Executive pay structure involves determine that compensation elements (tools) to be used and the levels or amounts for each.
The best way to accomplish this is to first determine a compensation philosophy. This defines what you are trying to accomplish with pay, the basic levels of pay as compared to the market, peer companies to use as comparison, the type of consistent, variable and very long-term pay and much more (Executive Pay Can’t Be Fixed! But….here are 3 things to consider.)
Then the company will review market data for the pay types and levels of relevant peers. These become data points for the comparison against the companies stated compensation philosophy.
In best cases modeling is done to determine worst case, best case, mathematical and “gut check” scenarios. The company then balances these and sets pay levels and types for each individual.
The process is part science, part art and a bunch of pseudo-science. The end result is generally fairly acceptable and defensible. As companies get very big the data and approach sometimes breaks down, but the high levels of pay you see are usually not because of this breakdown.
The high levels of pay are because everyone would rather wait and pay executives (usually through stock) than guarantee them cash up front. And the corporate tax rules support this.
Let me know if you need more…
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