Executive Compensation
Expert-defined terms from the Certified Professional in Employee Benefits in a Global Context course at London School of Business and Administration. Free to read, free to share, paired with a professional course.
Executive Compensation #
Executive compensation refers to the financial and non #
financial rewards, incentives, and benefits that top-level executives receive from their organizations for their performance and leadership. This type of compensation typically includes a combination of salary, bonuses, stock options, benefits, and other perks that are designed to attract, retain, and motivate executives to drive the organization's success.
Components of Executive Compensation #
- Salary: The fixed amount of money paid to an executive on a regular bas… #
- Salary: The fixed amount of money paid to an executive on a regular basis for their services.
- Bonuses: Additional compensation awarded to executives based on their p… #
- Bonuses: Additional compensation awarded to executives based on their performance, company performance, or achieving specific goals.
- Stock Options: The right to purchase company stock at a predetermined p… #
- Stock Options: The right to purchase company stock at a predetermined price in the future, usually tied to the company's performance.
- Benefits: Non-cash rewards such as health insurance, retirement plans,… #
- Benefits: Non-cash rewards such as health insurance, retirement plans, and other perks provided to executives.
- Perks: Additional benefits such as car allowances, club memberships, an… #
- Perks: Additional benefits such as car allowances, club memberships, and travel accommodations that are offered to executives.
Executive Compensation Philosophy #
The executive compensation philosophy outlines the organization's principles and… #
It typically includes the organization's objectives, guiding principles, and desired outcomes related to executive compensation.
Pay #
for-Performance:
Pay #
for-performance is a compensation strategy that links executive pay directly to the organization's performance. In this model, executives are rewarded based on achieving specific goals, targets, or key performance indicators (KPIs). This approach is designed to incentivize executives to drive the organization's success and align their interests with those of shareholders.
Golden Parachute #
A golden parachute is a contractual agreement between a company and its executiv… #
These benefits often include cash payments, stock options, and other perks to ensure executives are well-compensated in the event of a job loss.
Clawback Provisions #
Clawback provisions are clauses in executive compensation agreements that allow… #
These provisions are intended to hold executives accountable for their performance and behavior, especially in cases of misconduct or financial restatements.
Say #
on-Pay:
Say #
on-pay is a regulatory requirement that gives shareholders the right to vote on executive compensation packages. This process allows shareholders to express their opinions on the fairness and appropriateness of executive pay practices and ensure that compensation aligns with company performance and shareholder interests.
Compensation Committee #
The compensation committee is a group of independent directors responsible for o… #
This committee ensures that executive pay is competitive, aligned with company goals, and compliant with regulatory requirements.
Total Direct Compensation (TDC) #
Total direct compensation (TDC) refers to the sum of an executive's base salary,… #
TDC provides a comprehensive view of an executive's total compensation package and is often used to compare compensation across different executives and organizations.
Long #
Term Incentive Plan (LTIP):
A long #
term incentive plan (LTIP) is a compensation strategy that rewards executives based on achieving long-term goals, performance targets, or stock price appreciation over an extended period. LTIPs are designed to motivate executives to focus on the organization's long-term success and create value for shareholders.
Equity #
Based Compensation:
Equity #
based compensation refers to rewards given to executives in the form of company stock, stock options, or other equity instruments. This type of compensation aligns the interests of executives with those of shareholders, as executives benefit from the company's stock performance.
Performance Metrics #
Performance metrics are specific criteria used to evaluate an executive's perfor… #
These metrics can include financial targets, operational goals, strategic objectives, or other key performance indicators that align with the organization's priorities and objectives.
Retention Bonus #
A retention bonus is a one #
time payment or incentive offered to executives to encourage them to stay with the organization for a specified period. Retention bonuses are often used to retain key executives during times of uncertainty, transition, or significant organizational change.
Deferred Compensation #
Deferred compensation is a portion of an executive's pay that is earned in one y… #
This type of compensation allows executives to defer a portion of their income to a later date for tax planning purposes or to align with long-term financial goals.
Base Salary #
The base salary is the fixed amount of money paid to an executive as compensatio… #
Base salary is usually determined by factors such as the executive's experience, skills, responsibilities, and market benchmarks.
Short #
Term Incentive Plan (STIP):
A short #
term incentive plan (STIP) is a compensation strategy that rewards executives based on achieving short-term goals, performance targets, or financial metrics within a specific period, usually one year. STIPs are designed to motivate executives to focus on immediate objectives and drive short-term results.
Severance Package #
A severance package is a compensation and benefits package provided to executive… #
This package typically includes financial payments, benefits continuation, stock options acceleration, and career transition support to help executives during the transition period.
Performance #
Based Compensation:
Performance #
based compensation is a type of executive pay that is directly tied to the executive's performance and achievement of specific goals or targets. This approach incentivizes executives to focus on results, outcomes, and value creation for the organization in exchange for financial rewards.
