Executive Compensation Industry Averages
In 2006, chief executives of 500 biggest companies had a collective pay raise but in 2007, they too a 15 percent pay cut. According to Forbes, the last time executive compensation took a pay hit was way back in 2002.
The top executives in the biggest companies in the US do not follow executive compensation industry averages. Larry J Ellison, chief of Oracle, drew a salary of $1 million in 2007 and realized $182 million from the exercise of vested stock options.
There is no doubt that executive compensation in the US is no where near the executive compensation industry averages. In fact, executive compensation is overly generous, poorly linked to performance and poorly controlled by the public board. This has put the boards across the nation in dilemma where on one hand they have to approve a plan to effectively attract, retain and motivate CEOs and other top management, and on the other hand, they have to ensure that pay and performance are linked together.
However, in companies that follow executive compensation industry averages, it is seen that bonus is primarily tied to profitability and growth. Investors do not want to invest in companies that do not have both profitability and growth. In addition, the total compensation in these companies reflects the difficulty of the performance objectives set relative to peers. If the objectives are difficult, then compensation matches the difficulty.
Boards are realizing that invariably objectives are set as per industry averages but compensation levels are set higher than industry averages because of executive attraction and retention. But things are now changing, especially as the US is being hit with inflation and executive compensation is now reaching industry averages, slowly but surely.
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