What is it?
Executive compensation is a very important issue for investors to consider when making investment decisions. Executive pay should be an important part of corporate governance, and is often determined by a company’s board of directors in association with compensation experts.
How it works
The starting point for determining the level of executive compensation is to compare an executive to his or her industry peers (benchmarking).
Executive pay is composed of financial compensation and other non-financial awards received by an executive for their service to the organization. It is typically a mixture of salary, bonuses, shares, options (on the company stock), benefits, and perquisites, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance.
Short-term incentives usually are formula-driven and have some performance criteria attached depending on the role of the executive. For example, a CEO’s compensation could be based on incremental profitability and revenue growth. Bonuses are after-the-fact (not formula driven) and often discretionary. Executives may also be compensated with a mixture of cash and shares of the company. These are almost always subject to vesting restrictions (a long-term incentive). To be considered a long-term incentive the measurement period must be in excess of one year (3–5 years is common). The vesting term refers to the period of time before the recipient has the right to transfer shares and realize value. Vesting can be based on time, performance or both. Other components of an executive compensation package may include such perks as generous retirement plans, health insurance, a chauffeured limousine, an executive jet, and interest-free loans.
The explosion in executive pay has become controversial.
The idea that huge paychecks are part of a beneficial system in which executives are given an incentive to perform well has become something of a perversity. A 2001 article in Fortune, “The Great CEO Pay Heist” encapsulated the cynicism: “You might have expected it to go like this: The stock isn’t moving, so the CEO shouldn’t be rewarded. But it was actually the opposite: The stock isn’t moving, so we’ve got to make up some other basis for rewarding the CEO and top executives. “
The three decades starting with the 1980s, saw a dramatic rise in executive pay relative to an average worker’s wage. It continues to be debated as to whether this rise is a natural and beneficial result of competition for scarce business talent that can greatly add to stockholder value in large companies, or a socially harmful phenomenon brought about by social and political changes that have given executives far too much control over their own pay.
Defenders of high executive pay say that the global war for talent and the rise of private equity firms can explain much of the increase in executive pay.
Evaluating executive compensation can be a difficult task for the individual investor. While new laws and regulations have made executive compensation much clearer in company filings, many investors remain clueless as to how to find and read these critical reports. A popular way to evaluate executive compensation is by comparing pay versus performance. Unfortunately, many executives are given raises and bonuses even when their companies are faltering. Comparing pay to stock performance can help determine whether executives are overpaid.
Other laws have been passed globally and in Switzerland to curb compensation excesses. However it appears that companies devise clever ways to circumvent these laws.
In Switzerland, executive compensation has been a very contentious topic for the last few years, particularly due to the continued excesses of a few companies.
SUISHARE will create better oversight over issues of Executive Compensation, as well as ensure that investors are better informed.
In some companies, CEO’s and senior executives have far too much influence over their own pay packages. SUISHARE believes that for a fairer assessment, SUISHARE compensation specialists will perform industry benchmarks to verify reported salaries.
The SUISHARE oversight function will study the “Smörgåsbord” approach to performance evaluation where the Compensation Committees allows the CEO to overstate and claim credit for all positive changes but conveniently ignore negative aspects.
SUISHARE intends to investigate all incidences of improper compensation, insisting on the implementation of claw-backs, or class action cases against responsible senior management & Board individuals in order to recover money illegitimately paid out.