It starts with the CEO
Chief executive officers (CEOs) get paid lots of money for being the top employees in the company. Why do they get paid so much? Like athletes and actors, CEOs provide a level of talent that is required to produce the desired product – in this case, a strongly performing company. The skills and responsibilities that come with the job of CEO are extreme and the number of people who can fill these roles is limited. That is why the market has determined that people with these skills are worth a lot of money to their companies.
Only about 20 percent of a CEO’s pay is base salary; the rest is made up of incentives based on the company’s performance. The rationale is that if the company is performing well and the
shareholders are making money, then the CEO should share in that success.
A CEO’s compensation package affects everyone within a company. Often it can be considered the yardstick by which all other employee benefits and bonuses are measured and negotiated. Moreover, the CEO’s compensation may be an indicator of how well the company is performing.
This performance, in turn, could translate into a more generous compensation package for individual employees who are savvy negotiators.
When companies establish pay structures, they define the compensation for the highest- and lowest-paying jobs before filling in the compensation for the jobs that fall in between in the traditional
Chief Executive Officer
Plans and directs all aspects of an organisation’s policies, objectives, and initiatives. May require a bachelor’s degree with at least 15 years of experience in the field. Relies on experience and judgment to plan and accomplish goals.
May preside over board of directors. Source: Salary. Com the compensation for the jobs that fall in between. In the traditional internal equity method of establishing a pay structure, the CEO’s compensation sets a ceiling for the company, and each level below is compensated at a comparably lower level. If you know how well the CEO is compensated, you can get a sense for how generous the company is likely to be toward other employees as well.
CEOs make most of their Money through Incentives As a general rule, base salary accounts for just 20 percent of a CEO’s pay. The other 80 percent comes from performance-based pay.
Base pay for the core role and responsibilities of the day-to-day running of the organisation. This amount is very often less than $1 million because the IRS has imposed tax restrictions on
Annual bonuses for meeting annual performance objectives. Long-term incentive payments for meeting performance objectives to be achieved for a two- to five-year period. These awards are sometimes described as performance shares, performance units, or long-term cash incentives.
Restricted stock awards as an incentive to assure the executives are strongly aligned with the interests of shareholders. Because restricted stock awards have an actual cash value when they are granted, the proxy table shows these in dollars, not in shares.
Stock options and stock appreciation rights (SARs) for increasing share price and increasing the shareholders’ returns. Options have very favourable accounting treatment for the company, which is why they are so common. Option grants are always shown as a number of shares underlying the option.
In a subsequent table in the proxy is an estimation of the present value of each option grant assuming a 5 percent and a 10 percent increase per year in the stock price, or using a mathematical model (e.g., Black-Scholes) to predict the value of the option.