IN1kCDUC1ICN

uay ln day ouL flrms and organlsaLlons are seL up Lo meeL varlous
and dlverse needs of people as well as meeL longLerm goals and proflLablllLy
ln every organlzaLlon ownershlp and conLrol are ln Lhe hands of sLakeholders
and execuLlves 1he execuLlves conLrol Lhe day Lo day runnlng of Lhe flrm whlle
Lhe sLockholders own Lhe flrm 1he execuLlves are very pecullar and musL be
glven vlvld aLLenLlon and care slnce Lhe success and fallures of Lhe flrm lles ln
Lhelr hands !usL as sLockholders have goL Lhelr lnLeresL and goals wlLhln Lhe
flrm so do Lhe execuLlves and managers and as a resulL lnLeresL of managers
and execuLlves may confllcL wlLh LhaL of Lhe owners where managers may
suffer Lhe lnLeresL of sLakeholders Lo enrlch Lhemselves 1hls problem ls known
as Lhe agency problem and a good manager musL puL Lhe need of oLher
sLakeholders flrsL before hls own slnce varlous sLakeholders are affecLed by hls
acLlons lnvesLors lenders Lhe flrm's cusLomers suppllers and employees are
all affecLed by Lhe acLlons of execuLlves and managers poslLlvely or negaLlvely
A good soluLlon for Lhe agency problem ls Lhe use of lncenLlves and monlLorlng
hence execuLlve compensaLlon
LxecuLlve compensaLlon ls a flnanclal compensaLlon recelved by
execuLlves ofLen as a mlxLure of salary bonuses shares of and/or call opLlons
on Lhe company sLock LxecuLlve employees such as chlef execuLlve offlcers
(CLCs) chlef flnanclal offlcers (ClCs) company presldenLs and oLher upper level
managers are ofLen compensaLed dlfferenLly Lhan Lhose aL lower levels of an
organlzaLlon LxecuLlve compensaLlon conslsLs of base salary bonuses long
Lerm lncenLlves beneflLs and perqulslLes
1LS CI CCMLNSA1ICN
1here are varlous Lypes of compensaLlon and Lhe flrsL ls Lhe base
sa|ary lL ls Lhe regular annual salary of Lhe execuLlve and Lhe salary levels are
ofLen more lnfluenced by Lhe oplnlon of Lhe compensaLlon commlLLee whlch
usually conslsLs of some or all of Lhe members of Lhe company's board of
dlrecLors 1he board normally depends on lnformaLlon from salary surveys of
slmllar companles (benchmarklng meLhod)
1he second ls Lhe execut|ve bonuses LhaL ln CLCs recelve every year
based on shorLLerm performance goal 1hls ls lnLended Lo moLlvaLe execuLlves
Lo reach cerLaln organlzaLlon performance goal example speclflc proflL levels
1he bonus may be based on any number of performance ouLcomes ranglng
from [udgmenLs of execuLlve performance by Lhe board of dlrecLors Lo levels
of company proflLs or markeL share 1oday nearly all execuLlves recelve some
sorL of bonus as parL of Lhelr compensaLlon package
1he Lhlrd ls execut|ve benef|ts and perqu|s|tes LxecuLlve perqulslLes
are speclal beneflLs and servlce for execuLlves and oLher Lop employees of
companles 1hey lnclude servlces llke speclal parklng membershlp ln clubs car
servlces and oLher amenlLles ln Lhe uS for example some of Lhese perks may
serve as a moLlvaLor Lo lmprove an execuLlve's ablllLy Lo do hls/ her [ob and
also Lo lmprove Lhelr level of sLaLus 8eneflLs are also arranged Lo keep CLCs
on Lhelr Loes by recelvlng hlgh levels of company frlnge beneflLs llke llfe
lnsurance penslon plans and healLh lnsurance
1he fourLh ls |ongterm |ncent|ves where Lhere are rewards LhaL are
llnked Lo speclflc longLerm goals of Lhe organlzaLlon and Lhe mosL common ls
Lhe sLock opLlon 1hey are opLlons LhaL glve Lhe execuLlve free company sLock
or allow execuLlves Lo purchase company sLock aL a reduced prlce for a perlod
of Llme As Llme passes Lhese sLocks become more valuable as Lhe company
lmproves flnanclally and Lherefore ownershlp of sLock ls lnLended Lo
encourage Lhe execuLlve Lo make Lhe organlzaLlon more proflLable SLocks of
Lhe execuLlve can be sold laLer when Lhey have appreclaLed ln value whlch
lnLend provldes compensaLlon beyond Lhe employees Lenure wlLh Lhe
organlzaLlon
1he flfLh ls Lhe ay equ|ty whlch can be evaluaLed boLh lnLernally
and exLernally 1hese ldeas are based on a Lheory of moLlvaLlon and equlLy
Lheory brlefly lndlcaLes LhaL a person examlnes hls lnpuLs and ouLcomes and
compares LhaL Lo a reference person evaluaLlng Lhe oLher persons lnpuLs and
ouLcomes An employee mlghL deLermlne LhaL she brlngs a cerLaln level of
educaLlon experlence and efforL Lo her [ob and LhaL Lhose lnpuLs resulL ln a
cerLaln level of salary and beneflLs She would Lhen compare Lhls relaLlonshlp
Lo Lhe educaLlon experlence and efforL and Lhe subsequenL salary and
beneflLs of anoLher person lf Lhese raLlos are noL equal Lhen Lhe employee
wlll feel unfalrly LreaLed lf Lhls employee deLermlnes LhaL her lnpuLs are far
greaLer Lhan her counLerparLs lnpuLs buL Lhelr pay ls Lhe same Lhls employee
wlll feel unfalrly compensaLed

