What are factors that affecting Executive Compensation ?
The factor affecting executive compensation are as follows :
Changing nature of Work: The way work is organized and managed is constantly changing. This change is triggered by technological breakthrough and the mounting pressure of global competition. The changing world of work demands new compensation practices for executives who are at helm of affairs of an organization. They are the drivers of shareholder wealth. Many compensation principles were conceived over 50 years ago. “In recent years, the environments of organizations have moved from being relatively stable, simple, orderly, predictable and local to one to one of discontinuous change complexity, chaos, ambiguity and globalization”. The pressure of keeping up with fast changing technology and improving performance is organization’s need to find ways to become more competitive revolution that is being created from a work revolution.
Investors confidence: Corporate image and governance have a large influence on the market price and perceived value of an organization. The collapse of Enron and others has highlighted the need for good corporate governance in executive compensation. Investors, analysts and stakeholders are nervous and it may cost organizations dearly if they get the slightest sniff of something untoward. Members of the committees making compensation policy decisions are under the spotlight and there’s nothing more important than restoring investor confidence in the executives.
Effective benchmarking: Compensation committees rely on benchmarking in order to ascertain the going rate executive compensation . Most often, organizations engage the services of compensation consultants for the purpose of benchmarking with market rates. However, care should be taken that the compensation consultant:
- Is not engage for other assignments with the organization.
- Has a widely acknowledged fair credibility in the market.
- Is directly under the control of compensation committee.
- Is aware of the government regulations on executive compensation
Governance : The implications for directors, managers, board committees, consultants, investment analysts, asset managers, pension funds, the accounting profession, regulators, politicians and common man is enormous. Non-executive directors and compensation committees are playing an increasingly important role as organizations focus on issues of corporate governance. Organizations that fail to comply with the stock exchanges listings requirements will attract penalties. Depending on the breach, an organization could be suspended or have its listing terminated. Rules and practices in compensation and disclosure can facilitate or inhibit the effective operation of governance.
Attracting and retaining high performance executives: There is a greater need now for competitiveness in attracting and retaining high-performing executives than at any time in the history of work. Recent dramatic changes in the nature of the workplace can no longer offer a single reward solution. Successful organizations are designing their best executives to competitors.
Fostering right executive behavior: No investment offers a greater potential for return than one in executives. Compensation is most organization’s single largest expenditure and executive compensation is a major part of this. Organizations can no longer afford to be behind in executive compensation strategy. The cost of executive turnover could be crippling for an organization. But at the same time, executive compensation system should drive the right executive behaviors that can withstand governance questions, media and stakeholder scrutiny. Organizations put governance structures and committees comprising independent or non-executive directors in place to assist with compliance and ensure that the right behavior are rewarded.