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Unit 8: International Compensation

years). They are an investment vehicle that allows people to defer taxation of both the Notes
initial contribution and the earnings on the deferred assets.
5. Performance incentives are special incentives – shares of stock, cash, vacations, or other
bonuses – tied to the performance of the department or business area that the executive
manages. Performance incentives linked to long-term goals create vision that can inspire
an executive to remain committed to a company.
6. Other benefits like car allowances, life insurance, relocation payments, flexible start dates,
signing bonuses, use of company-owned vacation property, health-club membership,
tuition reimbursements, etc. Offering non-monetary incentives also helps in attracting
the talented candidates for the executive level.

Example: US corporations pay their top executives salary and short-term incentives or
bonuses. This combination is referred to as Total Cash Compensation. Short-term have some
performance criteria attached depending on the role of the executive. The Sales Director’s
performance related bonus may be based on incremental revenue growth turnover; a CEO’s
could be based on incremental profitability and revenue growth.

8.4.2 Strategies for the Growth of Executive Compensation

There are a number of strategies that could be employed as a response to the growth of executive
compensation.
1. In the United States, shareholders must approve all equity compensation plans.
Shareholders can simply vote against the issuance of any equity plans. This would
eliminate huge windfalls that can be due to a rising stock market or years of retained
earnings.
2. Independent non-executive director setting of compensation is widely practiced.
Remuneration is the archetype of self dealing. An independent remuneration committee
is an attempt to have pay packages set at arms’ length from the directors who are getting
paid.
3. Disclosure of salaries is the first step, so that company stakeholders can know and decide
whether or not they think remuneration is fair. In the UK, the Directors’ Remuneration
Report Regulations 2002 introduced a requirement into the old Companies Act 1985, the
requirement to release all details of pay in the annual accounts.

4. A say on pay – a non-binding vote of the general meeting to approve director pay packages,
is practiced in a growing number of countries. The aim is that the vote will be a highly
influential signal to a board to not raise salaries beyond reasonable levels.
5. Progressive taxation is a strategy that affects executive compensation, as well as other
highly paid people. There has been a recent trend to cutting the highest bracket tax payers.
Executive compensation could be checked by taxing more heavily the highest earners.
6. Maximum wage is the idea to place a cap on the amount that any person may legally
make, in the same way as there is a floor of a minimum wage so that people can not earn
too little.
7. Indexing Operating Performance is a way to make bonus targets business cycle independent.
Indexed bonus targets move with the business cycle and are therefore fairer and valid for
a longer period of time.

Executive compensation is a very important issue for investors to consider when making
decisions. An improperly compensated executive can cost shareholders money and can produce

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