executive pay

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The special arrangements that exist in private companies for managing the pay of executive directors. Executive pay typically consists of four main elements: basic pay, an incentive bonus scheme, a share option scheme, and an executive benefit package, the most distinctive element of which is a non-contributory pension. Particularly significant are the bonus and share option elements, which are designed to overcome a potential principal-agent problem and ensure directors act in accordance with the interests of shareholders. Bonus schemes may be short or long term, though long-term incentives (LTIs) have become popular as a means of retaining executives and ensuring the effective long-term management of company assets. Pre-tax profit, earnings per share, and other financial indices are the performance measures that are most frequently used within executive bonus schemes. Executives also frequently receive share options, the right to buy a block of shares on some future date at the share price when the option was granted. Executive pay has been a controversial subject in recent years as a result of the rapid growth of executive earnings, research findings that indicate limited connection between earnings and business performance, and the growth of income inequality. The differential that executives enjoy over other employees in the enterprise has grown enormously since the 1970s. In the UK, the result has been a series of inquiries, including the reports of the Cadbury and Greenbury committees in the 1990s. These recommended greater transparency and disclosure of executive pay and the use of remuneration committees, composed of non-executive directors, to determine the pay package. [See fat cat.]

Subjects: Human Resource Management.

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