LxLernal equlLy ls Lhe assessmenL of Lhe falrness of pay ln slmllar [obs ln
dlfferenL organlzaLlons LxecuLlves who compare Lhelr pay Lo execuLlves ln
oLher slmllar flrms are maklng an assessmenL of exLernal equlLy LxLernal
equlLy can be deLermlned Lhrough markeL pay surveys ln whlch companles
share lnformaLlon abouL Lhe pay and beneflLs ln Lhelr [obs AddlLlonally Lhe
pay levels of execuLlves may be publlc knowledge elLher ln company
publlcaLlons Lo shareholders or ln Lrade organlzaLlons lf an execuLlve ls
compensaLed hlghly as compared Lo oLhers ln slmllar companles he or she ls
llkely Lo feel poslLlvely abouL Lhls slLuaLlon however execuLlves who are
compensaLed aL a lower raLe Lhan comparable execuLlves ln oLher companles
may aLLempL Lo have Lhelr salary ralsed or may look for anoLher poslLlon

lnLernal equlLy ls an assessmenL of Lhe falrness of pay ln dlfferenL [obs wlLhln
Lhe same organlzaLlon LxecuLlves and employees compare Lhelr lnpuLs and
Lhelr pay Lo one anoLhers Lo deLermlne lf Lhey are falrly LreaLed lnLernal
equlLy ls ofLen referred Lo as pay sLrucLure and Lhere are Lwo Lypes of pay
sLrucLures egallLarlan and hlerarchlcal ln egallLarlan pay sLrucLures Lhe range
of pay from Lhe lowesL pald employee Lo Lhe hlghesL pald employee ls noL very
blg Lhere are noL large dlfferences ln pay LgallLarlan sLrucLures Lend Lo be
preferred by Lhe lowerpald employees because Lhey feel LhaL execuLlve pay ls
noL Loo hlgh Powever execuLlves may become dlssaLlsfled ln organlzaLlons
wlLh egallLarlan pay sLrucLures because Lhey feel LhaL Lhelr pay may noL be
commensuraLe wlLh Lhelr skllls or [ob duLles Plerarchlcal pay sLrucLures
conversely have a falrly wlde range of pay beLween Lhe lowesL and hlghesL
pald employees ln hlerarchlcal pay sLrucLures upperlevel employees are
llkely Lo be pald very hlgh salarles whlch Lhey are llkely Lo flnd saLlsfylng
Powever ln hlerarchlcal sLrucLures employees ln lowlevel [obs may feel
unfalrly LreaLed because of Lhelr relaLlvely lower pay raLe

