EXECUTIVE

COMPENSATION
MD & CEO, Tata group
Trends in executive compensation
a) Industry lead differentiation in executive rewards

b) Key people movement

c) The composition of executive pay- executives are more

risk averse

d) They care more about relative pay –how they were paid

in relation to their peers.

Points to be considered in Executive
remuneration
• Global Impact & placement of roles

• Changing structures for improved focus

• Shareholder & founder activism

• Benchmark for the position or earning potential

• Short term gain vs long term wealth creation

Questions related to Compensation
Are CEOs paid based on performance?

Are CEOs paid based on industry?

Are CEOs paid based on company size?

Are CEOs paid and promoted on Merit?

 Highest paid CEO - 2014-2015
• Name Company Salary (Rs. Crore)
• C.P. Gurnani MD & CEO, Tech Mahindra 165.6
• Pawan Munjal CMD & CEO, Hero MotoCorp 43.9
• D.B. Gupta Chairman, Lupin 37.6
• Aditya Puri MD, HDFC Bank 32.8
• Sunil Mittal Chairman, Bharti Airtel 27.2
• N. Chandrasekeran CEO & MD, TCS 21.3
• Rajiv Bajaj MD, Bajaj Auto 20.5
• K.M. Birla Chairman & Non-executive director, UltraTech 19
• Y.C. Deveshwar Chairman & Wholetime Director, ITC 15.3
• Navin Agarwal Chairman, Vedanta 15.1

• https://officechai.com/miscellaneous/top-10-highest-paid-ceos-in-
india/#sthash.yXOCrZwG.dpbs
• http://www.paycheck.in/main/salary/salarycheckers/vipcorporate
• https://finapp.co.in/ratan-tata-net-worth/
What is Executive Compensation?
• Core Compensation= Base Pay & guaranteed Bonus,

• Short term Incentives

• Long term incentives

• Stock Options

• Fringe Compensation

• Performance based pay (devising appropriate performance

standards ,shareholder value ,operating profit margin , revenue
growth)
 The principles of the executive
compensation
Clear focus on profits generation

Long term orientation of the compensation scheme

Motivation of manager by high bonuses

Non cash focus of the compensation (stock options,

phantom schemes)

Risk Management

Balanced Scorecard implemented into compensation

scheme
Elements of Executive Compensation

• Higher managerial post are - presidents, vise-presidents,

directors, general manager, etc
• Managerial remuneration of such positions comprises of 5
elements:
1) Base Pay
2) Short Term Incentive (Bonus – achieving short term goals like
yearly sales, revenue)
3) Long Term Incentive (Stock options)
4) Perquisites (Special benefits for executives usually non-cash
items alike insurance, retirement pension plans)
5) Benefits
 ESOP
1) Employee Stock Option Scheme (ESOS) continued service

over a specific period of time.

2) Employee Stock Purchase Plan (ESPP)- discount from fair

market value

3) Restricted Stock Units (RSU)- to receive shares on a pre-

determined date subject to occurrence of a specified event

or fulfillment of specified conditions.

4) Stock Appreciation Rights (SARs)

 SALARY
• Salary determined through job evaluation and serves as
basis for other benefits
• Manager is paid for his capabilities and for job he
performs
• Norms of wages and salary fixation are generally not
observed while fixing salary of manager
• Salary of 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
• To avoid such deductions managers are offered incentives
and attractive perks
 PROFIT SHARING
• This type of incentive is annual and based on company
performance or profit sharing

• In some system annual bonus tied to share returns on

investments

• Other bonus plans are based on subjective judgments of

board of directors and CEO’s
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 price
• Stock options valuable as long as price of share keeps
increasing
 Perquisites
• Special benefits for executives usually non-cash items:
- Companies provide health club memberships with personal
trainers
- Discounted company products
- Automobiles
- Country club memberships
- First class airfare or use of the corporate jet
- Executive health plans
- Personal car service
- Personal computers and cell phones
- Entertainment
- Financial planning assistance
Why executives Should Be Paid More
• can have considerable worth , hence command hefty
premiums
• Manager’s success is the means by which organizational
goal is achieved
• Financial reward is a symbol of manager’s role, its power ,
its dignity and its freedom
• Organization pay heavily to attract and retain talented and
competent manager
• Lifestyle of manager needs considerable amount of money
• For manager financial reward is symbol of social prestige
and position
• High compensation is made to manager to eliminate or
minimize corruption .
Unique Feature of Managerial Remuneration

• Their competence and contribution are the strengths

for determining their pay package
• Secrecy is maintained in respect of managerial
remuneration.
• No two executives in private sectors, in same grade
receive same pay
• Compensation and reward depends upon such factors
as competence , length of service , contributions, and
loyalty to the company
• Exorbitant amounts are paid to executives in some
organizations.
• annual salary of CEOs’ range even to few crore
IBM EXECUTIVE COMPENSATION PACKAGE
Two main components of executive compensation package
• Base salary and Cash Incentive/Bonus
• Long-term Incentive Compensation
Three main elements drive compensation package
• Competitive marketplace
• Complexity of leading IBM &
- Pay for performance not loyalty or tenure
- Differentiate pay based on the marketplace
- Differentiate increases based on individual performance pay in
marketplace
- Differentiate bonuses based on business performance and individual
contributions
- Differentiate stock-option awards based on critical skills of individual
and risk of loss to competition
Expectancy theory of Victor Broom
• Person’s motivation to exert some level of effort depend
on three things :

 The person’s expectancy “ E” (in terms of probability)

 Instrumentality “ I” (perceived
relationship between successful performance & actually
obtaining the rewards
 Valence “V” (perceived value the person
attaches to the reward)
What determines executive pay?
Job Complexity (span of control , functional divisions
over Which the executive has direct responsibility)

Employer’s ability to pay ( total profit & rate of return)

Human Capital
Who Sets Executive Compensation?
Different for Each Company

Compensation Consultants

Compensation Committees

Board of Directors

Shareholders
Employee benefits
• Golden Handcuff

• Golden Handshake

• Golden Hello

• Golden Parachute
Agency Theory: Executive Compensation
• An executive compensation plan is:

an agency contract between the firm and its manager

attempts to align the interests of owners and manager

details the manager’s compensation (bonus, shares,

options, salary, benefits, memberships, etc.)

bases on one or more measures (net income and share

price) of the manager’s effort in operating the firm.

 Conclusion

• If you pay peanuts, you get monkeys.”

• Rewarding good work with appropriate pay, benefits and

recognition

• The above are must to keep Executive compensation

scenario at the most healthy level