COMPENSATION MANAGEMENT EXECUTIVE REMUNERATION SYSTEMS

ASSIGNMENT NO:1

Executive remuneration can be defined as the total compensation a top executive receives within a corporation. This includes basic salary, bonuses, options and other company benefits. Many people consider pay for performance systems along with private ownership, as the hall marks of capitalism. To these people good organization simply will not function effectively without good pay for performance systems. Pay for performance include such examples as, sharing in profits of trading voyager, piece rate pay used since at least the industrial revolution, and profit sharing in the modern corporation; hare cropping, in which the worker shares in the output created on the land owners property.

Can either be a motivational tool encouraging executives to pursue strategic decisions that are in the best interest of shareholders or it can be designed to reinforce the wrong strategic choices

The Role of Risk in the Executive Compensation Contract

Employment risk the possibility that the executive will be terminated either due to unsatisfactory performance or due to change in control Compensation risk the potential unpredictability in the executives future pay represented mainly by the proportion of stock options in the total pay package Business risk the uncertainty surrounding the firms competitive environment

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Salary Salary as a component of total remuneration is not significant as it is subject to various deductions. Bonus is a short-term incentive and is based on performance. In some organizations bonus is tied to the share price. Other bonus plans are based on the subjective judgment of the board of directors and the CEO. Some organizations establish certain targets,e.g.a 10% increase in corporate earning and then a bonus pool after the target is achieved. Commission Companies pay to their executives and going by the figures, commission constitutes a major share in executive remuneration. The CMD of Raymond received a total remuneration of Rs.1.98 crore in 2003.of which commission was 1.4 crore 70.54 percent common practice in private sector. Long term Incentives(ESOP) Companies allow executives to purchase their shares at fixed prices.Stock options are valuable as long as the price of share keep increasing

During 2003, about half of Fortune 500 CEO compensation was in cash pay and bonuses, and the other half in ESOP. Perquisites
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Perks constitute a major source of income for executives. PF,Gratuity,Special parking, vacation travel,memebership in clubs and well furnished houses. Executives are rarely required to spend money from their pockets.

FEATURES OF EXECUTIVE COMPENSATION Executive compensation cannot be compared with wage. Executives are denied of having the unions. Executive pay is based on corporate performance rather than individual. Executive remuneration may be subject to statutory ceilings. It is based on competence,loyality, non-substitutability.

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Features of ER in India
1. Norms of wage and salary fixation such as job evaluation are generally ignored. 2. There is a tendency to link remuneration to performance.HCL,Titan and Modi,Xerox are reported to link salaries to performance. 3. Holidaying abroad is gaining increasing acceptance. In year executive works 10 months 1 month holiday abroad 1 month training. 4. Relatively higher salaries are paid during the foreign assignments. Once they come back the same executives receive less pay to ensure parity. Ranbaxy reportedly follows this practice. 5. Competition among the companies to attract competent executives is resulting in virtual hijacking of competent. Pepsi did and took away quite a few executives from HLL & Nestle. Kelloggs and Coke did the same to Pepsi. 6. Executives in the public sector stand nowhere in comparison to their counterparts in the private sector in respect of remuneration.
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therefore there is movement of executives from government to pvt sector enterprises. SAIL alone lost 50 to Essar,Tisco. BEL BPL SBI too lost quite a few GMs. 7. As the ABC consultants study reveals, executives are offered composite' salaries instead of menu salaries.

The Theories:

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Reinforcement Theory:
A theory that says that behavior is a function of the consequence. Features-Reinforcement Theory:

Equity Theory
It states that individuals compare their job inputs and outcomes with those of others and then respond to eliminate any inequities.

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Features-Equity Theory: Employees are motivated when perceived outputs(i.e., pay) are equal to perceived inputs (e.g., effort, work, behaviors). A disequilibrium in the output-to-input balance causes discomfort. If the employees perceive that others are paid more for the same effort, they will react negatively to correct the output-to-input balance.

Agency Theory The Agency Theory says that the principal must choose a contracting scheme that helps align the interest of the agent with the principals own interest. A theory that states that both sides of the exchange will seek the most favorable exchange possible and will act opportunistically if given a chance. Executive/Employee-The Agents Shareholders-Principals Remuneration payable-Agency cost

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Factors
Factors can be categorized by : 1 External Factors 2 Internal Factors External Factors Labour Market going rate productivity Cost of Living Labour Union Internal Factors Business Strategy Job Evaluation and Performance Appraisal The Employee Skill Based Pay Pay Reviews Pay Secrecy Comparable worth International Pay

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References 1. S Koplan and A.A. Atkinson; Advanced management Accounting 3rd edition Prentice Hall New Jersey. 2. www.mercer.com. 3. CIMA 4. Christine A. Mallin, Corporate governance; Oxford University 5. Ulrich Streger. Et. Al 2004, Mastering corporate governance 6. Thomas A. Lee, 2004,Financial reporting and corporate governance 7. The Mcgrawlfill Executive, corporate governance, MBA series, 2003

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