| Executive Compensation is how top executives of business corporations are paid.
Means
Salary is taxable to an individual at a high individual rate. If part of
that income can be converted to capital gain, for example by granting
stock options to executives, a more advantageous tax treatment may be
obtained.
In a typical modern US corporation, the CEO and other top executives are paid with a
mixture of cash and shares of the company (which could immediately be sold and redeemed for its value in cash). For example a
highly paid CEO would get 1 million in cash, and 1 million in company shares.
Other components of an executive compensation package may include such perks as generous retirement plans, a chauffered limosine, an executive
jet, interest free loans for the purchase of housing,
etc.
Stock compensation
During 2003, about half of Fortune 500 CEO compensation was in cash pay
and bonuses, and the other half in vested restricted stock, and gains from from
exercised stock options according to Forbes magazine ([1] (http://www.forbes.com/lists/2004/04/21/04ceoland.html)). Forbes magazine counted the 500 CEOs
compensation to $3.3 billion during 2003 (which makes $6.6 million a piece). That include cash salary and bonus, market value of
restricted stock received, and gain from option excercise (the gains being the difference between the price paid for the stock
when the option was excercised and that days market price of the stock).
Options
Supporters of stock options say that they align the self-interest of the CEO to that of the company, since options are only
valuable if the stock price remains above the option's strike price. Many
critics have called for options to be counted as a corporate expense, which would impact a company's income statement and make the distribution of options accountable to
shareholders. Detractors of stock options charge that they are granted exessively.
Restricted stock
This compares to restricted
stock, which is stock given to an executive that cannot be sold for a period of time, and immediately has a value, the same
value as the market price of the stock.
Criticism
There are many controversies about executive compensation:
Charges that CEOs are overpaid
Many people believe that CEOs are paid too much for the services they provide, while others believe that a good CEO can have a
positive effect on the company's performance and, therefore, that high compensation is needed to attract the best talent. Some
argue that since the CEO's pay is set by the board of
directors, a group usually composed almost entirely of CEOs of other companies, an unhealthy conflict of interest occurs and prevents effective price
competition (see http://www.theyrule.net).
External links
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