restricted stock

Executives are also compensated with restricted stock, which is stock given to an executive that cannot be sold for a period of time and has the same value as the market price of the stock.

Criticism

There are many controversies about executive compensation:

Charges that CEOs are overpaid

Many people believe that CEOs are paid too much for the services they provide, while others believe that a good CEO can have a positive effect on the company's performance and, therefore, that high compensation is needed to attract the best talent. Some argue that since the CEO's pay is set by the board of directors, a group usually composed almost entirely of CEOs of other companies, an unhealthy conflict of interest occurs and prevents effective price competition (see http://www.theyrule.net).

See also

External links

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