Executive Compensation - Meaning, Importance & Components

Published in Human Resources Terms by MBA Skool Team

What is Executive Compensation?

Executive compensation is the monetary and non-monetary benefits which are given to the senior management & executives of a company. Executive compensation includes salaries, perks, incentives, insurances etc. This includes high salaries for executive, insurances, company shares & other benefits.

Senior management plays a pivotal role in building the company's business and brand. Thus, organizations look take care of these employees by giving them special compensation and benefits. Their salaries & compensation is based not only on their experience but also on their profile, qualification etc.

Importance of executive compensation

It is an important aspect of business and HRM. Senior employees are the ones making the strategies, taking importance decisions etc. Thus, it is extremely important to keep the senior management motivated. The Executive compensation is negotiable between the employer and potential executive. It can defy the organizational norms on compensation to regular employees. Executive compensation is offered to the chairman, CEOs, board of directors etc.

Components of executive compensation

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.

Hence, this concludes the definition of Executive Compensation along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

Browse the definition and meaning of more similar terms. The Management Dictionary covers over 1800 business concepts from 5 categories.

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