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Compensating Executives

Compensating Executives. Chapter # 13. What is executive status?. IRS recognizes two groups Highly compensated Very responsible position 5% owner sometime during year Paid $100,000 or more yearly Key Employee $145,000 up Responsible role .

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Compensating Executives

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  1. Compensating Executives Chapter # 13

  2. What is executive status? • IRS recognizes two groups • Highly compensated • Very responsible position • 5% owner sometime during year • Paid $100,000 or more yearly • Key Employee • $145,000 up • Responsible role

  3. Long term and short term Pay

  4. CEO’s sell their services

  5. CEOs • Can hired and use their own compensation consultants. • Conflict of interest • Fired 119.089 employees last year (2007) • Who pays? stockholders

  6. Types of Executive Pay Packages • Main Components • Annual pay • Stock Options • Golden Parachutes • Perquisites and Enhanced Benefits • Bonuses

  7. Base (annual) Pay • Broader range • No formal pay structure • IRS lets firm deduct CEO pay as tax write off up top $1,000,000. • Base pay is smallest part of total package

  8. Bonuses • Single pay for performance • Discretionary • Depend upon profits • Future opportunities • Performance contingent bonuses • Predetermined allocation bonuses • Target plan bonus • No bonus if profits fall below a certain amount

  9. Short term incentives

  10. Deferred Core Compensations • Company stock • Pay given at future date • Idea is to create sense of ownership • Align goals of exec to goals of firm • Tax advantage for CEO • Deferred until retirement

  11. Types of incentives • Stock options • Have to pay cap gains in future • Non Statutory stock options • Tax paid upon receipt • Restricted Stocks • CEO has to return stock when leaving • At original price. Idea is to pocket gains

  12. Types continued • Phantom, stocks • Hypothetical stocks. • Discount stock option • Stock given at lower than market value • Stock appreciation rights • Income is taken at end of a certain period of time

  13. Golden Parachutes • IRS considers • It business • Expense • YOU’RE FIRED

  14. Platinum parachutes • Your’reouta here !!!!! • Before contract over • Severance • Continued benefits • Stocks • Example Bancorp…73.6 • + 24.4 mil cash stocks • + free health care • + 40,000 month consulting

  15. Tighter Regulations of Deferred Plans • EX: Enron • Exec withdrew cash out firm before bankrupt. • 2002 Sabanes Oxley Act • Financial disclosure or penalty to execs • Full audits

  16. Other Perks • Extra insurance • Corporate jets • Supplemental retirement plans • Country club memberships • Vacation homes • Tickets

  17. How is Executive pay Set? • Individuals • Groups • Consultants • Pay committees • Boards of Directors

  18. Theories about exec pay • Agency Theory • Tournament Theory • Social Comparison Theory

  19. Security Exchange Commission Disclosure • Look #336 • Full disclosure of four top level execs

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