Human Resources and Talent ManagementCompensation and Benefits

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• Base Salary: This is the guaranteed portion of an executive’s pay. Balsam notes that while base salaries have historically remained stable, their importance diminishes when variable components are substantial.

• Action: Conduct market research to set competitive yet sustainable base salaries for executives in your organization, ensuring they align with industry standards.

• Annual Incentives: These are short-term bonuses tied to primarily financial performance metrics such as revenue growth or net income.

• Example: A CEO might receive an annual bonus if the company surpasses its annual net income target by 10%.

• Action: Implement performance-based bonuses that tie directly to measurable business outcomes to incentivize corporate goals.

• Long-Term Incentives: Typically include stock options, restricted stock, and long-term performance plans, aimed at aligning the executive’s interest with the shareholders.

• Example: Stock options might vest over a period of five years, encouraging long-term company growth.

• Action: Design long-term incentive plans that not only reward sustained company performance but also retain top executive talent.

• Benefits: Standard benefits usually entailed health insurance, retirement plans, and other traditional employee benefits.

• Action: Review health and retirement benefit packages to ensure they are competitive and meet the needs of your executives.

• Perquisites: Also known as “perks,” these include additional privileged services like use of a company car or private jet.

• Example: Executives might be provided with club memberships or special insurance products.
• Action: Evaluate the cost-effectiveness of perks and ensure they add real value to the executive’s overall package.

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• Market Benchmarks: Companies often look to peers within their industry to determine competitive pay.
• Example: A tech company might benchmark its CEO’s pay against other Silicon Valley firms.

• Action: Regularly update benchmarking data to stay competitive in the market for top talent.

• Pay-for-Performance: Aligning compensation with company performance to motivate executives.

• Example: An executive compensation plan where a significant portion is variable and tied to achieving specific financial metrics.
• Action: Develop a pay-for-performance structure that directly correlates executive compensation with performance outcomes.

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• Stock Options: Provide the right to purchase company stock at a fixed price in the future.
• Example: A CEO given 100,000 stock options exercisable at $10 per share after three years, promoting long-term investment in the company.

• Action: Grant stock options with appropriate vesting periods to ensure commitment and drive sustained performance.

• Restricted Stock: Shares given to an executive which cannot be sold until certain conditions are met, typically time-based or performance-based.

• Action: Use restricted stock as part of the compensation to increase executive retention and long-term buy-in to the company’s success.

• Performance Shares: Shares awarded based on achieving specific performance criteria.

• Example: An executive receiving shares if the company achieves a 15% return on equity over three years.
• Action: Set clear performance criteria tied to strategic goals to qualify for performance shares, promoting organizational priorities.

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• Deferred Compensation: Allows income deferral to future years, potentially resulting in tax benefits.
• Example: An executive choosing to defer a portion of their bonus to a future year when they are in a lower tax bracket.

• Action: Offer deferred compensation plans to executives to provide tax planning flexibility and future financial security.

• Section 162(m) of the Internal Revenue Code: Limits the tax deduction for compensation over $1 million for top executives unless it is performance-based.

• Action: Structure compensation to maximize tax efficiency, ensuring compliance with tax legislation while taking advantage of performance-based exemptions.

• Accounting for Stock Options (SFAS 123): Details guidelines on how companies must account for options granted.

• Action: Stay updated on accounting regulations affecting executive compensation to manage financial reporting accurately.

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• Securities and Exchange Commission (SEC) Regulations: Requires disclosure of executive compensation in proxy statements.

• Action: Ensure full transparency and accuracy in compensation disclosures in line with SEC requirements to build shareholder trust and avoid penalties.

• Sarbanes-Oxley Act: Implements stringent reforms to improve financial disclosures and prevent accounting fraud.

• Action: Adopt robust internal controls and compliance programs to adhere to Sarbanes-Oxley requirements and promote ethical management practices.

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• Compensation Committees: Should be independent and informed to make objective decisions on executive pay.

• Action: Form an independent compensation committee with diverse industry expertise to oversee executive compensation effectively.

• Shareholder Engagement: Engage shareholders in the design and approval of executive compensation plans.

• Example: Proactively communicating with institutional investors about compensation strategies.

• Action: Involve shareholders in conversations about executive pay to gain their input and support, maintaining alignment with broader stakeholder interests.

• Regular Review and Adjustment: Continuously evaluate and adjust compensation plans based on company performance and market conditions.

• Action: Conduct periodic reviews of all elements of executive compensation to ensure ongoing relevance and effectiveness.

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Human Resources and Talent ManagementCompensation and Benefits