The top executive compensation is a special and specific area of compensation and benefits, which is usually confidential and it is not open to all employees in the organization. The top executives hold the responsibility for the organization, they lead the development of the organization and they have a tremendous impact on the results of the organization. The compensation scheme of top executives has to reflect the responsibility and it has to provide the security to the top executives to use the personal responsibility and to take courageous decisions.
The executive pay is about the focus on the short-term performance and the long-term sustainability of the organizational development. The top executives are motivated to search for the cost-cutting potential and focusing on the sales and performance growth in the long-term perspective as the shareholders can realize the benefits of being involved in the organization.
Executive Compensation Principles
The executive pay has to reflect the role of the executive top management in the organization. The executive management drives the development of the organization and the executive compensation has to be aligned.
The executive compensation changed dramatically over the last two years as the financial crisis showed several issues with the executive pay, which was too focused on the growth of the organization while ignoring the sustainability of the organization.
The executive compensation consists usually from two main parts:
- Short Term Pay
- Long Term Pay
The short term pay of the executives is about the base salary and short term bonuses, which are paid on the basis of the immediate performance of the organization. The bonuses are usually deferred over a period of time. The short term pay is usually fully cash based executive compensation component.
The long term pay is about the stock options, shares, restricted stocks and pay based on the performance against the index. The shareholders use these long term compensation components to protect the value of the organization and betting of the top executives on the growing value of the organization on the market. The long term compensation components can be realized just in case, the stock price of the organization grows. The long term pay component is usually non-cash based.
In the modern organizations the short term pay is just a small part of the total cash of the top executives.
Executive Compensation Risks
The executive compensation is sensitive to the right setting as the short term and long term components of the pay have to be in balance as the organization does not suffer from the imbalances in the managerial decisions. The organization should always focus to balance the short term remuneration (which is valued more) with the potential to get more in the future. It is always difficult to find the right balance and the shareholders have to be in the agreement with the top management.
The excessive compensation is always more the issue of trust and confidence of employees and shareholders. The executive compensation scheme has to include the holdbacks and claw-backs and safety brakes for the case, the organization outperforms hugely the market. Each executive compensation scheme needs caps and floor as it is manageable in all situations, which can happen on the market.