1. A Human Resource Management Approach
STRATEGIC COMPENSATION
A Human Resource Management Approach
Chapter 13
Compensating Executives
Prentice Hall, Inc. © 2006
Prepared by David Oakes

2. Key Employees
At any time during the current year the employee is either
An officer making at least $145,000
A 5% owner, or
A 1% owner making at least $150,000
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3. Highly Compensated Employee
During the current or preceding year employee is either
A 5 % owner
An officer
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4. Executive Compensation
Current or annual core compensation
Deferred core compensation: stock
compensation
Deferred core compensation: golden
parachutes
Enhanced protection program
Benefits and perquisites
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5. Bonus Types Discretionary Performance-contingent
Predetermined allocation
Target plan
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6. Stock Plans Incentive stock options Nonstatutory stock options
Restricted stock
Phantom stock
Discount stock options
Stock appreciation
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7. Stock Terminology Stock options - stocks purchased at a
designated price for a specific time
Stock grants - a company offers stock to
employees
Exercise of stock grants - purchase of stock
Disposition - sale of stock
Fair market value - average stock price on
the NYSE
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8. Incentive Stock Stock purchased in the future for current price
Capital gains are
The difference between the purchase price and
the stock option price
Taxed at the time of disposition
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9. Nonstatutory Stock Options
Company awards stock at discounted price
No favorable tax treatment
Taxes paid on difference between the
discounted price and the fair market value at
the time stock was granted
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10. Restricted Stock Awarded at discounted price
Ownership over stock in 5 – 10 years
Must sale stock back at same price if they
leave early
Taxes paid at end of restriction period
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11. Phantom Stock Executives awarded hypothetical stock
Executives must be employee 5 – 20 years
Executives must retire from company
Capital gains paid at retirement
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12. Discount Stock Option Plans
Options granted at rates far below fair
market value on the date its’ granted
Executive receives benefit equal to
difference between exercise price and
fair market value
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13. Stock Appreciation Rights
Executive never has to exercise stock rights
to receive income
Income from difference between stock value
when granted and the value at end of period
Executive gets to keep the stock
Income taxed when rights exercised
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14. Golden Parachutes Provides executives pay & benefits
following termination due to ownership
change
Income & benefits for years
Not triggered by retirement, resignation
or disability
Treated as a business expense
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15. Enhanced Benefits Supplemental life insurance Supplemental retirement
Perquisites
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16. Common Perquisites Company car Financial services Legal services
Recreational facilities
Travel perks
Residential security
Tickets to sporting events
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17. Key Players Compensation consultants Board of directors
Compensation committees
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18. Compensation Consultants
Propose recommendations
Develop packages based on strategic analysis
External market context
Internal factors
Possible conflicts of interest
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19. Board Of Directors Represent shareholders’ interests
Usually 15 members
CEOs & executives
Community leaders
Professionals
Give final approval to recommendations
Are compensated well for services
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20. Compensation Committees
Usually other board of directors’ members
Major duties include:
Review consultants’ recommendations
Discuss assets & liabilities
Make final recommendations
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21. Executive Compensation Theories
Agency theory
Shareholders give control to executives
Tournament theory
Managers compete for promotions
Social comparison theory
Compensation compared to others
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22. Disclosure Rules Governed by Securities and Exchange Commission (SEC)
Securities Exchange Act of 1934
Amended in & 1993
Major objectives
Clarify disclosure of compensation to CEO &
top executives
Increase board of directors’ accountability
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23. SEC Disclosure Requirements
Stock option & appreciation rights
Long-term incentive plans
Pension plan
Stock performance comparison
Compensation committee report
Directors’ compensation
Employment contracts & golden parachutes
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24. Summary Compensation Table
Compensation for CEO & 4 top-paid
executives over 3-year period
Disclosure of annual compensation
Salary & bonuses
Disclosure of long – term compensation
All other compensation
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25. Corporate Performance Measures
Size
Growth
Profitability
Capital markets
Liquidity
Leverage
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