In 2006, Apple CEO, Steve Jobs whose official executive salary form Apple was $1, earned approximately $646 million dollars in compensation from Apple. Whereas, Forbes 2nd richest man in the world, Warren Buffet, with an estimated net worth of over 40 billion dollars, earned $100,000 as an executive salary. How are these figures determined and what does executive compensation consist of is a common question. Generally speaking, executive compensation is the keyword for how top executives of business corporations are paid.
Compensation System
Generally speaking, the compensation and salaries of every executive employee are decided by the company owners through the board of directors and the management team.
Means of Compensation
In executive compensation, there are five basic tools used to compensate and reward executives in various United States Organizations. These five basic tools include: (1) base salary, (2) short-term incentives, (3) long-term incentives (generally referred as (LTIP)), (4) employee benefits and (5) perquisites (perks). In most typical modern United States corporations, the CEO and other high level executives are paid a considerable salary plus short-term bonuses and incentives. Total Cash Compensation (TCC) is the term generally used to refer to the total compensation package.
The combination of the different options is referred to as Total Cash Compensation (TCC). Short-term incentives are generally formula-driven and have some sort of performance criteria attached to them depending upon the role of the executive. For example, within the corporate environment, the Sales Director's performance related bonus may be somewhat based on incremental revenue growth turnover; however, a CEO's salary could be based on revenue growth and incremental profitability.
Bonuses paid to employees are after-the-fact (not formula driven) and most often discretionary. Executives can also be compensated with a mixture of shares in the company and cash which are almost always subject to some type of vesting restrictions (a long-term incentive). For a bonus to be considered a long-term incentive the measurement period of that payment must be in excess of one year however, 3-5 years is common. The vesting term of that payment refers to the period of time before the recipient of the bonus has the right to transfer shares and realize any type of value. Vesting can be based on performance, time, or both. For example a well paid CEO could get 1 million in cash, and 1 million in company preferred shares (and / or share buy options).
Perquisites ("perks")
Other common components of a true executive compensation package can include such perks as health insurance, generous retirement plans, a chauffered limousine, interest free loans for the purchase of a housing, an executive jet, etc.
Fortune 500 compensation
Most common, about half of Fortune 500 CEO compensation is in bonuses and cash pay, and the other half of the compensation package is in restricted stock, and gains from exercised stock options. This information comes according to Forbes magazine. Forbes magazine recounted the 500 CEOs compensation to be roughly $3.3 billion during 2003 (which makes $6.6 million a piece). However this figure includes gains from many stock call options used; these options may have been rewarded many years before the option to buy is actually used.
2006 CEO Compensation (millions)
The Top 10 CEO compensation packages of 2006 follow:
1. Steven P. Jobs, Apple - 646.60
2. Ray R Irani, Occidental Petroleum - 321.64
3. Barry Diller, IAC/InterActiveCorp - 295.14
4. William P Foley II, Fidelity National Finl - 179.56
5. Terry S Semel, Yahoo - 174.20
7. Angelo R Mozilo, Countrywide Financial - 141.98
8. Michael S Jeffries, Abercrombie & Fitch - 114.64
9. Kenneth D Lewis, Bank of America - 99.80
10. Henry C Duques, First Data - 98.21
Criticism
There are many criticisms and controversies regarding executive compensation:
Critics charge that many CEO's are highly overpaid for the services that they provide, however others believe that a quality CEO can have an enormously positive effect on the company's talent and performance. Therefore, a high compensation is necessary to attract and hire the best talent. Opponents and critics point out that because the CEO's pay is set by the board of directors and the CEO determines the board's tenure, selection and committee assignments, and compensation consultants, an inherent conflict of interest occurs and effectively prevents effective price competition.
Determining which CEO's are overpaid is an extremely complex issue. Many articles with an emphasis on high CEO pay only survey the CEO's who received the most overall money compensation in a particular year even though the majority of the compensation might be obtained from exercising options or selling stock that was obtained over many years and was not sold before. Also, many indirect corporate perks are generally not included in these figures.
Defenders of significantly high executive pay consistently state that the international war for talent and the rise and success of private equity firms is often attributed to much of the increase in executive pay.
1 Comment
Point #5
Where is the 5th type of basic tool you spoke about?