Executive compensation actually differs from the typical pay of management or professionals, it is also called as executive pay. It is actually designed for senior management and upper level employees of a company; it is composed of both financial and non-financial benefits. It is rewarded by an organization to the executives for their services to the firm. This compensation includes the base salary and other annual or semiannual bonuses.
Executive compensation has changed over time as many organizations realizes that even executive compensation isn’t working out to resolve agency problems between owners and CEOs so they started giving stock options, restricted stocks and preference shares to the executives. So, it became indirect compensation as by doing this CEOs become more curious about raising the value of the stocks of the company so that, they can get more rewards in the form of profits. In this way the CEOs will work harder for organization and get the executive compensation in this form and organization will also be benefitted.
The main objectives of executive compensation policy are as follows:
The cost of the executive pay must be limited to the limit where the shareholder’s wealth does not get affected but maximizes.
Salary package should be designed in such a way that it motivates the executives to take risks, work harder, and take distasteful decisions such as termination or cost cutting, for the purpose of increasing the shareholder’s wealth
Most of the time the executive compensation is designed with the intent to hold on to the executives during the bad times caused due to the industry factors or adverse market of the company.
Incentives should be given to managers so that they adopt those strategies, actions, and investments which results in the shareholder value increment. For which an executive aligns his interest with the interest of the shareholder.
Normally, the Packages of executive compensation are designed by the board of directors, especially by the compensation committee, which comprises of the independent directors. The purpose for which the committee is formed is to pay incentives to the executive team who play an important role in decision making and the overall value creation of the company and is responsible for the corporate strategy.