Compensation Benchmarking #
Compensation benchmarking is the process of comparing an executive's pay and ben… #
Benchmarking helps organizations ensure that their executive compensation practices are competitive, fair, and aligned with market trends.
Salary Survey #
A salary survey is a research study that collects data on executive pay, benefit… #
Organizations use salary surveys to benchmark their executive compensation against industry standards and trends and make informed decisions about pay levels.
Employee Stock Ownership Plan (ESOP) #
An employee stock ownership plan (ESOP) is a retirement plan that allows employe… #
ESOPs are designed to align employee interests with company performance and create a sense of ownership and pride among employees.
Compensation Philosophy #
The compensation philosophy is a set of guiding principles and beliefs that shap… #
This philosophy outlines the organization's goals, values, and strategies related to rewarding executives for their contributions, performance, and leadership.
Compensation Strategy #
A compensation strategy is a comprehensive plan that outlines how an organizatio… #
The strategy is designed to align executive pay with organizational goals, values, and objectives.
Compensation Survey #
A compensation survey is a research study that collects data on executive pay, b… #
Organizations use compensation surveys to benchmark their executive compensation against industry standards, trends, and competitors.
Equity Compensation #
Equity compensation refers to rewards given to executives in the form of company… #
This type of compensation aligns the interests of executives with those of shareholders, as executives benefit from the company's stock performance and value creation.
Executive Benefits #
Executive benefits are non #
cash rewards and perks provided to top-level executives in addition to their salary and bonuses. These benefits can include health insurance, retirement plans, car allowances, club memberships, travel accommodations, and other incentives designed to attract and retain executives.
Non #
Qualified Deferred Compensation (NQDC):
Non #
qualified deferred compensation (NQDC) is a type of executive pay that allows executives to defer a portion of their income to a future date for tax planning purposes. NQDC plans are not subject to the same tax rules as qualified retirement plans and offer flexibility in timing distributions.
Performance Bonus #
A performance bonus is a financial reward given to executives based on achieving… #
Performance bonuses are typically tied to individual, team, or company performance and are designed to motivate executives to excel and drive results.
Salary Range #
A salary range is a range of compensation levels within which an executive's sal… #
Salary ranges provide flexibility for organizations to adjust executive pay based on performance, market conditions, and other factors.
Compensation Package #
A compensation package is the total sum of an executive's pay, benefits, incenti… #
The package includes components such as base salary, bonuses, stock options, benefits, retirement plans, and other rewards designed to attract, retain, and motivate executives.
Executive Stock Options #
Executive stock options are a form of equity #
based compensation that gives executives the right to purchase company stock at a predetermined price within a specified period. Stock options allow executives to benefit from the company's stock performance and value appreciation over time.
Long #
Term Performance Incentive Plan:
A long #
term performance incentive plan is a compensation strategy that rewards executives based on achieving long-term performance goals, targets, or key performance indicators (KPIs) over an extended period. This plan is designed to motivate executives to focus on creating sustainable value for the organization and shareholders.
Merit Increase #
A merit increase is a salary increase given to executives based on their individ… #
Merit increases are typically awarded annually as a recognition of an executive's efforts and results and are designed to reward and retain top talent.
Variable Pay #
Variable pay is a form of compensation that fluctuates based on an executive's p… #
Variable pay can include bonuses, incentives, commissions, profit-sharing, and other rewards that align with results and outcomes achieved by the executive.
Compensation Disclosure #
Compensation Philosophy Statement #
A compensation philosophy statement is a formal document that articulates an org… #
The statement outlines the organization's objectives, values, and strategies for rewarding executives and serves as a guiding framework for compensation decisions.
Compensation Program #
A compensation program is a structured plan or system that outlines how an organ… #
The program includes components such as base salary, bonuses, incentives, benefits, and equity awards.
Compensation Structure #
A compensation structure is the framework that defines how an organization's exe… #
The structure includes components such as salary ranges, pay grades, incentive plans, benefits packages, and equity awards that together form the total compensation package.
Executive Compensation Benchmarking #
Executive compensation benchmarking is the process of comparing an organization'… #
Benchmarking helps organizations evaluate the competitiveness, fairness, and alignment of their executive compensation practices with market trends and best practices.
Executive Compensation Committee #
The executive compensation committee is a subgroup of the compensation committee… #
The committee ensures that executive pay is competitive, fair, and aligned with company goals and shareholder interests.
Executive Compensation Survey #
An executive compensation survey is a research study that collects data on execu… #
Organizations use executive compensation surveys to benchmark their pay levels against industry standards and competitor practices.
Executive Incentive Plan #
An executive incentive plan is a compensation strategy that rewards executives b… #
Incentive plans are designed to motivate executives to focus on results, outcomes, and value creation for the organization in exchange for financial rewards.
