It’s difficult to read the business news without encountering stories about the salaries, bonuses, and stock option packages given to CEOs of publicly listed firms. Making sense of the statistics to determine how much firms pay their top executives is difficult. Investors must guarantee that executive remuneration benefits them. When assessing a company’s compensation scheme, consider the following recommendations.
Risk and Reward
In general, business boards aim to utilize pay contracts to match executives’ behavior with company performance. The concept is that the CEO’s performance adds value to the organization. When describing their compensation systems, most firms repeat the phrase “pay for performance.”
Salaries in cash or the form of a base salary
CEOs frequently get base salaries above $1 million. In other words, when the firm does well, the CEO gets handsomely rewarded. However, when the firm does poorly, the CEO is also rewarded. Large base wages, on their own, provide little motivation for CEOs to work harder and make wise judgments.
Bonuses
Bonuses should be avoided. In many situations, an annual bonus is just a disguised basic income. A CEO with a $1 million salary may be eligible for a $700,000 bonus. If any of that incentive, say $500,000, is not performance-based, the CEO’s compensation is $1.5 million. Bonuses based on performance are a different story. CEOs who know they will be paid for their performance tend to perform better because they have an incentive to work hard.
Option on Stocks
Finding my number
When comparing base pay versus yearly bonuses, investors prefer firms that offer a larger portion of income as a bonus rather than a base salary. The DEF 14A should explain how the bonus is calculated and what form the incentive takes, such as cash, options, or shares.
The summary tables also provide information on the CEO’s stock option holdings. The form reveals the frequency of stock option grants as well as the number of awards earned by executives during the fiscal year. It also discloses stock option re-pricing.
Conclusion
Over CEO compensation evaluation is a skill. It is not easy to interpret the numbers. Investors, on the other hand, should have an understanding of how pay plans may provide incentives or disincentives for top executives to operate in the best interests of shareholders. Consult with Executive Asset Advisors today to learn more about the executive and CEO’s compensation.
