Posted in Finance, Accounting and Economics Terms, Total Reads: 468
Definition: Camouflage Compensation
Camouflage compensation is an additional concealed compensation paid to top tier employees including CEO’s, Directors etc. Camouflage compensation is not revealed in company's annual reports and other documentation. This type of compensation is given over and above the salary and perks given to the employees & is kept hidden or camouflaged.
Even if it is shown, camouflage compensation is made to appear in such a way that it does not look as a huge amount. With the war for talent intensifying due to heavy competition in all industries, companies are finding it very difficult to attract, retain and poach talent from competitors. This is achieved by giving incentives and perks along with a good compensation to employees.
Giving a huge compensation in various forms is a strategy adopted to overcome this difficulty. However, to escape from investors/regulators’ ire, companies camouflage the compensation and benefits package to make it look much less than the true value paid out as gross compensation. This is often given over and above the executive compensation given to the top employees.
Parts of camouflage compensation
Different parts of a compensation package and their extent of camouflage is explained below
Not incentive based; Cannot be camouflaged
There is generally a stipulated limit
Split premium life insurance
Complex and hence can be camouflaged
Other non-retirement benefits
Can be camouflaged
Difficult to monitor, measure and value and hence can be camouflaged
Difficult to find non-market benchmarks so can mislead investors
Not easy to see the impact and can be used to camouflage
Option based compensation
Difficult to value and monitor and hence a good camouflaging technique
Easier to exclude from filings
Often excluded from filings since benefits are not easily discernible
Post-retirement consulting contracts
Can be camouflaged
Example of camouflage compensation
For example, let us imagine a situation where a company X is looking for a CEO. The salary of the outgoing CEO is Rs. 45 lakh pa. But the board has identified a top executive in a rival firm who if employed as CEO would change the tables in favour of X because of his expertise and knowledge. But he is demanding Rs. 3 crore pa. The board thinks that is not a huge amount given the benefits that he can bring in. But the same may not be communicated to investors because they might fear X is overpaying and get wary and sell off stock. To avoid this, the company may camouflage the 3 crore package in the following structure.
Rs. 60 lakhs pa + Rs. 60 lakhs deferred compensation + Rs. 80 lakhs in Bonuses + Rs. 1 crore in stock options