Executive Compensation Flashcards
What is executive compensation?
Financial and non-financial rewards provided to top executives, including salary, bonuses, equity and benefits.
Why is executive compensation controversial?
It is often criticized as excessive and not always tied to performance.
What is the purpose of executive compensation?
To attract, retain, and incentivize executives while aligning their interests with shareholders.
What are the main components of executive compensation?
Base salary, bonuses, equity-based compensation, long-term incentive plans, and benefits (insurance and pensions).
What is the role of base salary?
It provides a fixed annual income, typically benchmarked to industry standards and firm size.
How do bonuses incentivize executives?
Bonuses reward short-term performance, often tied to financial or operational metrics.
What is equity-based compensation?
Incentives such as stock options and restricted stock that align executive pay with long-term shareholder value.
How do stock options work?
They give executives the right to buy shares at a fixed price in the future, encouraging stock price increases.
What are restricted stocks?
Shares granted to executives that cannot be sold for a set period.
What are long-term incentive plans (LTIPs)?
Multi-year performance-based rewards, often tied to sustained profitability or growth.
What non-cash benefits do executives typically receive?
Retirement plans, health insurance, and other perks like sabbaticals or vacation allowances.
What is the pay-for-performance principle?
Linking executive compensation to company success using performance metrics.
What are common financial performance metrics?
Earnings, EBIT, sales and stock price.
What are common operational performance metrics?
Customer satisfaction, product development, and market share.
Why are financial metrics sometimes problematic for pay-for-performance?
They are backward-looking and can be manipulated.
