In the recent light of corporate governance, board involvement and financial/economic crisises, it is not a wonder why Executive Compensation has become such an area of intense focus.
Essentially, every company employs key executives who are critical to the success of the business. Retaining these skilled, well-trained professionals can be extremely challenging in today’s competitive environment. A well thought out and fair executive compensation plan can help to motivate, incentivize and retain those creative professionals that drive the success of the business.
Who Gets Executive Pay?
Usually only those members of your most senior management team qualify for executive pay. It is usual the members of the “C-Suite.” By title they typically are:
What Are the Components of Executive Compensation?
While a non-exempt employee earns simply an hourly rate and, hopefully, a benefits package that includes basics such as medical, paid time off, and a 401(k) option, the components of executive pay are more numerous and more complex. They include, but are not limited to:
• Base salary
• Incentive pay, with a short-term focus, usually in the form of a bonus
• Incentive pay, with a long-term focus; stock awards, option awards, non-equity incentive plans
• Enhanced benefits package that usually includes a Supplemental Executive Retirement Plan (SERP)
• Extra benefits and perquisites, such as cars and club memberships
• Deferred compensation earnings
What Is Executive Compensation Based Upon?
Most organizations have separate executive pay plans and these plans focus much more on the individual, where it is the person for whom the compensation package is tailored. The executive pay packages must still be consistent with the compensation philosophy of the organization. They must be competitive in terms of what is being offered to similar officers within the same industry and in comparably sized organizations. Whereas geography is a huge factor in terms of prevailing wages for non-exempt employees, at this end of the pay spectrum geography is not as an important factor. Recruitment at this level is usually at the national or even international.
Why Is Executive Pay Complicated?
Executive pay is complex for a number of reasons, which include tax minimization, financial reporting, and government regulations. While most of us are left on our own to deal with Uncle Sam and the taxes we owe every April; effective executive compensation plan designs look at the current tax laws and take those laws into consideration. Plan updates are made when favorable tax benefits are found.
The Sarbanes-Oxley Act (SOX) that passed in 2002 enhanced financial disclosure and put limits on what can be offered to executives of public companies. SOX stopped loans to executives, for example. The Financial Accounting Standards Board (FASB) has determined that stock options must be reported on financial statements as an expense. The combination of SOX and FASB regulations has made stock options granted a less popular element of the total reward mix.
How Can I Design an Executive Compensation Plan for My Organization?
You must assure that sufficient employment, severance, and change of control agreements are in place to meet the needs and goals of the organization. Concurrently, your executive pay plan needs to have clearly understood corporate-wide measurements to maximize the compensation investment being made. The total rewards package for your executives needs to be reviewed by your legal counsel and satisfy your executive pay committee of your board of directors. It is critical to get this pay right for the good of your executives, as well as the health and leadership of organization. Now is the time to call in an expert and partner with your finance department.
About Compass Asset Management Group
Our boutique-style firm has an investment philosophy is both prudent and value driven. We combine research from the largest firms on Wall Street with three decades of market experience to provide strategic, tactical and dynamic investment management. Compass Asset Management Group, LLC delivers personalized financial planning, estate planning and investment management advice in a private setting with a high degree of sensitivity to your concerns and objectives. Our goal is to exceed yours expectations by listening closely, understanding deeply and communicating well through frequent, personal consultations entirely focused on your financial goals.
Make the right choice with your financial future. Consult Compass Asset Management Group for advice & guidance that will change your life. Plan better to live better…Call Compass Asset Management Group.
Please note that the content of this blog does not constitute tax advice and is only intended for the educational purpose of the reader. Please consult your tax advisor for specifics regarding your circumstances.
For more information contact us at 845.563.0537 or Contact@CompassAMG.com
Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.
COMPASS ASSET MANAGEMENT GROUP
100 STONY BROOK COURT SUITE C
NEWBURGH, NY. 12550
Tags: bonuses, CEO, CFO, CIO, club memberships, COO, deferred compensation earnings, discount share purchase, esop, executive compensation, executive pay, executives, fasb, financial accounting standards board, financial disclosure, golden handcuffs, grants, incentive pay, non-equity incentives, options, President, salary, sarbanes-oxley, serp, stock awards, stock options, supplemental executive retirement plan, Taxes