Executive Compensation

Posted in Human Resource Terms, Total Reads: 1656

Definition: Executive Compensation

Executive compensation is the remuneration paid to the executive level officers of a company who include the Chairman, the Directors on Board, the CEO, CFO, COO and other C-level managers.

The Executive compensation is negotiable between the employer and potential executive. It can defy the organizational norms on compensation to regular employees.

The various components of executive compensation are –

  1. Salary – base salary
  2. Short Term Incentives (STI) – for meeting the short term goals
  3. Long Term Incentives (LTI) – There are the incentives which are paid after a period more than a year (usually 3-5 years) like offering restricted stocks
  4. Guaranteed Severance Package -
  5. Perquisites – like club memberships, private planes,
  6. Insurance – health insurance for self and dependents

The executive compensation is a part of Corporate Governance and has been an issue of hot debate for quite a long time especially in Western media. The American Executives have often been criticized for the hefty packages received despite lackadaisical performance of their companies. There are no legal restrictions on the compensation paid to the executives in Western Companies.

However, the issue is not that severe in India partly because of the provisions in Indian Companies Act 1956 and many executives being the promoters of their companies. As per the Indian Companies Act, a ceiling has been imposed on the executive compensation in public companies and their private subsidiaries. The compensation cannot exceed 11% of the net profits of the financial year. Also the compensation of whole time directors cannot exceed 10% of the profits. However, the executives of private companies have been excluded from these restrictions.


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