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. To help accomplish these goals, Executive Compensation has four distinct characteristics:
- Pay Package Design: Executive pay arrangements typically consist of six distinct compensation components: salary, annual incentives, long-term incentives, benefits, perquisites and severance/change-in-control agreements.
- Equity Compensation: The majority of compensation of most executive pay packages comes in the form of company stock.
- Performance-Contingent Pay: Executive pay packages are designed so that the bulk of an executive's compensation is contingent on a company achieving pre-established criteria of specific financial results and/or strategic objectives.
- Vesting Schedules: Even after financial or strategic criteria for an award is met, full ownership of the equity award are often conditioned on the executive's compliance with certain covenants.
Executive Compensation plan characteristics and design are heavily influenced by elements of Corporate Management and Federal Law.