Executive Compensation and Employee Benefits - Term Paper Example

Task: Executive Compensation and Employee Benefits There has been a significant rise in the executive compensation over the past thirty years exceeding the increasing levels of the average worker's wage. This has drawn the attention of the shareholders, the public and regulation by the government as a response. In history, incentive compensation has been applied so as to achieve positive financial and performance goals. Finding higher-ranking executives competent enough to communicate the vision of an entity, motivate people and to lead the company towards success can be very challenging. A company with a number of products, clear vision and unique ideas stands to lure the most competent candidates in each and every level but to maintain this momentum of better performance, it is imperative that the top executive level secures the best talent. A compensation package which is attractive to ensure these talents are maintained at the top management level of the company since they enjoy significant negotiating power and as such additional incentives up and above the compensation package can be impacting in luring an executive to join an organization. Challenging and unique opportunities do sway employees and thus in addition to an appealing compensation package, employee benefits have been applied so as to supplement it. Employee benefits has been very helpful in enhancing economic security of the employees thus curtailing labor turnover, increasing employees loyalty and improving productivity. Introduction Compensation is any kind of remuneration that is received by a person in return for his/her performance of the company's or organizational tasks. There are four common methods of compensation: performance related pay (PRP) such as commission, bonus, time rate and piece rate; fixed basic pay; non-economic benefits such as house, car etc and finally ownership benefits where employees are awarded shares (Reid, 2004). Several factors influence the wage and the salary structure, these include: pressure from trade union, lowest wage rates, existing market rates, supply and demand for a particular job, the employee's qualification and the ability of the organization to pay. Compensation in the form of wages is normally given to a worker while compensation in the form of a salary is normally given to an employee. Executive compensation refers to the way senior executives for the business corporations or firms are paid. Executive compensation comprises of the basic salary, options, shares, bonuses plus additional company benefits (Bagley & Savage, 2006). Forms of Executive compensation There are a number of types of executive compensation which offers numerous performance incentives and tax benefits. They include: Stock options -Refers to the privilege sold by a buyer to a seller that gives the latter a right rather than an obligation either to call(buy) or put(sell) the stock at an agreed price on a particular date or within a specified period (Bagley & Savage, 2006). Stock options ensures the CEOs interests are kept at par with that of shareholders since their value is subject to the price of the stock remaining above the strike price/exercise price (price upon which a stock will be sold or bought upon the exercise of the option) of the option. However stock options are open to abuse through options backdating and excessive risk seeking (Lawrence, 2002). Restricted stock - These are stocks awarded to an executive but can only be sold once a specific conditions are arrived at and it carries a similar value to the stock's market price during time of the grant. Deferred compensation -This is normally applied for taxation purposes and involves postponing compensation up to a certain future date. Executive perks compensation includes travel reimbursements, private jet and extra rewards given to the executives. Retirement packages awarded to executives following their retirement from the organization; this is open to abuse as corrupt executives can attach "golden parachutes" to the package. Long-term incentive package (LTIPs) compensation which entails each and every performance based compensation mainly for taxation purposes. Cash compensation represents the annual summation of standardized cash salary received by the executives. Regulation of Executive Compensation The beginning of the millennium was marked by perquisites, option gains and substantial compensation being paid to the top executives of different companies like Enron and WorldCom which later went bankrupt as an aftermath of the unauthorized and excessive compensation arrangements (Berger, 2008). Enron and WorldCom present a perfect example of how greedy executives can abuse incentives available to them and defraud the company. Public companies are under no obligation to disclose the compensation of their top executives and thus much of the regulations target them as well as private companies since they may be publicized in future either through sale or conversion. According to Dorothy Berger (2008), "CEO pay is reported to have increased from 28 times average employees pay in 1970 to more than 500 times the average worker pay in 2000, remaining at 369 times average pay as of 2007. (p.367) Federal and state regulations employ various strategies to control the executive compensation growth. These include: Tax law restrictions- the Internal Revenue Code (IRC) imposes tax disincentives in an effort to regulate executive compensation. Section 280G of this code imposes an exercise tax and denies a deduction on the 'excess parachute payments' following change in control in a company. Section 162M denies any deduction on any compensation which is not performance based to particular executives of limited companies that exceed $ 1m per annual. Section 409A, imposes an interest and additional taxes on the deferred compensation that doesn't meet the fresh standards for time and form of payment. Section 4958 of the IRC imposes an exercise tax on particular organizations including their managers which are subject to tax-exemption owing to overpaying their officers. Progressive taxation strategy- this strategy implies that the higher the earnings of an individual, the higher the amount of tax that he pays; and it affects the both the compensation for the executive and those persons who are highly paid. Application of tax cuts on incomes exceeding a certain limit and applying a higher percentage for taxation purposes has been a common practice to check on executive compensation (Bagley & Savage, 2006). Alternative minimum tax (AMT) which is an additional tax up and above the regular income