EXECUTIVE COMPENSATION OR
MANAGERIAL REMUNERATION
INTRODUCTION
Executive Compensation or managerial
remuneration is how top executives of
business corporations are paid
Managers are very short in supply ,
therefore, organizations are competing with
each other to attract , retain and motivate
leader managers for their strategic
requirement
Elements of executive compensation
Higher managerial post like presidents, vise-
presidents, directors, general manager etc
The managerial remuneration of such
positions comprises of 4 elements . They are
–
1)Salary 2) Bonus 3) Long Term Incentive 4)
perquisites
SALARY
Salary is basically determined through job evaluation
and serves as the basic for other types of benefits ,
but in managerial compensation job evaluation plays
only a part and not represents the whole truth
A manager is paid for his capabilities and for the job
he performs , rather than only job demands . This is
the reason why the norms of wages and salary
fixation are generally not observed while fixing the
salary of the manager
Salary of the managers varies by the type of job ,
size of organization, region of the country and type
of industry .
Salary makes up of about 40 to 60 % of top
managers annual compensation but it is not
significant , as it is subject to deduction at source
and is also kept by government regulation . In order
to avoid such deductions and sealing , managers are
offered incentives and attractive perks
BONUS or PROFIT SHARING BONUS
This type of incentive is shortened (annual ) and is based on
performance or profit sharing
There are many bonus system as there are companies using
this form of managerial remuneration
In some system the annual bonus is tied by the formula to
share returns on investments . Other bonus plans are based on
the subjective judgments of the board of directors and Ceo’s
Managers deserve bonus because they have much more
stakes to influence organizational success than non-managerial
staff
LONG TERM INCENTIVES/STOCK
OPTIONS
If bonus are short term benefits , stock
options are long term benefits offered to
managers
Companies allow managers to purchase their
shares at fixed position but Stock options are
valuable as long as price of the share keeps
increasing .
Perquisites
Special benefits for executives that are usually non-
cash items. For example: companies provide health
club memberships with personal trainers; discounted
company products; automobiles and leases; country
club memberships; first class airfare or use of the
corporate jet; executive health plans; personal car
service; personal computers and cell phones etc.;
entertainment; financial planning assistance etc
BENEFITS FOR EXECUTIVES
As with benefits for non-executive employees , executive
benefits may take several forms , including traditional
retirement , health insurance vacations and others .
Executive compensation may include other benefits which
other employee do not receive
Executive health plans with no co-payments and with no
limitations on deductible or physical choice are popular among
small and middle sized business
Trust of various kinds may be designed by the help the
executive’s to deal with estate issues
Differed compensation offers another possible means of
helping executives with tax liabilities caused by incentives
compensation plans
Unique feature of Managerial
Remuneration
Managerial remuneration cannot be compared to wage and
salary schemes meant for non-managerial employees in
organization . Factors and variable are more numerous in
managerial jobs and simple comparisons and ratings are not
possible .
Managerial are denied the privilege of having unions and
collective bargaining . Their competence and contribution are
the strengths for determining their pay package .
Secrecy is maintained in respect of managerial remuneration .
This is done because no two managers in the private sectors,
in the same grade receive the same pay. Compensation and
reward depends upon such factors as competence , length of
service , contributions, and loyalty to the company .
Unique feature of managerial
remuneration
Managerial pay is not supposed to be individual performance measure
but rather on the unit of organization performance . This is because a
managers own performance is assumed to be directly reflected in
measure of units of corporate performance
Managers compensation is subjected to statutory sealing. As per the
latest guidelines , monthly salary varies from Rs 40,000 to 87,500
subject to an overall limit fixed per annum including perquisites .
Finally theoretically, remuneration of managerial personnel is
supposed to be guided by job description , job evaluation, salary
grades with ranges of pay in each grade and salary surveys .But in
practice norms seem to have thrown to winds and exorbitant amounts
are paid to decision makers in organizations. The annual salary of
Ceo's range from Rs 50 lakhs to few crore
Why managers should be paid more
Managers have intensive worth and hence command hefty premiums .
