1 - Executive Compensation Framework Flashcards
Six methods used to determine executive status in an organization are:
(1) _______—A simple direct way of establishing eligibility as an executive. The problems with this approach include its reliance on specific definable limits or cutoff points on the eligibility; considerable pressure exerted to move people above the eligible level; and adjustments of cutoff points required annually to prevent an increasing number of employees from qualifying as executives.
(2) ________— The rationale for this approach is simple: the value of a job to the organization was already determined when each job was placed in this. This approach may be superior to the use of salary because it relates to the content of the individual’s job, but it can be misleading because it places similar pressure to upgrade positions into the eligible group.
(3) ________—The use is to look at the position and determine whether its job content is appropriate. There are two problems with this approach. Jobs in the same job grade may be treated differently, and this approach needs to have frequent job review for additions and deletions for eligibility purposes. Using key positions is generally more popular with smaller organizations.
(4) _______—With this approach, this determines executive status. The problem with determining who is an executive by this is that a lower-level vice president may have fewer responsibilities than the highest-level director.
(5) __________—While it can be used to determine executive status, there is a problem with the inclusion of “executive assistants” and “assistants to” whose degree of importance to the organization might be better represented by their job grade than their organization level.
(6) ___________— Because each of the previous five approaches has disadvantages or shortcomings, often combinations of two or more of them are used to determine executive status. For example, using the de nition of anyone that is a vice president or higher who is in the top three levels of the organization could be used.
- Salary
- Job grade
- Key position
- Job title
- Reporting relationship
- Combinations
Two rough guidelines of the number of executives in an organization might be those individuals in the highest paid __% or __% of a company’s total workforce or those in the highest paid 5% of the _______ portion of that workforce. These percentages probably would need to be adjusted down in centralized companies and adjusted up in decentralized ones. In centralized companies, decisions are made at the very top of the organization. In decentralized companies, the ability to decide is pushed down in the organization.
One might expect a higher percentage of executives in a ______-intensive organization than a people-intensive organization because equipment rather than people dominates the lower levels of a capital-intensive organization. In people-intensive companies, decision making has to be pushed further down in the organization, to prevent the company from becoming an inefficient bureaucracy.
Generally the fewest number of executives will be found in _______, people-intensive organizations where all major decisions are made by a small number of top executives. In decentralized, people-intensive organizations one would find a moderate percentage of executives because decision makers would exist at all levels with a relatively small workforce. In a centralized, capital-intensive organization there would be fewer executives. Moving from a people-intensive to a capital-intensive organization, the number of executives decreases more slowly than the nonexecutive population. The reverse is also true.
2% or 3%
exempt
capital
centralized
______ is a form of extrinsic compensation. Work environment, type of work, learning, developmental opportunities, autonomy and power, and extent of recognition form intrinsic or “psychic” compensation.
Successful organizations may provide some intrinsic compensation, such as ______ in belonging to the organization, to their executives. Since the pay scales in such organizations usually are competitive, the intrinsic compensation adds to the retention capability of direct pay. Less successful organizations are under pressure to provide competitive pay because of a lack of intrinsic compensation.
All jobs have a combination of extrinsic and intrinsic compensation. Those jobs without a reasonable degree of intrinsic compensation often must provide an offsetting level of extrinsic compensation. Executives fall somewhere in the middle of the curve of all jobs, and executives will either forgo intrinsic needs to work in positive pay-performance situations or seek out high intrinsic compensation in jobs where the direct pay-performance link is not suf ciently strong.
Pay
pride
there are five basic compensation elements in an organization: in most organizations. 5:
only _______ and ________ are a factor for rank-and- file employees, but all five are present at the chief executive officer level. each of the other three is phased in at different levels of employment in the organization.
- salary
- employee benefits
- short-term incentives
- long-term incentives
- perquisites.
salary
employee benefits
Salary should reflect an individual’s experience and level of job performance. Basically, salary is a _______ form of pay to the executive since it is rarely, if ever, reduced. An executive’s base salary allows an executive to meet some of his or her ______ objectives. An enhanced lifestyle can be supported through additional compensation elements. Since short- and long-term incentives are not offered in some organizations, such as _______, the salary program has added importance in these situations. The extent to which a company chooses to be directly competitive on salaries is a function of the degree of risk or reward it wants to build into its program.
no-risk
lifestyle
nonprofits
employee benefits and perquisites
Employee benefits meet many needs that employees would otherwise have to pay for from their own disposable income such as retirement and health care coverage to name just two.
