Compensate Executive
Essay Preview: Compensate Executive
Report this essay
Compensating Executives
From a tax regulation perspective, the internal revenue service recognize two groups of employees who play a major role in companys policy decision, they are highly compensated employee and key employees.
Base pay: This is the fixed element of the annual cash compensation. These may have specific pay grades and pay ranges. Larger range spreads to highly paid grades as the specialized skills associated with higher pay grades are considered valuable. But the CEOs do not fall under formal pay structure as their work is highly unpredictable and complex .
Bonuses: These represent single pay-for-performance payments companies use to reward employees. Some types:
Discretionary bonus
Performance-contingent bonus
Predetermined allocation bonus
Target plan bonus
Stock Compensation: This refers to an agreement between an employee and a company to render payments to an employee as a future date. This is supposed to create a sense of ownership aligning the interests of the executive to that of the owners or shareholders. Different types of Company stocks shares are usually provided.
Incentive stock option plans
Stock purchased in the future for current price
Capital gains are The difference between the purchase price and the stock option price
Taxed at the time of disposition
Nonstatutory stock option plans
Company awards stock at discounted price
No favorable tax treatment
Taxes paid on difference between the discounted price and the fair market value at the time stock was granted
Restricted stock
Awarded at discounted price
Ownership over stock in 5 – 10 years
Must sale stock back at same price if they leave early
Taxes paid at end of restriction period
Phantom stock
Executives awarded hypothetical stock
Executives must be employee 5 – 20 years
Executives must retire from company
Capital gains paid at retirement
Discount Stock Option Plans
Options granted at rates far below fair market value on the date its granted
Executive receives benefit equal to difference between exercise price and fair market value
Stock Appreciation Rights
Executive never has to exercise stock rights to receive income
Income from difference between stock value when granted and the value at end of period