Market #
Based Compensation:
Market #
based compensation is a compensation strategy that aligns an organization's executive pay levels with market benchmarks, industry standards, and competitors' practices. This approach ensures that executive compensation is competitive, fair, and reflective of prevailing market conditions and trends.
Performance #
Based Incentive:
A performance #
based incentive is a form of compensation that rewards executives based on their performance, achievement of goals, or company performance. Performance-based incentives can include bonuses, commissions, profit-sharing, and other rewards tied to specific performance metrics and outcomes.
Phantom Stock Plan #
A phantom stock plan is a form of equity #
based compensation that gives executives the opportunity to receive cash payments based on the appreciation in the company's stock price over time. Phantom stock plans mimic the value of actual company shares without transferring ownership to the executive.
Stock Appreciation Rights (SARs) #
Stock appreciation rights (SARs) are a form of equity #
based compensation that gives executives the right to receive cash or stock payments based on the appreciation in the company's stock price over a specified period. SARs allow executives to benefit from the company's stock performance without owning actual shares.
Stock Grant #
A stock grant is a form of equity #
based compensation that gives executives actual shares of company stock as part of their compensation package. Stock grants provide executives with ownership in the company and align their interests with those of shareholders by linking their rewards to the company's stock performance.
Stock Ownership Guidelines #
Stock ownership guidelines are policies that require executives to hold a certai… #
These guidelines help ensure that executives have a personal stake in the company's success and are committed to creating long-term value.
Compensation Philosophy Framework #
A compensation philosophy framework is a structured model that outlines an organ… #
The framework provides a clear and comprehensive view of the organization's compensation philosophy, objectives, and guiding principles for rewarding executives.
Deferred Compensation Plan #
A deferred compensation plan is a formal arrangement that allows executives to d… #
Deferred compensation plans offer flexibility in timing distributions and can include various types of investments and payout options.
Equity Incentive Plan #
An equity incentive plan is a compensation strategy that rewards executives with… #
Equity incentive plans align executive interests with those of shareholders and drive value creation.
Executive Compensation Disclosure #
Executive compensation disclosure refers to the public release of information re… #
Disclosure requirements are mandated by regulatory authorities to promote transparency, accountability, and fairness in executive compensation practices.
Executive Compensation Philosophy #
The executive compensation philosophy is a set of principles, beliefs, and guide… #
The philosophy outlines the organization's objectives, values, and strategies related to executive compensation.
Overhang #
Overhang is a term used to describe the amount of unexercised stock options, equ… #
Overhang can impact the dilution of existing shareholders and the organization's ability to grant additional equity-based compensation.
Restricted Stock Units (RSUs) #
Restricted stock units (RSUs) are a form of equity #
based compensation that grants executives shares of company stock subject to certain restrictions or vesting conditions. RSUs provide executives with ownership in the company and align their interests with those of shareholders by tying their rewards to the company's stock performance.
Severance Agreement #
A severance agreement is a formal contract between an organization and an execut… #
Severance agreements typically include financial payments, benefits continuation, stock options acceleration, and other provisions to support the executive during the transition period.
Stock Option Plan #
A stock option plan is a formal program that grants executives the right to purc… #
Stock option plans align executive interests with those of shareholders by providing incentives tied to the company's stock performance and value creation.
Supplemental Executive Retirement Plan (SERP) #
A supplemental executive retirement plan (SERP) is a retirement savings program… #
SERPs are typically customized to meet the unique needs of executives and provide enhanced retirement security and financial stability.
Vesting Schedule #
A vesting schedule is a timeline that specifies when executives become entitled… #
Vesting schedules can be based on time served, performance milestones, or other criteria and are designed to align executive incentives with organizational goals.
Equity Vesting #
Equity vesting refers to the process by which executives become entitled to rece… #
Vesting typically occurs based on time served, performance milestones, or other criteria and aligns executive interests with those of shareholders by tying rewards to performance and longevity.
Performance Vesting #
Performance vesting is a method by which executives become entitled to receive b… #
Performance vesting aligns executive incentives with organizational goals and drives value creation for the company.
Retention Incentive #
A retention incentive is a form of compensation or benefit offered to executives… #
Retention incentives are designed to retain key talent, reduce turnover, and ensure continuity in leadership during times of transition, change, or uncertainty.
Retention Stock Grant #
A retention stock grant is a form of equity #
based compensation that grants executives shares of company stock as an incentive to stay with the organization for a specified period. Retention stock grants provide executives with ownership in the company and align their interests with those of shareholders.
Salary Benchmarking #
Salary benchmarking is the process of comparing an executive's salary to those o… #
Benchmarking helps organizations ensure that their executive compensation practices are competitive, fair, and aligned with market trends and best practices.
Salary Review #
A salary review is a formal #
A salary review is a formal