Trends of Executive Compensation in the U.S. Video

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  • 0:02 Types of Executive…
  • 1:45 Determining Executive…
  • 2:27 Trends
  • 3:26 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Some believe executive compensation in the U.S. has gotten out of hand. In this lesson, we'll discuss how executives are compensated, how their compensation is determined and recent trends in executive compensation.

Types of Executive Compensation

Calvin is the CEO of a large corporation. He is in charge of a company that employs thousands of people spread over dozens of offices and facilities across the globe. Calvin is well compensated for his efforts, as his total annual compensation package is valued at millions of dollars. Let's take a look at the components of Calvin's compensation.

  • Calvin receives a base salary as part of his overall compensation package, which is a specific fixed payment that is usually calculated on an annual basis and paid throughout the year in regular installments.
  • Calvin, like many executives, has the opportunity to receive bonuses, which are a form of variable pay. This means that receiving the bonus is conditional on meeting certain performance standards. For example, Calvin may be entitled to a bonus if his company achieves a certain level of profits at the end of the fiscal year. If it doesn't, Calvin is out of luck. Bonuses are often larger than the executive base salary.
  • The company will often either give the executive free shares in the company or give a stock option, which allows the executive to purchase the company stock at a set price for a period of time. The idea is to provide an incentive to the executive to work towards the long-term interests of the company. If the company continues to do well, the shares of stock will become more valuable.
  • Executives, like Calvin, often receive lucrative benefits as part of their compensation package. Executives often get generous health insurance, life insurance, pension plans and severance packages when they leave. Perks are often part of the benefits offered and may include such things as country club memberships, car services and use of the company jet.

Determining Executive Compensation

Setting executive compensation in a corporation is the responsibility of the company's board of directors. Compensation is negotiated between the board and the executive at arm's-length, which means each side has fairly equal bargaining power, information and is not under any type of influence or duress. However, some critics argue that this doesn't really happen.

Managerial power theory posits that executive compensation is often excessive when compared to a hypothetical and economically efficient compensation contract where both parties have equal bargaining power. Theory argues that executives are often in a position to have an undue amount of influence over the company's board of directors.

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