Executive compensation

Srishty(209) Bcom 5C
Reet (197) Bcom 5C
 INTRODUCTION
The term executive includes all personnel holding supervisory, managerial and executive
positions. Compensation means total cost of employment that covers all tangible items
incurred by an organization on the employees. Motivation and performance of this critical
group is dependent on how executive compensation is managed. Executive
compensation is a broad term for the financial compensation awarded to a firm's
executives. Executive compensation packages are designed by a company's Board of
Directors, typically by the compensation committee consisting of independent directors,
with the purpose of incentivizing the executive team, who have a significant impact on
company strategy, decision-making and value creation (Pay for Performance) as well as
enhancing Executive Retention. Executive compensation has four distinct characteristics:
1. Pay package design
2. Equity compensation
3. Performance contingent pay
4. Vesting schedules
Meaning of compensation strategy
The compensation strategy defines the pay market, the organization follows,
the desired position on the pay market and the way how the desired level
and position on the pay market will be achieved. The compensation strategy
defines the basic compensation components used in the organization and the
standard rules applied to each compensation component. The compensation
strategy does not change often as the compensation principles cannot be
changed within few days.
Defination of compensation strategy

A compensation strategy is a plan that dictates how employees are paid and
rewarded for their work. These ideas are based on the current market for
people with the same skills and the overall available funding a corporation is
able to expend on payroll. Compensation strategy is also a means of
motivation and incentivization that increases the value of general payroll
systems.
-Tom merton
Importance of compensation strategy
The compensation strategy gives the certainty to the HR employees and HR
managers as they can promise the stability in the compensation, the stability
and the managed development of compensation components.

1. Importance of compensation strategy for manager: As per the decided

consistent strategies the managers can plan the career of the
subordinates.
2. Importance of compensation strategy to employees: Helps them to
recalculate their salaries.
Prerequisites for an effective
compensation strategy:

1. Performance management system

2. Allocation of budget
3. Salary audits
4. Benefit package
5. Legal compliance
6. Structured administration
Strategic reward management system in organizations:

Reward management: It deals with stragtegies ,policies, processes which are

required to guarantee that the contribution of employees to the business is
recognised by all means. Its objective is to reward employees fairly,
equitably and consistently in correlation to value of these individuals to the org.

Role of rewards in employee motivation-

1. Incentive
2. Uniting the team
3. Self-Motivation
Different types of rewards
1. Intrinsic and extrinsic Rewards

2.Monetary and non- monetary Rewards

3.Performance based versus membership

based rewards
INTRINSIC REWARDS-
An intrinsic reward is an intangible reward of recognition, a sense of achievement, or a conscious
satisfaction. Intrinsic rewards are ones that come from within the employee. An employee who is
motivated intrinsically is working for his/her own satisfaction and may value challenging work
he/she perceives to be meaningful to the company. By having regular communication with an
employee, a manager can learn about the employee's motivations and might learn creative ways to
reward him or her.

Types of intrisic rewards-

1.Completion
2. Achievement
3. Autonomy
4. Personal growth
Impact of intrinsic rewards on individual and organisation
performance:
1. The intrinsic rewards have effect both individual and organizational performance. For example,
the employees in an organization have reached the esteem stage of development and possibly
the self-actualization phase through the impact of intrinsic rewards.

2. Itencourage and enhance both employees and employer to be able to challenge themselves
and accomplish new tasks and cooperate with others to work in harmony environment.

3. It enable the employees to have greater concentration and keep them in energizing and self-
managing state.

4. Intrinsically motivated employees become the informal recruiters and marketers for their org.

5.Increased job satisfaction which leads to increased profits for the organisation.

6.Incresed satisfaction leads to more interest ,fun, excitement and confidence in performing
tasks which leads to enhanced organisational performance.
EXTRINSIC REWARDS-
An extrinsic reward is a reward that is tangible or physically given to a person for accomplishing
something. It is a tangible recognition of one's endeavor. For example, it's a certificate of
accomplishment, a trophy or medal, for winning the race, a badge or points for doing something
right, or even a monetary reward for doing your job. Because extrinsic rewards are tangible, they
are usually given to the person doing the activity; as such, they are typically not from within the
person. Therefore, extrinsic rewards means the reward is extrinsic to the performer of the activity
or behavior.

Types of extrisic rewards-

1.Pay
2.Bonus
3.Promotions
4.Recognition
Impact of extrinsic rewards on individual and organisation
performance:
1. When talking about extrinsic rewards, individuals are said to be sensitively concerned on the
pay and bonuses. They will be more motivated by pay than any other type of reward.

2. It can be used to coordinate resources by linking employees monetary motive to goal of the
organisation.

3. However,people who pursue goals for extrinsic reasons such as money are less likely to attain
their goals even they do achieve them because they feel that the goals are less meaningful for
them.

4. Although the goals of org might be achieved but the feelings of employees would be
decreasing due to being uncomfortable with the jobs. This situation will lead the extrinsic
rewards become less effective in the org.
MONETARY REWARDS-
Monetary rewards include wages, bonuses, profit sharing, and the like or indirectly through
supportive benefits such as pension plans, paid vacations, paid sick leaves and purchase discounts.

Types of monetary rewards-

1.Stock options
2.Profit sharing
3.Raises
4.Bonuses
NON- MONETARY REWARDS-
Non financial rewards are potentially at the disposal of the organisation. They donot increase the
employee’s financial position, instead of making the employees life better off the job , non financial
rewards emphasis making life on thejob more attractive.

types of non-monetary rewards-

1.Appreciation of work done
2.Competition
3.Group incentives
4.Knowledge of the results
5.Worker’s participation in management
6.Opportunity for growth
7.Suggestion system
8. Job enrichment.
Performance bases versus membership
based rewards
The rewards that the organization allocates can be said to be based on either
performance criteria or membership criteria. Few organizations actually rewards
employees based on performance.Performance based rewards are exemplified by the
use of commission, piecework pay plans, incentive, group bonuses, or other forms of
merit pay plans. On the other hand, membership based rewards include cost of living
increases, profit sharing, benefits, and salary increases attributable to labour market
conditions, seniority or time in rank, credentials (such as a college degree or a
graduate diploma), or future potential (the recent M.B.A. from a prestigious university).
The demarcation between the two is not always obvious. For example, company paid
membership in a country club or use of company owned automobiles by executives may
be given for membership or performance. If they are available to all middle and upper
level executives, then they are membership base.