tax imposed on individuals with exceptionally high incomes who may escape or pay little tax by taking advantage of tax benefits (Bagley & Savage, 2006). Stringent disclosure requirements- it is a requirement of the companies Act that the payment details of the top management be released in detail in the annual financial account. This ensures accountability of the top leadership to the shareholders. This gives a chance to all the company stakeholders to know and make a decision regarding the fairness of the compensation. Clawback provisions- this is a provision in the executive pay agreements requiring an executive reimburse an organization or the company a precise amount of money in case he/she infringes a non-compete contract and is hired by a competing firm within a specified number of months after he/she leaves the company. Clawback provision may entail returning of bonuses or stock options already exercised in case the company fails to meet the specified levels (Bagley & Savage, 2006). Indexing operating performance- this is a technique to ensure that bonus targets in a business cycle are independent, fairer and valid in the long run (Berger, 2008). A strategy involving the setting of the executive compensation being done by an independent and non-executive director is commonly applied. Remuneration in this case is a prototype of a self dealing. A remuneration committee which is independent is an effort to have payment packages being set at arms' length from executives or directors receiving the payment. Shareholders' approval- each and every equity compensation plan is subject to the approval of the shareholders who can vote for or against issuance of an equity plan on a non-binding basis. This eradicates enormous windfalls which may result owing to a stock market being on the rise or following a long period of retained profits. Employee Benefits Employee benefits also referred to as perks, perqs, perquisites, benefits in kind or fringe benefits are a number of compensations which are non-wage which are provided to an employee as a supplement to their normal salaries or wages e.g. housing paid for or provided by the employer, group insurance, tuition, retirement benefits, vacation-non (paid or paid), profit sharing, social structure, tuition reimbursement, promotion opportunities, education funding and additional specialized benefits. Perks or perqs refers to those flexible benefits to employees demonstrating exemplary performance or the ones in higher-ranking. Employees' benefits are purposed to improve the employee's economic security (Dave, 1996). Employee benefits are types of value as opposed to payments which are given to an employee as a reward for his/her contribution in an organization or the company. Worker's unemployment compensation benefits are both federal requirements; worker's compensation is more of a right to an employee as opposed to a benefit (Sirkin & Cagney, 1996). Employee benefits can be intangible or tangible. Intangible benefits refers to some indirect benefits such as appreciation by the boss, a nice office, probability for promotion, etc. tangible benefits are more direct and they include: maternity leave, holiday pay, vacation pay, bonuses, stock options, profit sharing, pension pay and insurance (worker's and unemployment compensation, disability, dental, life and medical). Employee benefits can be employee-paid or company-paid. Most forms of employee befits are usually catered for by the company e.g. vacation pay, holiday pay etc. but some other forms of benefits e.g. medical insurance are frequently paid for either in part or in full by the employees owing to their high costs. Employees' benefits are advantageous both to the employer and to the employee. To the employer: employee benefits can attract and retain highly skilled employees, provide high risk coverage cheaply hence low financial burden to the company, enhance productivity and efficacy since employees are assured of security including that of their families, the company saves since premiums are tax deductible. To the employee: additional protection for employees with own life insurance, pride in the company and a boost in morale owing to the confidence employees attach to the company's employee benefits (EB) schemes, discounted rates which are bargained via the employer, improved productivity owing peace of mind as a result of better security. It is worth noting that employees' benefits can have a shortcoming in case the normal tax rate if an individual is applied to them, especially in cases where there is no financial gain to an employee from the said benefit (this is the case in the UK). The compensation scheme should be designed in a way which is fair and motivating so that the workers give their best to the organization. Conclusion The executive compensation is an imperative issue for consideration by investors in their decision making. A poorly compensated executive may lose shareholders money or deprive the executive to boost the share price and profits. Steps have been undertaken by the government to curb the loopholes that allow for the misuse of incentives granted to the executives through legislation to enhance transparency in the process; also new tools for analysis have been developed to keep the investors informed. Employee benefits improves the economic security of an individual employee and they are very advantageous both the employee and to the employer. An attractive compensation package alone is not sufficient and hence supplementing it with other incentives can help the organization to meet its human resource co-objective i.e. to enhance efficiency and productivity of its employees and lead the organization towards attainment of its objectives. It is imperative that the options adopted for employee benefits be flexible to minimize costs to the business. References Bagley, C. & Savage, D. (2006). Managers and the legal environment. 5th Ed. UK: Havard Business Press Berger, D. (2008). The compensation Handbook. 5th Ed. NJ: McGraw Hill Professional Dave, U. (1996). Human Resource Champions. The next agenda for adding value and delivering results. Boston, Mass.: Harvard Business School Press. Foulkes, F.K. (1991). Executive compensation: A strategic for the 1990s. UK: Havard Business Press Lawrence, G. (2002). Options as a strategic investment. 4th Ed. New York: New York Institute of Finance Reid, M.A., Barringtone, H.A., Brown, M. and Chartered Institute of Personnel and Development. (2004). Human Resource Development: Beyond Training Interventions. 7th Ed. UK: CIPD Publishing Sirkin, M.S. & Cagney, L.K. (1996). Executive Compensation. Florida: Law Journal Publisher Read More