Executive Compensation
Executive compensation is how top executives of business corporations are paid. The compensation of every employee is decided by the company owners through the board of directors (in the case of the most highly compensated executive positions) and the management team (or "management committee") (for everyone else). The board of directors may have a personnel and compensation committee that deals specifically with labor compensation.
There are five basic tools to compensation (or reward) in U.S. organizations. These are: base salary, short-term incentives, long-term incentives (LTIP), employee benefits and perquisites. In a typical modern US corporation, the CEO and other top executives are paid salary plus short-term incentives or bonuses. This combination is referred to as Total Cash Compensation (TCC). Short-term incentives usually are formula-driven and have some performance criteria attached depending on the role of the executive. For example, 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. 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 which 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. For example a highly paid CEO would get 1 million in cash, and 1 million in company shares (and share buy options used).
Golden Handshake
A golden handshake is a clause in an executive employment contract that provides the executive with a significant severance package in the case that the executive loses his or her job through firing, restructuring, or even scheduled retirement. This can be in the form of cash, equity, and other benefits, and is often accompanied by an accelerated vesting of stock options.
Typically, "golden handshakes" are offered only to high-ranking executives by major corporations and may entail a value measured in millions of dollars. Golden handshakes are given to offset the risk inherent in taking the new job, since high-ranking executives have a high likelihood of being fired and since a company requiring an outsider to come in at such a high level may be in a precarious financial position. Their use has caused some investors concern since they do not specify that the executive had to perform well. In some high-profile instances, executives cashed in their stock options, while under their stewardship their companies lost millions of dollars and thousands of workers were laid off.
Golden Parachute
A golden parachute is a clause (or several) in an executive's employment contract specifying that they will receive certain significant benefits if their employment is terminated. Sometimes, but not always, these clauses apply only in the event that the company is acquired and the executive's employment is terminated as a result of that acquisition. These benefits may include severance pay, cash bonuses, stock options or a combination of the items. The benefits are designed to reduce perverse incentives.
The use of golden parachutes have caused some investors concern since they don't specify that the executive had to perform successfully to any degree. Their concern is understandable since many golden parachute clauses can promise benefits well into the millions. In some high-profile instances, some executives cashed in their golden parachute while under their stewardship their companies lost millions and thousands of workers were laid off as a result.
According to a 2006 study by the Hay Group human resource management firm, the French executives' golden parachutes are the highest in Europe, and equivalent to the funds received by 50% of the American executives. In contrast, the French standard revenues for executives located themselves in the European average. French executives receive roughly the double of their salary and bonus in their golden parachute.
