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Executive Compensation

Executive compensation resources

Overview

Executive compensation is part of sustainability as both a social and economic concern. It plays into the analysis of how a business decides to distribute revenue and whether proper and adequate attention is given to equitable distribution that is focused on long termism vs short termism.

One long-term study by faculty at Harvard Business School of 180 companies showed that tying management compensation to sustainability performance contributed to greater share value.

Resources

Pay scales or ratios

Compensation levels in any company can vary widely, with large gaps between those at the top and average wages for the lowest-paid workers. Assessing the magnitude of that gap can be done using relevant industry pay scales or by calculating the ratio between executive compensation and the median level of compensation for all other employees. The greater the gap, the more likely that the company is contributing to the income inequality that is pervasive in the US and elsewhere. The SEC now requires that public companies disclose this ratio, but all companies should be aware of the scope and extent of their own pay gap and take steps to minimize it.

Sustainability performance pay

Pay-for-Performance (PFP) is becoming increasingly common, including tying compensation to specific sustainability performance indictors. Companies with a strong commitment to meeting sustainability goals include those goals in PFP criteria. Using sustainability performance PFPs has been shown to enhance both sustainability and overall performance, and contribute to increased share value and the ability to attract longer-term investors.

Resources

Executive comp basics

Executive compensation is a broad term for the financial compensation awarded to an organization’s executives. A company’s Board of Directors Executive establishes compensation packages for top executives, typically based on recommendations from a board compensation committee.

Executive pay arrangements typically consist of six components:

  • salary

  • annual incentives

  • long-term incentives

  • benefits

  • perquisites

  • severance/change-in-control agreements

The purpose of executive compensation is to incentivize executives who have a significant impact on company strategy, decision-making, and value creation. A main goal of executive compensation is “Pay for Performance” and retention.

Federal law, senior management, market conditions, and stakeholders all heavily influence executive compensation plans, characteristics, and design. Compensation will vary depending on a number of factors including company size, industry, years of experience, level of education, and location.