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Compensating Executives

This chapter explores the complex landscape of executive pay, including IRS classifications of highly compensated and key employees. It outlines the various components of executive compensation packages, such as base pay, bonuses, stock options, and additional benefits. The impact of the Sarbanes-Oxley Act on compensation practices is discussed, highlighting the need for transparency and accountability. Key theories regarding executive pay, including agency theory and tournament theory, are examined, shedding light on how compensation is determined by boards, consultants, and pay committees. ###

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Compensating Executives

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  1. Compensating Executives Chapter # 13

  2. What is executive status? • IRS recognizes two groups • Highly compensated • Very responsible position • 5% owner sometime during year • Paid $100,000 or more yearly • Key Employee • $145,000 up • Responsible role

  3. Long term and short term Pay

  4. CEO’s sell their services

  5. CEOs • Can hired and use their own compensation consultants. • Conflict of interest • Fired 119.089 employees last year (2007) • Who pays? stockholders

  6. Types of Executive Pay Packages • Main Components • Annual pay • Stock Options • Golden Parachutes • Perquisites and Enhanced Benefits • Bonuses

  7. Base (annual) Pay • Broader range • No formal pay structure • IRS lets firm deduct CEO pay as tax write off up top $1,000,000. • Base pay is smallest part of total package

  8. Bonuses • Single pay for performance • Discretionary • Depend upon profits • Future opportunities • Performance contingent bonuses • Predetermined allocation bonuses • Target plan bonus • No bonus if profits fall below a certain amount

  9. Short term incentives

  10. Deferred Core Compensations • Company stock • Pay given at future date • Idea is to create sense of ownership • Align goals of exec to goals of firm • Tax advantage for CEO • Deferred until retirement

  11. Types of incentives • Stock options • Have to pay cap gains in future • Non Statutory stock options • Tax paid upon receipt • Restricted Stocks • CEO has to return stock when leaving • At original price. Idea is to pocket gains

  12. Types continued • Phantom, stocks • Hypothetical stocks. • Discount stock option • Stock given at lower than market value • Stock appreciation rights • Income is taken at end of a certain period of time

  13. Golden Parachutes • IRS considers • It business • Expense • YOU’RE FIRED

  14. Platinum parachutes • Your’reouta here !!!!! • Before contract over • Severance • Continued benefits • Stocks • Example Bancorp…73.6 • + 24.4 mil cash stocks • + free health care • + 40,000 month consulting

  15. Tighter Regulations of Deferred Plans • EX: Enron • Exec withdrew cash out firm before bankrupt. • 2002 Sabanes Oxley Act • Financial disclosure or penalty to execs • Full audits

  16. Other Perks • Extra insurance • Corporate jets • Supplemental retirement plans • Country club memberships • Vacation homes • Tickets

  17. How is Executive pay Set? • Individuals • Groups • Consultants • Pay committees • Boards of Directors

  18. Theories about exec pay • Agency Theory • Tournament Theory • Social Comparison Theory

  19. Security Exchange Commission Disclosure • Look #336 • Full disclosure of four top level execs

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