Executive Compensation is how top executives of business corporations are paid.

Contents

1 Means 2 Stock compensation 2.1 Options 2.2 Restricted stock 3 Criticism 3.1 Charges that CEO's are paid too much 4 See also 5 External links

Means

Salary is taxable to an individual at a high individual rate. If part of that income can be converted to capital gain, for example by granting stock options to executives, a more advantageous tax treatment may be obtained.

In a typical modern US corporation, the CEO and other top executives are paid with a mixture of cash and shares of the company (which could immediately be sold and redeemed for its value in cash). For example a highly paid CEO would get 1 million cash, and 10 million in shares of the company.

Other components of an executive compensation package may include such perks as generous retirement plans, a chauffered limosine, an executive jet, interest free loans for the purchase of housing, etc.

Stock compensation

During 2003, about half of Fortune 500 CEO compensation was in cash pay and bonuses, and the other half in vested restricted stock, and gains from from exercised stock options according to Forbes magazine ([1] (http://www.forbes.com/lists/2004/04/21/04ceoland.html)). Forbes magazine count the 500 CEOs compensation to $3.3 billion during 2003 (which makes $6.6 million a piece). That include cash salary and bonus, market value of restricted stock received, and gain from option excercise (the gains being the difference between the price paid for the stock when the option was excercised and that days market price of the stock).

Options

Supporters of stock options say that they align the self-interest of the CEO to that of the company, since options are only valuable if the stock price remains above the option's strike price. Many critics have called for options to be counted as a corporate expense, which would impact a company's income statement and make the distribution of options accountable to shareholders. Detractors of stock options charge that they are granted exessively.

Restricted stock

This compares to restricted stock, which is stock given to an executive that cannot be sold for a period of time, and immediately has a value, the same value as the market price of the stock.

Criticism

There are many contraversies in the field of executive compensation:

Charges that CEO's are paid too much

Many people believe CEO's are paid too much. Others counter that this is necessary to retain the best talent. This argument however is countered by those who say that true price competition does not occour at the CEO level, because their pay is set by the board of directors-a group usually almost totally composed of CEO's of other companies (see http://www.theyrule.net).

See also

• Golden Parachutes

External links

• Forbes.com - Executive Pay (http://www.forbes.com/lists/2004/04/21/04ceoland.html)