Components of an Executive Compensation Plan

Components of an Executive Compensation Plan

There are five basic components of an executive compensation plan:

Basic salary: although formal job evaluation still plays a crucial role in determining executive base salary, other sources tend to be more important. Most important is the opinion of a compensation committee, usually composed of the organization’s board of directors. In most cases, the compensation committee takes over some information analysis previously done by the chief human resource manager (Samsa & Scheidt, 2013). This goes as far as analyzing performance records and salary survey data for executives of comparable firms. Executive compensation committees use the approach of identifying the main competitors and setting the executive’s compensation at a level between the worst and best of these comparison teams.

Bonuses or short-term incentives: in most cases, annual bonuses are essential in executive compensation and are fundamentally designed to encourage better performance. Strikingly, the popularity of this compensation approach has been rapidly increasing. Currently, bonuses are awarded to almost 90% of the executives (Henderson, 2006).

Capital appreciation and long-term incentives: today, long-term incentives contribute about forty percent of total executive compensation, up from thirty percent a decade ago. The executive stock remains the most common form of long-term executive incentive. A stock option refers to the right to buy a defined amount of stock at a stipulated price over a given period based on certain eligibility requirements (Samsa & Scheidt, 2013).

Executive benefits: because many benefits are linked to income level such as disability, life insurance and pension plans, typically, executives tend to receive higher benefits than other workers do. Besides the typical benefits, a number of executives are given additional exclusions from deductibles for health care costs, life insurance, and supplementary pension income that exceed the maximum permitted limit under employment guidelines for qualified pension plans (Henderson, 2006).

Perks: these are tied to ranks. Life at the top comes with its own rewards meant to satisfy various executive needs. They include internal rewards that offer a little luxury while the executive is inside the company. Examples include an executive dining room, a luxury office, and special parking. The second perk is categorized as company-related perks meant for business conducted externally (Samsa & Scheidt, 2013). They include payment of hotel, airplane, resort, and auto expenses. The final segment is known as the personal perk including aspects like legal and personal counseling, free home improvements and repair, low-cost loans, expenses for vacation and personal use of company property.

The nature of tax legislature is increasingly changing. Each component of the executive compensation plan receives significant attention in designing executive compensation plans. Local, state, federal income tax, Medicare, and Social Security taxes have quickly focused on a percentage of earned income. Many employees can easily calculate and understand these taxes. These tax programs are a major source of revenue for the local, state, and federal governments. Since the passage of the Tax Revenue Act, Tax Reform Act, and Tax Payer Relief Act, subsequent tax legislations have undergone immense changes. Since then, the marginal rate of employee compensation has declined and risen depending on the revenue needs of the country (Henderson, 2006).

The Tax Payer Relief Act coded child credits, reduced wealth transfer, and capital gains and provided new savings and education incentives for employees. To ease the burden of payroll and income taxes, families with extremely low income receive an earned income tax credit. This has become a core element of federal efforts to lessen poverty and boost income from work among families with children. This has become the “make work pay” strategy of the federal government. The government has used tax legislations to promote corporate and individual behaviors that have social merit. These social improvement goals have been achieved through adding a variety of credits and deductions for individual and corporate income tax obligations. These credits and deductions have enhanced the lifestyles and security of all employees and their dependents.


Henderson, R.I. (2006). Compensation management in a knowledge-based world (10th ed.). Upper Saddle River, NJ: Prentice Hall.

Samsa, M.K., & Scheidt, K.S. (2013). International employee equity plans: Participation beyond borders. The Hague [u.a.: Kluwer Law International.

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