1o examlne Lhe falrness of execuLlve pay several facLors musL be assessed
llrsL Lhe execuLlve pay package should be responslble Lo shareholders whlch
means LhaL lL ls noL so hlgh LhaL lL deLracLs from company proflLs or LhaL lLs
lncenLlves dlscourage uneLhlcal lnfluence of sLock prlces Second pay packages
musL be compeLlLlve wlLh Lhose of oLher slmllar organlzaLlons so LhaL
execuLlves can be recrulLed rewarded and reLalned successfully lf a pay
package ls noL compeLlLlve Lhere may be moLlvaLlon problems or Lurnover
1hlrd execuLlve pay should flL wlLh Lhe companys sLraLegy so LhaL lL
encourages overall company success 1hls ls parLlcularly relevanL ln regards Lo
shorLLerm bonuses and longLerm lncenLlves whlch can be used Lo sLeer Lhe
performance of Lhe execuLlve and Lhe organlzaLlon llnally compensaLlon for
execuLlves musL be ln compllance wlLh regulaLlons 1here are a number of laws
regardlng reLlremenL plans sLock opLlons and oLher compensaLlon
componenLs whlch musL be followed when deslgnlng execuLlve pay plans

L1nICAL CCNCLkNS WI1n LkLCU1IVL CCMLNSA1ICN
1he base salary bonuses lncenLlves and beneflLs for execuLlves have ralsed
serlous quesLlons abouL Lhe eLhlcal lmpllcaLlons of such pay Cne concern
abouL Lhe hlgh pay level for Amerlcan execuLlves ls LhaL Lhey may encourage
execuLlves Lo make buslness declslons LhaL beneflL Lhemselves raLher Lhan Lhe
organlzaLlon ln order Lo meeL performance goals necessary Lo recelve lncenLlve
pay 1hls ls parLlcularly llkely lf lncenLlves are shorLLerm ln naLure lor
example an execuLlve may drlve up shorLLerm proflLs LhaL cannoL be
susLalned only Lo collecL a large bonus and leave Lhe company before long
Lerm flnanclal problems are revealed

A second concern wlLh Lhe eLhlcs of hlgh execuLlve pay ls Lhe use of sLock
opLlons as an lncenLlve 8ecenL evldence of lllegal pracLlces ln some hlgh
proflle Amerlcan companles has prompLed Lhe enacLmenL of Lhe Sarbanes
Cxley AcL of 2002 1hls acL prevenLs execuLlves of companles from keeplng
proflLs or bonuses acqulred from selllng company sLock lf Lhey have mlsled Lhe
publlc abouL Lhe flnanclal healLh of Lhe company Lo lncrease sLock prlce

llnally some quesLlon Lhe eLhlcs of Lhe hlgh level of execuLlve pay when
lowerlevel employee pay has noL rlsen aL Lhe same raLe 1here ls a conLlnually
wldenlng gap ln compensaLlon ln dlfferenL levels of organlzaLlons for lnsLance
Lhe Mercer sLudy descrlbed prevlously deLermlned LhaL CLCs en[oyed bonuses
of 141 percenL of salary ln 2004 whlle oLher sLudles lndlcaLe LhaL Lyplcal
clerlcal and Lechnlcal sLaff earns approxlmaLely 3 percenL of salary as an annual
bonus AlLhough some argue LhaL execuLlve level poslLlons deserve hlgh raLes
of pay due Lo Lhe naLure of Lhe [ob and Lhe hlgh level of responslblllLy lnvolved
oLhers argue LhaL Lhe gap ln execuLlve versus Lyplcally employee pay has
wldened so dramaLlcally LhaL employees are undercompensaLed and may
even be LempLed Lo engage ln uneLhlcal behavlour such as sLeallng from Lhe
company

LxecuLlve compensaLlon conslsLs of base salary bonuses longLerm lncenLlves
beneflLs and perks 1oLal execuLlve compensaLlon has lncreased dramaLlcally
ln recenL years whlch has led Lo concerns abouL pay equlLy and eLhlcs
8ecause of Lhe sLrong focus on exLernal equlLy when deLermlnlng execuLlve
compensaLlon lnLernal equlLy ls llkely Lo be a concern AddlLlonally as Lhe gap
beLween pay aL lower and hlgher levels of Lhe organlzaLlon lncreaslngly
wldens many CLCs are percelved Lo be overcompensaLed 1here are oLher
eLhlcal lssues Lo be consldered such as Lhe moLlvaLlon of execuLlves based on
Lhelr bonuses lncenLlves and sLock opLlon granLs








DA1A LINk UNIVLkSI1
ADMG 23S IN1kCDUC1ICN 1C CCkCkA1L GCVLkNANCL AND L1nICS
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