what are the 5 basic elements of most executive
compensation packages?
Companies are now placing more and more emphasis on ______ at the expense of base salary
(1) base salary,
(2) short-term (annual) incentives or bonuses,
(3) long-term incentives and capital
appreciation plans,
(4) executive benefits, and
(5) executive perquisites
incentives
Base Salary
Who decides that?
How is that decided?
When is salary generally higher?
- compensation committee of the company’s board of directors & formalized job evaluation
- this committee will take over some of the data analysis tasks previously performed by the chief human resources
officer - 60% of them will analyze & set the salary based on salary survey data and performance records for executives of comparably sized
firms - higher when
a) likely to be raided, or
b) who have greater power over the wage-setting process, or
c) who successfully made strategic changes
d) larger companies
Annual bonuses
1) primary purpose
2) % of executives
3) reward what type of results?
1) primarily designed to motivate better
performance
2) 90 percent of executives
3) short-term - so, need to balance w/long-term incentives… be careful b/c may have dire long-term consequences
- One of the most common long-term incentives remains ________
- how is it different than bonuses?
- What is 1 complaint about stock options?
- executive stock options
- Unlike bonuses, stock options, which are typically vested
- stock options don’t pay for performance of the executive… executives can exercise options at much higher prices than the initial grant price.. it’s an undeserved reward
3 types of long term incentives for executives
- appreciation based plans
a) stock options:
Option to purchase company stock at a stipulated price at
a future time.
b) stock appreciation rights:
Stock award determined by increase in stock price during
any time chosen (by the executive) in the option period
- Full share plans
a) restricted stock plans
Grant of stock on the condition it may not be sold before a
specified date.
b) Restricted stock units/phantom
stock plans:
Grant of notional shares/units on the condition that they
may not be sold before a specified date.
c) Deferred share units:
Restricted stock units/phantom stock payable upon
retirement, termination, or death.
- Performance based plans
a) Performance share/unit plans
Stock award earned when specific performance goals
achieved.
Executive Benefits
Why do executives typically receive higher benefits than most other exempt employees?
What other benefits do executives get?
Because many benefits are tied to income level (e.g., life insurance, disability insurance, pension
plans),
- additional life insurance,
- exclusions from deductibles for healthcare
costs, and - supplementary pension income exceeding the maximum limits permissible under legal guidelines for registered
(eligible for tax deductions) pension plans
Executive Perquisites
3 types
1: classified as internal, providing a little something extra while the executive is inside the company:
- luxury offices,
- executive dining rooms,
- special parking.
2: company related, but for business conducted externally - company-paid membership in clubs/associations - payment of hotel, airplane, and auto expenses
3: differential tax status / personal perks
- low-cost loans,
- personal and legal counselling,
- free home repairs
and improvements,
- personal use of company property, and
- payment of expenses for vacation homes
What is self-insured mean and how does it work?
When an employer pays out of pocket as things come up. ER doesn’t outsource their insurance.
What is the most frequently self-insured benefit?
Why?
Most frequently self-insured coverage is short term disability
Possibly cheaper for employers because premiums are higher than long term disability because of the frequency. It runs from 13-17 weeks. Because the premiums are so much more expensive, the company will hope it will be cheaper to do it out of pocket.
Who should pay long-term disability, why?
Employee should pay out of pocket. If the ER pays, then should the EE require long term disability benefits, those benefits will be taxed.
Calculation for defined benefits (most common)
Time period * % * years of pensionable service
Pensionable service = full time years
What is one of the main benefits of a group life vs non-grouplife through ER?
- Private group life, medical history/status is examined and considered
- Company group life, a higher number of people means there’s no need for medical evidence. Additionally, some group life plans will offer extra coverage which would need medical evidence.
- Company group life is less expensive
What is the standard range of coverage in group life?
1 – 2 years
What is the term adverse selection / anti-selection?
- When people are allowed to select services they will use and not pay for things they don’t need. This could bankrupt the insurance company. This also means costs for certain benefits increases. The game only works if everyone plays. So how to address this? Have everyone buy group life.
- If it was cafeteria style (people choose only what they want), people may not understand what they need or the options. Personal biases and perspectives may also influence poor decision making, like age.
ASO
TPA
Administrative Service Only
Third party administrator: someone else is doing it, not you (could be the insurer)
Agency theory / Problem
You pay someone to do something, they go and do it. The person doing the work will do the least amount of work for that money. Why would they do extra if they have to? So, why would an executive/company do more than they have to do to protect your money? They won’t. So, you need corporate governance bodies.
CD&A
Compensation committee must generate this CD&A. This report includes details on the company’s plan design, objectives, executive compensation, justifying elements of plan
Principles for Canadian Coalition for Good Governance Executive Compensation
1: executive compensation should depend on their performance
4: change of control refers to merging/acquisitions – what happens in that case?
