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Types of executive compensation

On Behalf of | Nov 30, 2021 | Executive Employment

If you have a future working at the corporate level in New Jersey, you may benefit from learning about the types of executive compensation. Pay packages offered to executives are substantially different than hourly or salaried employee compensation because they are largely structured around incentives targeting business performance and increasing value for shareholders. Executive pay packages may include a base salary, short-term and long-term incentives, employee benefits, perquisites and severance payments.

Executive salary and benefits

Base pay is stated as annual salary, but it’s typically paid monthly or bi-weekly like other salaried employees. The 2017 Tax Cuts and Jobs Act capped compensation for the CEO, CFO and next three highest-paid executives at $1 million, repealing a performance-based statute established in 1993. This $1 million cap applies to compensation made after termination and retirement.

Executive payment packages include the same benefits as most salaried employees, such as sick days, medical insurance, life insurance and statutory benefits like workers’ compensation. In addition, executives are often eligible to participate in special retirement plans that are more risk-laden.

Executive incentives

Annual incentives compensate executives for fulfilling the short-term strategy established in annual goals typically set by the board of directors. Annual objectives may include developing new projects, implementing new strategies, improving profit margins or expanding into a new market. These incentives are typically offered in a two-tier payment structure expressed as a proportion of the annual salary. Long-term incentives are often provided in the form of stock-based compensation.

Evaluating executive pay packages

Compensation committees typically structure executive pay packages around meeting retention and pay-for-performance objectives. Companies also offer executives perquisites, or perks, providing extra benefits designed to recognize the employee’s value to the organization. Severance agreements are an effective recruitment tool providing executives with payments whether their termination is voluntary or involuntary.