Compensating Executives

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Compensating Executives Chapter # 13

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Compensating Executives. Chapter # 13. What is executive status?. IRS recognizes two groups Highly compensated Very responsible position 5% owner sometime during year Paid $100,000 or more yearly Key Employee $145,000 up Responsible role . - PowerPoint PPT Presentation

Transcript of Compensating Executives

Page 1: Compensating  Executives

Compensating Executives

Chapter # 13

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What is executive status?

• IRS recognizes two groups

– Highly compensated • Very responsible position• 5% owner sometime during year• Paid $100,000 or more yearly

– Key Employee• $145,000 up • Responsible role

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Long term and short term Pay

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CEO’s sell their services

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CEOs

• Can hired and use their own compensation consultants.

• Conflict of interest• Fired 119.089 employees last year (2007)• Who pays? stockholders

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Types of Executive Pay Packages

• Main Components

• Annual pay• Stock Options• Golden Parachutes• Perquisites and Enhanced Benefits• Bonuses

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Base (annual) Pay

• Broader range• No formal pay structure• IRS lets firm deduct CEO pay as tax write off

up top $1,000,000.• Base pay is smallest part of total package

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Bonuses

• Single pay for performance• Discretionary

• Depend upon profits

• Future opportunities• Performance contingent bonuses• Predetermined allocation bonuses• Target plan bonus

• No bonus if profits fall below a certain amount

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Short term incentives

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Deferred Core Compensations

• Company stock• Pay given at future date• Idea is to create sense of ownership• Align goals of exec to goals of firm• Tax advantage for CEO

• Deferred until retirement

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Types of incentives

• Stock options• Have to pay cap gains in future

• Non Statutory stock options– Tax paid upon receipt

• Restricted Stocks– CEO has to return stock when leaving – At original price. Idea is to pocket gains

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Types continued

• Phantom, stocks– Hypothetical stocks.

• Discount stock option– Stock given at lower than market value

• Stock appreciation rights– Income is taken at end of a certain period of

time

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Golden Parachutes

• IRS considers• It business• Expense

• YOU’RE FIRED

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Platinum parachutes

• Your’re outa here !!!!!• Before contract over• Severance• Continued benefits• Stocks

• Example Bancorp…73.6 • + 24.4 mil cash stocks• + free health care• + 40,000 month consulting

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Tighter Regulations of Deferred Plans

• EX: Enron• Exec withdrew cash out firm before

bankrupt.• 2002 Sabanes Oxley Act– Financial disclosure or penalty to execs– Full audits

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Other Perks

• Extra insurance• Corporate jets• Supplemental retirement plans• Country club memberships• Vacation homes• Tickets

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How is Executive pay Set?

• Individuals• Groups• Consultants• Pay committees• Boards of Directors

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Theories about exec pay

• Agency Theory

• Tournament Theory

• Social Comparison Theory

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Security Exchange Commission Disclosure

• Look #336

• Full disclosure of four top level execs