1. Compensating Executives Chapter # 13

2. What is executive status? IRS recognizes two groups – Highly compensated Very responsible position 5% owner sometime during year Paid $100,000 or more yearly – Key Employee $145,000 up Responsible role

3. Long term and short term Pay

4. CEO’s sell their services

5. CEOs Can hired and use their own compensation consultants. Conflict of interest Fired 119.089 employees last year (2007) Who pays? stockholders

6. Types of Executive Pay Packages Main Components Annual pay Stock Options Golden Parachutes Perquisites and Enhanced Benefits Bonuses

7. Base (annual) Pay Broader range No formal pay structure IRS lets firm deduct CEO pay as tax write off up top $1,000,000. Base pay is smallest part of total package

8. Bonuses Single pay for performance Discretionary Depend upon profits Future opportunities Performance contingent bonuses Predetermined allocation bonuses Target plan bonus No bonus if profits fall below a certain amount

9. Short term incentives

10. Deferred Core Compensations Company stock Pay given at future date Idea is to create sense of ownership Align goals of exec to goals of firm Tax advantage for CEO Deferred until retirement

11. Types of incentives Stock options Have to pay cap gains in future Non Statutory stock options – Tax paid upon receipt Restricted Stocks – CEO has to return stock when leaving – At original price. Idea is to pocket gains

12. Types continued Phantom, stocks – Hypothetical stocks. Discount stock option – Stock given at lower than market value Stock appreciation rights – Income is taken at end of a certain period of time

13. Golden Parachutes IRS considers It business Expense YOU’RE FIRED

14. Platinum parachutes Your’re outa here !!!!! Before contract over Severance Continued benefits Stocks Example Bancorp…73.6 + 24.4 mil cash stocks + free health care + 40,000 month consulting

15. Tighter Regulations of Deferred Plans EX: Enron Exec withdrew cash out firm before bankrupt. 2002 Sabanes Oxley Act – Financial disclosure or penalty to execs – Full audits

16. Other Perks Extra insurance Corporate jets Supplemental retirement plans Country club memberships Vacation homes Tickets

17. How is Executive pay Set? Individuals Groups Consultants Pay committees Boards of Directors

18. Theories about exec pay Agency Theory Tournament Theory Social Comparison Theory

19. Security Exchange Commission Disclosure Look #336 Full disclosure of four top level execs