Years of ______ and/or level of ______ typically determine the extent of coverage, and a group basic employee benefit package generally is provided to all employees in an organization. A key component of executive compensation includes perquisites. These are special _________ tailored exclusively for executive employees rather than rank-and- le employees.
service
pay
privileges
short- and long-term incentives
Designed to include both downside risk and upside potential, short-term incentives reward achievement of a short-term target, normally occurring within _____. Typically, the amount of pay varies in relation to performance, thereby lowering cost to the organization when performance is low, while providing the executive significant rewards for achieving or exceeding objectives. Performance objectives may be group and/or individual in nature and should be clearly tied to annual business targets.
Long-term incentives cover a performance period beyond one year. Normally, there is no individual ________ component in long-term incentives, only group or unit. The executive has a portion of pay placed at risk with degree to attainment of business objectives.
Failure to meet the expected target results in no payment or low payment for long- term incentives. The multiyear nature of long-term incentives provides some holding power over the executive if the payout will be signi cant later on. Typically, pay is based on _______ value and/or ________ performance of the defined unit. The defined unit could be the entire company, a sector (i.e., European operations) or a division (i.e., electric power group). Some form of stock compensation program is often used with long-term incentives.
one year.
performance
shareholder
financial
Different elements of compensation take on different emphasis at different pay levels in the organization. For example, salary might be 75% of total compensation at the $100,000 level but only 20% at the $5 million level. Conversely, long-term incentives might only be 2% at the $100,000 total pay level, but 50% at the $5 million level.
At higher levels of total compensation, decreasing emphasis is applied to ______ and _______, whereas an increasing emphasis is given to short-term incentives, long-term incentives and _______.
The reason for the decreasing emphasis on salary is that it is more advantageous to the company to relate _______ to performance. In the realm of employee benefits, there are limitations imposed in many benefit plans. Also, in non-income-related benefit programs such as medical and dental plans, there is a decrease in the value of premiums as a percent of total compensation as compensation escalates.
salary
benefits
perquisites
reward
The factors that impact the design of an executive pay program are:
- (a) Stakeholders and ______
- (b) __________
- (c) _________ elements
- (d) Performance _____ and ______
- (e) Strategic ______
- (f) Market ______
- (g) Structural organization ______
- (h) ______ of company.
- rulemakers
- Board of directors
- Compensation
- measurements and standards
- thinking
- lifecycle
- change
- Type
__________ companies receive favorable tax treatment after qualifying under the Internal Revenue Code. Because of their status, they must be sure to avoid any significant residue after paying all their expenses or risk careful scrutiny by the Internal Revenue Service. Lacking a profit incentive removes many of the short- and long-term incentive opportunities available to the for-pro ts.
Not-for-profit
Publicly traded companies are those that are required by the Securities Exchange Act of 1934 to register their securities because of an offering to the public, as described in the Securities Act of 1933. Publicly traded companies have shareholders who have the right to vote on both binding and nonbinding resolutions. A company not meeting these requirements is considered to be a _______.
Because of the absence of publicly traded stocks and capital gains opportunities, one might expect privately held companies to pay higher salaries than their public counterparts, but this generally is not the case. Short-term incentives for both are comparable using both internal and external measurements, although privately held companies may use fewer of the latter. Long-term incentives are similar in design, but the absence of a public stock market and the desire of the owners not to diffuse ownership restricts the attractiveness of ________ in private companies.
private company
equity issues
The four stages in the market lifecycle are as follows:
- Threshold Stage
- Growth Stage
- Maturity Stage
- Maturity Stage
(1) Threshold Stage
- (a) The company has a limited range of closely related _______, and distribution may be primarily in a ______ area.
- (b) The company may have attained a position of dominance in a small industry, and managers are exploring new markets for products.
- (c) Decisions are made by individuals, and there are few, if any, ______ and procedures.
- (d) Relative duties and responsibilities of individuals are not clearly identified, and there is a high degree of _______ in apparent responsibilities among a number of jobs. There is no depth of management.
- (e) The tone is casual with everyone on a first-name basis, and the dress code emphasizes _______ rather than appearance.
- (f) Survival of the products has the full _______ of everyone.
- (g) Cash is scarce, and cash- ow problems periodically occur, with management often deferring its own salary payments to ease the crunch.
- (h) It is a time of high risk in order to survive. Increased sales and sufficient cash flow to meet needs are key factors.
- products
- regional
- policies
- overlap
- comfort
- attention
The _________ for a company is simply a consolidation of its products and where they are in their respective _______.
By the same logic, a company and/or industry can be described by stage of ______. Recognize that a product could be in the growth phase while the market for such product is in decline.
market cycle
market cycles
lifecycle
There are five possible events that can occur in any of the four stages in the lifecycle of a company—
- remain
- advance
- sellout
- turnaround
- bankruptcy.
