Camouflage Compensation

Posted in Finance, Accounting and Economics Terms, Total Reads: 590
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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

Type

Comments

Base Salary

Not incentive based; Cannot be camouflaged

Medical benefits

There is generally a stipulated limit

Split premium life insurance

Complex and hence can be camouflaged

Other non-retirement benefits

Can be camouflaged

Non-financial perquisites

Difficult to monitor, measure and value and hence can be camouflaged

Bonus Compensation

Difficult to find non-market benchmarks so can mislead investors

Stock based compensation (shares, dividend units, share appreciation rights, phantom stock, restricted shares etc)

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

Deferred Compensation

Easier to exclude from filings

SERP’s

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

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