Compensating Executives
Chapter # 13
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
Long term and short term Pay
CEO’s sell their services
CEOs
• Can hired and use their own compensation consultants.
• Conflict of interest• Fired 119.089 employees last year (2007)• Who pays? stockholders
Types of Executive Pay Packages
• Main Components
• Annual pay• Stock Options• Golden Parachutes• Perquisites and Enhanced Benefits• Bonuses
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
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
Short term incentives
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
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
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
Golden Parachutes
• IRS considers• It business• Expense
• YOU’RE FIRED
Platinum parachutes
• Your’re outa here !!!!!• Before contract over• Severance• Continued benefits• Stocks
• Example Bancorp…73.6 • + 24.4 mil cash stocks• + free health care• + 40,000 month consulting
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
Other Perks
• Extra insurance• Corporate jets• Supplemental retirement plans• Country club memberships• Vacation homes• Tickets
How is Executive pay Set?
• Individuals• Groups• Consultants• Pay committees• Boards of Directors
Theories about exec pay
• Agency Theory
• Tournament Theory
• Social Comparison Theory
Security Exchange Commission Disclosure
• Look #336
• Full disclosure of four top level execs