Components & Design- An executive compensation comprises of five main components.
- Base Salary: Though job evaluation plays an important role in determining executive base salary, other factors also should be considered. Most important is the opinion of the compensation committee which comprises of the board of directors or a subset of the board. Sometimes the committee takes over the task data analysis and analyzes salary survey data and performance records for the executives of the firms which are the same size as their own firm.
- Short Term Incentives or Annual Bonuses: Annual bonuses play an important role in executive compensation and are designed to motivate better performance.
- Long Term Incentives and Capital Appreciation Plan: Long term incentives nowadays account for about half of the total executive compensation. The most common form of long term incentive is the executive stock option. Stock option is the right to purchase the stocks of the company at a stipulated price over a period of time by following some eligibility requirements.
- Executive Benefits: Many benefits are tied to income level like life insurance, disability insurance, pension plans etc. These are the typical benefits. Apart from these many executives also receive additional life insurance, exclusions from deductibles for health related costs and supplementary pension income exceeding the maximum limit permissible under ERISA guidelines which are eligible for tax deductions.
- Perquisites or Perks: Perquisites or perks as they are popularly known differ according to the ranks of the employees.
- Internal perks are a type of perk provided to an employee within the company like a luxurious office, special parking, executive dining room etc.
- The second type of perks are related to the company but are related to the business conducted externally like company paid membership in clubs or associations, payment of hotels, air fare, auto expenses etc.
- Then are the personal perks. These are completely different from the aforesaid perks due to their difference in tax status. This includes personal and legal counseling, free home repairs and improvements, personal use of company property, expenses for vacations etc.
A well constructed and balanced compensation package should include the following elements:
1. Salary
2. Benefits
3. Short term incentive
4. Long term incentive
5. Something special, including deferred compensation
Become Vskills Certified Compensation and Benefits Manager. Learn the module “Components & Design”. Try the free practice test!
Apply for Compensation and Benefits Certification Now!!
http://www.vskills.in/certification/Certified-Compensation-and-Benefits-Manager
