Types of compensation See also: Employee stock option, Golden parachute, and Performance-related pay There are six

basic tools of compensation or remuneration. salary bonuses, which provide short-term incentives long-term incentive plans (LTIP) employee benefits paid expenses (perquisites) insurance (Golden parachute) In a modern US corporation, the CEO and other top executives are paid salary plus short-term incentives or bonuses. This combination is referred to as Total Cash Compensation (TCC). Short-term incentives usually are formula-driven and have some performance criteria attached depending on the role of the executive. For example, the Sales Director's performance related bonus may be based on incremental revenue growth turnover; a CEO's could be based on incremental profitability and revenue growth. Bonuses are after-the-fact (not formula driven) and often discretionary. Executives may also be compensated with a mixture of cash and shares of the company which are almost always subject to vesting restrictions (a long-term incentive). To be considered a long-term incentive the measurement period must be in excess of one year (35 years is common). The vesting term refers to the period of time before the recipient has the right to transfer shares and realize value. Vesting can be based on time, performance or both. For example a CEO might get 1 million in cash, and 1 million in company shares (and share buy options used). Vesting can occur in two ways: Cliff vesting and Graded Vesting. In case of Cliff Vesting, everything that is due to vest vests at one go i.e. 100% vesting occurs either now or a later point in time at year X. In case of graded vesting, partial vesting occurs at different times in the future. This is further sub-classified into two types: Uniform graded vesting (eg. Same percentage i.e. 20% of the options vest each year for 5 years) and Non-uniform graded vesting (eg. different proportion i.e. 20%, 30% and 50% of the options vest each year for the next three years). Other components of an executive compensation package may include such perks as generous retirement plans, health insurance, a chauffered limousine, an executive jet[1], interest free loans for the purchase of housing, etc. Stock options Executive stock option pay arose out of scholarly support from University of Chicago educated Professors Michael C. Jensen and Kevin J. Murphy. Due to this and support from Wall Street and institutional investors, Congress passed a law making it cost effective to pay executives in equity. Supporters of stock options say they align the interests of CEOs to those of shareholders,

since options are valuable only if the stock price remains above the option's strike price. Stock options are now counted as a corporate expense (non-cash), which impacts a company's income statement and makes the distribution of options more transparent to shareholders. Critics of stock options charge that they are granted without justification as there is little reason to align the interests of CEOs with those of shareholders. Empirical evidence shows since the wide use of stock options, executive pay relative to workers has dramatically risen. Moreover, executive stock options contributed to the accounting manipulation scandals of the late 1990s and abuses such as the options backdating of such grants. Finally, researchers have shown that relationships between executive stock options and stock buybacks, implying that executives use corporate resources to inflate stock prices before they exercise their options. Stock options also incentivize executives to engage in risk-seeking behavior. This is because the value of a call option increases with increased volatility. (cf.options pricing). Stock options therefore - even when used legitimately - can incentivize excessive risk seeking behavior that can lead to catastrophic corporate failure. In the Financial crisis of 2007-2009 in the United States, pressure mounted to use more stock options than cash in executive pay. However, since many then-proportionally larger 2008 bonuses were awarded in February, 2009, near the March, 2009, bottom of the stock market, many of the bonuses in the banking industry turned out to have doubled or more in paper value by late in 2009. The bonuses were under particular scrutiny, including by the United States Treasurys new special master of pay, Kenneth R. Feinberg, because many of the firms had been rescued by government Troubled Asset Relief Program (TARP) and other funds.[2] Restricted stock Executives are also compensated with restricted stock, which is stock given to an executive that cannot be sold until certain conditions are met and has the same value as the market price of the stock at the time of grant. As the size of stock option grants have been reduced, the number of companies granting restricted stock either with stock options or instead of, has increased. Restricted stock has its detractors, too, as it has value even when the stock price falls. As an alternative to straight time vested restricted stock, companies have been adding performance type features to their grants. These grants, which could be called performance shares, do not vest or are not granted until these conditions are met. These performance conditions could be earnings per share or internal financial targets.

Tax issues Cash compensation is taxable to an individual at a high individual rate. If part of that income can be converted to long-term capital gain, for example by granting stock instead of cash to an executive, a more advantageous tax treatment may be obtained by the executive.