Advantages Of Executive Compensation

The Royal Bank of Scotland - just like many other banks and businesses - paid out its managers considerable bonuses for their performances. Managers at RBS started maximising their bonuses by aggressive actions such as take overs and investing in complex financial products. These actions caused the profits of RBS to grow rapidly, which meant high bonuses for the managers. These actions, however, also meant the stability and financial safety of RBS on the long-term got worse and worse. This was not a problem for the managers as they had already earned their bonuses. A different bonus structure probably would have prevented the reckless actions of the RBS managers.

Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.

I hope this finds you well. As head of the executive compensation committee I am writing this recommendation in order to reach a unilateral consensus on the adequate amount the new CEO just hired should be paid. I want to concisely go over the pros and cons of attempting to follow industry standards and will debrief a compensation plan I have put together that reflects our values as a company.

By changing the frequency of payouts and tying the bonus amount to be paid to the profit margin employees would not factor it into their monthly budgets, decreasing the likelihood that they feel entitled to the additional income, and further give greater motivation for the employees to increase production in an effort to increase profits and ultimately their bonus. Further, tying the bonus to the profit made during the time frame decided upon would not be as complicated of a figure to explain to the employees. Like any company, Engstrom would likely track profit and loss on a frequent if not weekly basis, this information could be made available for all employees to see, perhaps in a breakroom information board or somewhere that employees could

* Other: Includes long-term, non-equity incentive payouts, the value realized from vesting of restricted stock and performance shares. Also includes other executive personal benefits, such as premiums for supplemental life insurance, annual medical examinations, tax preparation and financial counseling fees, club memberships, security services and the use of corporate aircraft.

Executive Officer Compensation: American Express believes that having executives who are strong leaders will enable them to attract and retain the best talent, promote continued growth and demonstrate the Company’s values. Compensation program for the top leaders is designed to attract, motivate and retain executives of exceptional ability and experience. The program includes incentive compensation tied to the Company’s annual or long term financial and strategic objectives, aligning the financial interests of the most senior leaders with that of the

Executive Compensation is typically structured to incentivize executives to achieve company performance consistent with increases in shareholder value. As a result, a majority of executive pay is contingent on performance. If the company or the executive fails to perform, the pay may never be received. Corporate Governance is the system of principles and processes by which a corporation is managed that defines the relationships among the board, shareholders, management and other stakeholders in a manner designed to promote long-term growth in share price. Specific to executive compensation, the Center believes that a board-centric approach to corporate governance is best and that consistent with that approach, best practices should ensure that compensation decisions are aligned with the best interests of shareholders and other

The bonus system should not only based on meeting and exceeding budgeted profitability, but also based on the evaluation of mystery shoppers on subjective goals, such as good customer service and experience staff, ect. A simple point system can be considered as way of quantifying the managers’ bonus. This way not only can see how well a manager is doing profit wise, but also how good they are doing in other aspects as well.

The main components of executive compensation are, current or annual core compensation, differed core compensation: stock compensation, Deferred core compensation: golden parachutes and platinum parachutes, employee benefits enhanced protection program benefits and perquisites, and clawback provision. All of these compensation components include the following, base pay, bonuses, short-term incentives, and a variety of stock compensation. Executives receive benefits just like other employees do. The enhanced protection program benefits and perquisites differ for executives in a

CEO compensation package comprises of four key components: base fixed salary, annual bonus, stock options & restricted stock grants, and long term incentive plan

Read the discussion case "Executive Compensation" on pages 190-192 then answer/discuss questions 1-7 that follow.

In addition, the management may also hope to achieve their personal interests through the change in accounting policies. According to the case, it is obvious that the top management is awarded with an executive incentive plan in 1985. With that being said, if the financial performance appeared on the financial statement in 1985 improve; most members on the management team would definitely earn the significant bonuses.

The rate of bonus plan still is 10% of net income to top management. In the one hand, the structure

This year’s bonus pay costs will affect profits, due to increases in employment tax and minimum wage rates. If Norman Ride’s executives do not act to correct this problem, Norman Ride faces extreme revenue shortfalls. Also, managers anticipate that

We believe the new incentive system was needed and reasonable because the accounting-based incentive system, where EPS was a measure of performance, raised valid concerns. The first being an agency problem. This existed within the old system as manager’s interests were not aligned with those of stockholders. EPS had improved steadily at a rate of 9% annually; however, the share price had increased only slightly in comparison. Therefore, the company’s stockholders had hardly benefited. The second issue was the use of subjectivity in granting bonus awards. These awards were given out even when their entity had not performed well. Managers began “politicking”, meaning they would try and convince their evaluators they performed better than the results had shown.