Executive compensation, also referred to as executive pay, includes remuneration packages that are specifically designed to suit business leaders, executive-level employees, and the senior management of an organization. It is usually given to these employees in return for the services they carry out in the firm (SHRM, n.d.). The package consists of both financial and non-financial benefits since it includes a mixture of salaries, short-term and long-term incentives, insurances, variable bonuses based on the executive’s performance, perquisites, and incentives, among other things (SHRM, n.d.). This paper will look at the current status of executive pay, arguing that this type of compensation bears significant.
This type of compensation is important as the senior management and executive-level employees play a critical role in an organization. They make strategies and important decisions that are crucial for the company’s success. Therefore, setting the right benefits package is a key factor in keeping these employees motivated and satisfied (SHRM, n.d.). Executives who are not properly compensated may not have the incentive to perform in the best interest of shareholders, thus leading to huge costs for the company.
Currently, executive pay has become more challenging than usual for several organizations, especially because of the financial consequences of the Corona Virus pandemic. Several organizations have been impacted by the pandemic’s financial challenges (Morrison & Barone, 2020). As a result, they are facing difficult restructuring decisions. Moreover, companies have also changed some of their internal compensation policies and practices. For instance, some firms set up temporary salary reductions, promising to repay forgone wages either later in 2020 or the coming years (Morrison & Barone, 2020). Therefore, COVID-19 has led to unexpected issues that have significantly affected executive compensation. In addition to this, companies have now cut back on perquisites for executives especially those like private security, tax gross-ups, spousal travel care, etc., that are more likely to raise the rage of shareholders (SHRM, n.d.). Current trends in executive compensation also indicate that pay is more focused on long-term results, like stock options.
To design an effective executive pay plan, firms must balance recruitment and retention, shareholder alignment, cost and perceived value assessment, and performance-based pay. To achieve this balance, a long-term compensation plan with performance-based incentives can work (Ntim et al., 2019). One of the best strategies to determine executive pay is to first understand an organization’s links regarding pay-for-performance. Evaluating such metrics, including long-term performance plans that measure companywide success plays a vital role in gauging an executive’s potential pay. Another strategy would be to balance the short and long-term incentives by assessing and intertwining the relationship between these performance metrics and the creation of value for investors (Ntim et al., 2019). This will make it easier to determine executive pay since the more value provided for investors, the higher the executive compensation will be.
As a HR manager, one of the policies I would promote would be to provide executive pay depending on the value these executive-level employees bring to the table. This will ensure that executives are not just given benefits due to their titles but as a result of their performance and the value they bring to the organization. Too many benefits may also interfere with the executives’ performance in a company. Therefore, tying executive compensation to the performance and value brought by the employee to the firm results in a win-win situation where both the investors and executives are satisfied.
References
Morrison, J. A., & Barone, A. O. (2020). 5 executive pay issues for 2021. SHRM. Web.
Ntim, C. G., Lindop, S., Thomas, D. A., Abdou, H., & Opong, K. K. (2019). Executive pay and performance: The moderating effect of CEO power and governance structure. The International Journal of Human Resource Management, 30(6), 921-963. Web.
SHRM. (n.d.). Designing Executive Compensation Plans. SHRM. Web.