The managers drive himself to success in his or her role is creating the mean
by which certain organizational goal is achieved . The financial reward is a
symbol of managers role itself , its power , its dignity and its freedom
The class of people called manager are always in short supply. One must pay
heavenly if one has to attract and retain talented and competent individual
Having succeeded in retaining them , the manager must be motivated for
better performance and it is the money which motivates employees and
managers are no exceptions .
The lifestyle that fits his status and job requires considerable amount of money.
To a worker , the wage is a mean of living but for a manager financial reward is
a symbol of social prestige and position .
It is to eliminate or at least minimum corruption . The best of satisfying greed is
to pay well .scans and scandals cost the organization irreparably
Mythologies-cum Strategies for
managerial compensation
Salary/basic salary/consolidated salary continues to remain a major component
, though salary scales are often discarded these days or used only as guides. It
is the performance contribution that determines the pay and future revisions,
which vary widely from individual managers .
Grade wise flats allowances are being consolidated , except where tax
exemption benefits are available . Allowances may be linked to the salary as a
percentage or by slabs , but preferences is for flats amounts , which do not
increase automatically and increase at the discretion and therefore controllable
Reimbursement of expenses incurred on company's work has been limited ,
and that in line to conform to the tax laws . Being actual in most cases , they
are not considered as part of compensation , unless it is provided towards
personal benefits .
Annual –payments –bonus or commission and leave travel are common
features. Some tax relief applied for the latter
Benefits generally comprises of furnished or unfurnished company
owned or leased accommodation , use of company owned or leased
vehicle , medical coverage ,, covering provident fund, pension, or
superannuation and gratuity , post retiral medical assistance , easy
loan scheme or utility items or vehicle , furniture or utility items , etc,
renting employees owned housing , club entrance fee
reimbursement , etc . Minor benefits could be provision of security ,
drivers , gardening, assistant, sales of products or assets at the
concessional rate , the relocation and transfer expenses , including
admission etc, fees for children , credit card fees, phones etc.
Most of the companies are now moving away from traditional
compensation package (basics, DA,HRA etc) to cost of company
basis. Companies are talking in terms of gross salary and asking
managers to do their own tax planning
Some of the companies give their managers freedom to design
package keeping in view of total cost . It means giving
managers the flexibility to choose lifestyles of their own living
within the certain parameters .
Performance linked payments+Bonus+generous increments
+merit awards are increasing . The trend is to move away from
seniority and hierarchy system and attach value to performers.
The concept of star performers are giving ground.
Lifestyles perks( good accommodation, club membership ,
liberal furnishing , holiday abroad with family ) continues to be
the practice even if these are taxed.
New way of pay
Against changing patterns , organization are increasingly linking their
variable pay plans to individuals , teams and organizational
performance. the extent of linkage and the nature ( short/long term)
varies for different levels within the organization . Some of the variable
pay plans ( VPPs) that organizations have successfully implemented
include individual/team performance based gain profit sharing ,
productivity based business individual /team performance , based
gained profit sharing , productivity based business incentives , stock
options , and ownership and other customized schemes .
While long term incentive plan is a good mechanism to link
organizational objectives to individual rewards . The feedback is that
organizations with strategically aligned variable compensation have
experienced a positive impact on individual as well as organizational
performance . Companies have leveraged the variable pay to
aggressively position their top performer at the top end of the market
Increasingly , companies are experimenting with the “cost to
company "concept , with focus on higher rich compensation
structure. New and emerging sectors like retail , telecom,
aviation and IT/ITES which have the advantage of no legacy
issues and also have younger employee population . Tend to
adopt simplified structures at the outset
Another concept gaining popularity due to changing tax
environment is the flexible salary structures where the
employee has the freedom to choose from the defined menu of
items of pay and optimize his/her own tax planning . This works
in a win-win manner and has increasingly gained acceptance
as it provides flexibility to the employee and tax compliance to
the organization
