Question

1. Discuss benefits and drawbacks of including non-financial performance criterial in executive’s compensation package.

Answer 1

Answer:

Comparing advantage and disadvantage of executive Compensation package :

1. Cash Compensation: Cash offered to executives as part of their compensation package is traditionally in the form of a salary.

Advantage: You have immediate access to the funds, and they can be used for virtually anything you want or need. You can pay your home mortgage or buy a new car, there are no limitations put on cash compensation.

Disadvantage: Cash compensation is taxed as income, which is typically one of the highest, if not the highest, tax brackets for top-level executives.

2.Employee Stock Option: Option granted to corporate employees to purchase a certain amount of corporate stock at a specific price.

Advantage: One of the biggest benefit is that they will be taxed at a long term capital gain rate, when they are sold.

Disadvantage: Stock option generally involves a vesting schedule and sometimes other rules in regard to when they can be exercised and sold,

3. Deffered Compensation: This is a plan between the employer and employee to delay a portion of his/her income until a later date.

Advantage: You have the ability to defer your taxable income to a later date. This is helpful for executives that plan to retire completely one day and will be in a lower tax bracket later in life.

Disadvantage: Because your compensation is deferred, you don't have access to the funds until you receive them.

4. Long term Incentive Plan: This is a plan to incentivize long-term performance and growth of an employee, with benefits not necessarily tied to the company stock price.

Advantage: You are typically compensated for your work beyond what the company stock price reflects, which is not true if you were only compensated in stock options.

Disadvantage: If your company performs very well, but your are only compensated with cash incentive, for example you could miss out on a huge potential for stock appreciation. Also, compensation paid through a long term incentive plan will be taxed.