Why Businesses Need Executive Compensation Packages
Executive compensation packages are designed to reward high-performing executives for their outstanding performance. Often, executive bonuses are offered as a percentage of their base salary and are divided into tiers. Each tier of bonuses includes target and stretch goals for executives to meet. Stretch goals allow executives to earn the total amount of their bonus only if they achieve extraordinary results. This helps to lessen the impact of the bonus on the business.
Companies can use many types of incentives to reward top executives. Some of these incentives are financial, and others are non-financial. Incentives can be designed to focus on a specific goal, such as meeting sales targets. They can also be based on operational goals, safety, and quality assurance hurdles, innovation, and other business criteria.
Executive compensation plans often include health insurance, severance pay, and various paid time off, such as vacation, holiday, and sick days. In addition, a portion of the total compensation may be in the form of stock options. In addition to severance payments, executives can also receive annual bonuses.
An executive’s base salary is the annualized pay before any bonuses and incentives are considered. This amount can be based on several factors, including the type of industry, the size of the company, and market trends. In many cases, the base salary is also tied to an executive’s performance. This compensation plan is also referred to as a pay-for-performance plan. In addition, the compensation package may include stock plans, which offer significant incentives to top executives.
In addition to the base salary, executive compensation packages may include various other forms of compensation. These may include perks, bonuses, health insurance, and stock option awards. Executive compensation is essential to human resource management, as it helps keep employees motivated.
Contingent pay for executive compensation packages is a type of employee compensation that requires the executive to achieve specific pre-set achievements to receive an award. It may include a base salary, stock options, personal benefits, and perks. In addition, some executive compensation plans may include bonuses. Bonuses are annual incentives that are added to the executive’s salary. Contingent pay can also involve stock options and vesting schedules. Executive compensation plans vary, but the company’s board of directors determines most.
Executive compensation packages should be carefully designed to address the organization’s needs. Individual pay should be tied to the executive’s performance, but group incentives are also significant. This ensures that the executive is managing the performance of the team rather than simply the performance of individual employees.
Even though executive compensation packages are a popular way to reward top performers, tax benefits are not necessarily what businesses want. Executive compensation is often overstated. In some cases, it could cost the company more money in the long run. This is especially true for large public corporations that may not have to pay taxes. Examples include Goodyear and Whirlpool Corporation, which didn’t pay taxes in 2010 and 2011.
While CEO compensation may be necessary for a company’s bottom line, it’s not a primary driver of business success. Therefore, companies should be transparent about their compensation and their performance. Generally, CEO compensation is deductible, but there are restrictions. In 2010, for example, there were less than a thousand CEOs in the U.S. – less than the number of companies that filed proxy statements annually.
Stock options are an essential part of an executive compensation package for businesses. This type of compensation carries several tax advantages. Employees who receive ISOs do not have to pay taxes on the exercise of the options and do not have to pay taxes on the value of the stock when they sell them. But, employees must meet specific IRS requirements before receiving ISOs’ tax benefits. They must also hold onto the options for at least two years before they can exercise them, or the shares will be taxed as NSOs.
Stock options are typically offered to employees at the time of hire. They allow organizations to reward critical employees, promote high performers, and recognize job promotions. Some organizations also award annual option grants to employees.
Executive retirement plans offer high-paid employees an opportunity to save for retirement. More than 400 large public companies offer such programs to their top executives, totaling $13 billion in accumulated benefits. These plans can increase executive retirement savings while reducing tax liabilities. But they are not without their risks.
Some executive retirement plans are funded through company cash flows and cash-value life insurance policies. As a result, they don’t require approval from the IRS and require minimal reporting.