Making A Good Compensation Plan

Executive compensation has been at the forefront of discussion for a long period of time. Analyzed by academics, highlighted by the media, questioned by Congress, and scrutinized by the general public, the topic warrants much debate. In the 1990’s, total executive compensation increased substantially as companies began offering stock option programs; CEO’s of S&P 500 saw an average increase of 150%.

Quality of employees work is very critical for company’s success. If planned properly, incentive pay plans may increase employee’s interest in providing better service. This paper discusses

Compensation systems can take on many forms, all of which have positives and negatives related to it. However, certain components are noted to be determinants of solid compensation plans. One agreement of a solid compensation system is the use of incentives. “Clearly a successful companies set objectives that will provide incentives to increase profitability” (Needles & Powers, 2011). Incentive bonuses should be measures that the company finds important to long-term growth. According to Needles & Powers (2011) the most successful companies long term focused on profitability measures. For large for-profit firms, compensation programs should offer stock options. The interweaving between the market value of a company’s stock and company’s performance both motivate and increase compensation to employees As the market value of the stock goes up, the difference between the option price and the market price grows, which increases the amount of compensation” (Needles & Powers, 2011). Conclusively, a compensation plan should serve all stakeholders, be simple, group employees properly, reflect company culture and values, and be flexible (Davis & Hardy, 1999; The Basics of a Compensation Program).

The senior leadership within Harrah Entertainment, Inc. feel compelled to, and recognizes the need to look inward at its staff to better equip and motivate them with a meaningful compensation strategy to support and achieve their overarching goals. The method currently in place is a customer-satisfaction driven gain sharing bonus plan (Delong & Vijayaraghavan, 2003). The question at hand, are they dealing the right deck of cards to their employees to continue to meet and exceed the goals? In this paper, key players within

With the constant change in today’s business world, to have a competitive advantage makes it difficult for employers to attract and retain the most talented employees. Identifying the company’s compensation strategy ensures the organization offers the right pay and manages the pay increases to retain top talents. When we hear the word compensation we think about compensating an employee for their work performed, but there

However, there have been many cases where the CEO and executive officers receive outrageous compensation even when the companies suffer. Overall, there is a wide disconnect between the incentive of the executives and the financial performance of their company, which needs to be fixed. By passing regulations and rules such as the Dodd-Frank Act, there is hope of shedding light on the connection between the company’s performance and the executives pay. Although it will provide a clear insight, it will not be able to set a strict regulated compensation or define what an executive should earn. Instead regulations will allow for more transparency for the shareholders regarding corporate governance issues such as executive pay. Along with that, it will force companies to take accountability for their actions. If they do poorly, then the executives should be paid less, and vice versa. Overall, there should be a direct alignment between executive pay and the company’s

Generally, under-performing companies are the prime targets of hostile takeovers, so it makes sense that aligning shareholder and executive goals is a major way to avoid that. One popular way of aligning these goals is through the use of elaborate, structured compensation plans for executives which directly tie an executive’s salary to the performance of the company, usually and specifically its stock price (Megginson & Smart, 2009). These compensation plans have become the norm for American corporations, and their effectiveness in solving the agency problem is debatable. On one hand, it should drive an executive to strive to maximize the shareholder wealth, and it also helps companies to attract and retain the best available managers. On the other hand, it serves to sometimes wildly inflate the compensation paid to these executives, either by corporations trying to stay competitive for the best talent, or through easily achievable goals and uncapped maximums. The structured plans, if done correctly, are an effective way to help insure the goal of wealth maximization, but they are also by definition agency costs. Hence, agency problems are inherent to our American corporate system.

Directors have awarded compensation packages that go well beyond what is required to attract and hold on to executives and have rewarded even poorly performing executives. These executive pay excesses come at the expense of shareholders as well as the company and its employees. Furthermore, a poorly designed executive compensation package can reward decisions that are not in the long-term interests of a company. Excessive CEO pay is essentially a corporate governance problem. When CEOs have too much power in the boardroom, they are able to extract what economists' call "economic rents" from shareholders (Economic rent is distinct from economic profit, which is the difference between a firm's revenues and the opportunity cost of its inputs). The board of directors is supposed to protect shareholder interests and minimize these costs. At approximately two-thirds of US companies, the CEO sits as the board's chair. When one single person serves as both chair and CEO, it is impossible to objectively monitor and evaluate his or her own performance.

Executive incentive plan has motivated the management to bring changes as the plan says that if the company achieves the target of net after tax profit, 11 senior executive officers will be given incentive compensation of 40% of annual salary.

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

In order to examine the effects of excessive CEO pay on the company’s stakeholders, one must define the two terms. Russell S. Whelton, a former graduate student at Saginaw Valley State University, defines excessive pay as, “compensation that is 20% or greater than the national average CEO salary” (Whelton 15). Therefore, excessive pay would constitute compensation over $13.8 million per year (Chamberlain). A stakeholder is anyone who is directly affected by the performance of an organization and thereby, holds a stake in that company (Schermerhorn 73). Some examples of stakeholders are directors, shareholders, executive officers, and all employees. It is important to understand why executive officers are compensated at the high levels they are today to determine the benefits and disadvantages of the argument. The purpose of compensation at any higher level is to “attempt to ensure that management actions result in successful performance for the firm” (Ashley and Yang 369). Possible excessive compensation can be a result

Executive compensation is a form of financial compensation that is determined by the compensation committee. The compensation committee sets the package so it correlates with factors that have an effect on the company. According to an economic theory known as the “Optimal Contracting Theory.”, top executives and shareholders negotiate through the board of directors to maximize their respective interests (Managerial). A principal/agent problem arises because shareholders need to get the

In examining the driving force in a corporation’s success, one of the key factors is to maximize on shareholder wealth while considering the motivations of the management team. Often times, these interests are maintained through executive compensation packages that engage managers and executives to perform with regard to the best interests of shareholders. These executives are being incentivized through bonuses in the form of huge bonuses, stock options and awards. Many believe these rewards have become obscene and are in no way reflective of executive level performance.

As part of the compensation committee, you shall take into considerations some qualifications in giving right compensation for CEOs. The company’s performance, individual performance of employees, managers and CEO, alignment with pay decisions for other executives, market data and expected trends, external messaging and internal messaging are some of the key considerations. The compensation must be a mix of the dollar salary and the firm’s

The management in the company has the top position in the organization. They need high and outstanding compensation they are responsible for the over all business results to be discus to shareholders at the end of the year. They are answerable to shareholders. Their position in the company is at risk executives job contact can be cancelled at anytime. So the executives’ compensation plan is a protection against the case of job cancelled.