1. Executive Compensation
Professor Srividya Iyengar

2. Coverage Classification of Executive Compensation
Calibration of Exec. Compensation to Performance
Theories of Exec.Compensation
Principles of Executive Compensation
Factors affecting Executive Compensation
Models of Executive Compensation
Different Criteria for Exec. Compensation
Process of Setting Executive Compensation
Legal Environment for Exec. Comp in India

3. Performance Linked Compensation
Perquisites
Base Compensation
Terminal Benefits
Classification of Executive Compensation

4. Calibration of Exec. Compensation to Performance
High
High Pay / Low Performance
High Pay / High Performance
Low Pay / Low Performance
Low Pay / High Performance
Pay
Low
Performance
High
Low

5. Theories of Executive Compensation
Agency theory, Actions and Model
Tournament theory
Social comparison theory
Balance sheet approach
HQ-based pay
Golden handcuffs
Competency based pay
Golden Parachutes
Cafeteria plan

6. Agency Theory
Principals (shareholder)s are risk neutral or risk averse
Agents (Executives) are risk-averse or risk neutral
Material incentives are necessary and sufficient to motivate executives to work
Higher sum of monetary compensation causes higher executive effort;
The efforts put in by an executive is sometimes difficult to observe i.e., it is not tangible. And intangible efforts are difficult to quantify and reward

7. Sequence of actions Step 1 Step 2 Step 3 Step 4 Step 5 Step 6
Shareholders create a contract having or not the condition of awarding incentives
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Executives acceptance or non acceptance
Shareholders pay for work provided including incentives
Executives decide on quantity and quality of work they want
Shareholders (through the BOD) evaluate results
Executives handle a work

8. ORGANIZATIONAL OUTCOMES CONTROL STRUCTURES UPON THE AGENT
Model of Agency Theory
AGENCY PROBLEM
AGENCY COST
ORGANIZATIONAL OUTCOMES
Conflict arising out of separation of Ownership & Management
Interest Divergence:
Shareholder’s self- interest
Executive’s self-interest
Information asymmetry
Moral Hazard
Adverse Selection
Empire Building tendencies
Collusive agreement b/w executive and supervisor / employees
Performance
Risk
Diversification
Acquisition
Sale of Firm
Executive Compensation
CONTROL STRUCTURES UPON THE AGENT
Shareholder’s Remedies
Monitoring Incentives
Bonding Writing of contracts

9. Principles of Executive Compensation
Attracting and retaining executive talent
Upholding shareholders interest
Performance based compensation
Effective compensation committee
Executives to shareholders
Compliance of law
Transparent disclosure

10. Factors affecting Executive Compensation
Changing nature of work
Investors confidence
Fostering right executive behaviours
Attracting & retaining high performing executives
Governance
Effective benchmarking
Factors Affecting Executive Compensation

11. Models of Executive Compensation
Optimal Contracting Model
EC is designed to reduce agency cost
Market for managerial talent, capital, product and corporate control-preclude executives from earning excessive compensation
Arms length bargaining

12. Contd… Managerial Power Model
Executive’s ability to manipulate the compensation
Set their compensation as shareholders are diffused and uninterested in corporate governance, generally preferring liquidity to control
Executive have considerable influence including
The power of the CEO over appointment of directors
The ability of the CEO to reward cooperative directors
Social and psychological influences
Cognitive biases of directors tat come from being CEO’s
Time and information barriers most directors face to making an informed and reasoned decision about compensation
Not negotiated at arm’s length

13. Different criteria Exec. Compensation
Strategy
Role or Position
Individual characteristics
Performance
Behaviour
Size
Market
Peer compensation

14. Process of Setting Executive Compensation
Market for Managerial Talent
Engagement of compensation consultants
Pay for Performance
To Link EC with organizational performance
Corporate Governance
Mechanism to scrutinize EC
Board of Directors
Shareholders decide EC
Government Regulations
U/S 198 of The Companies Act 1956
Setting Executive Compensation

15. Legal Environment for Exe. Comp in India
Boothalingam Committee
Compensation differential between lowest and highest salary was in the range of 1:10
Suggested for setting up National Pay Commission for fixing executive compensation
Sachar Committee
Role of government in regulating executive compensation should be reduced
Universal norms to be prescribed for everyone to follow
Shareholders should be taking a decision on executive compensation