Types of Executive Compensation

Critical Thinking Essay: Executive Incentives

Executive compensation is a very important thing to consider when evaluating an investment opportunity. Executives who are improperly compensated may not have the incentive to perform in the best interest of shareholders, which can be costly for those shareholders. While new laws and regulations have made executive compensation much clearer in company filings, many investors remain clueless as to how to find and read these critical reports. T

Types of Executive Compensation

There are many different forms of executive compensation that offer a variety of tax benefits and incentives. Below are the most common forms: 1. Cash Compensation – This is the sum of all standard cash salary compensation that the executive receives for the year. 2. Option Grants – This is a list of all options granted to the executive; the information includes strike prices and expiration dates. 3. Deferred Compensation – This is compensation that is deferred until a later date, typically for tax purposes. However, changes in regulations have lessened the popularity of this type of compensation. 4. Long-Term Incentive Plans (LTIPs) – Long-term incentive plans encompass all compensation that is tied to performance for tax purposes. Current tax laws favor pay for performance-type compensation. 5. Retirement Packages – These are packages given to executives after they retire from the company. These are important to watch because they can contain so-called “golden parachutes” for corrupt executives. 6. Executive Perks – These are various other perks given to executives, including the use of a private jet, travel reimbursements and other rewards. These are found in the footnotes of annual reports. Finding Executive Compensation All executive compensation information can be found in public filings with the Securities and Exchange Commission (SEC). Use the following link to access these reports via the EDGAR system which is maintained by the SEC:www.sec.gov/edgar/searchedgar/webusers.htmThe SEC mandates that all public companies disclose how much they are paying their executives, how this amount is derived and who is involved in determining pay. The information itself is disclosed in several locations, including: • Form 8-K: The current event filing can be used to disclose compensation information if the event is related to changes in compensation policies and/or procedures. • Form 10-K: The annual report filing is always used to disclose yearly compensation information. • Form 10-Q: The quarterly report filing also contains quarterly compensation information. • S-1/S-3 Forms: contain executive compensation information relevant for future investors to consider. • DEF14A The proxy statement for shareholders filed in EDGAR