Compensate Executive

Compensating Executives

From a tax regulation perspective, the internal revenue service recognize two groups of employees who play a major role in company's policy decision, they are highly compensated employee and key employees.

 Base pay: This is the fixed element of the annual cash compensation. These may have specific pay grades and pay ranges. Larger range spreads to highly paid grades as the specialized skills associated with higher pay grades are considered valuable. But the CEOs do not fall under formal pay structure as their work is highly unpredictable and complex .

 Bonuses: These represent single pay-for-performance payments companies use to reward employees. Some types:

 Discretionary bonus

 Performance-contingent bonus

 Predetermined allocation bonus

 Target plan bonus

 Stock Compensation: This refers to an agreement between an employee and a company to render payments to an employee as a future date. This is supposed to create a sense of ownership aligning the interests of the executive to that of the owners or shareholders. Different types of Company stocks shares are usually provided.

Incentive stock option plans

 Stock purchased in the future for current price

 Capital gains are The difference between the purchase price and the stock option price

 Taxed at the time of disposition

Nonstatutory stock option plans

* Company awards stock at discounted price

* No favorable tax treatment

* Taxes paid on difference between the discounted price and the fair market value at the time stock was granted

Restricted stock

* Awarded at discounted price

* Ownership over stock in 5 - 10 years

* Must sale stock back at same price if they leave early

* Taxes paid at end of restriction period

Phantom stock

* Executives awarded hypothetical stock

* Executives must be employee 5 - 20 years

* Executives must retire from company

* Capital gains paid at retirement

Discount Stock Option Plans

* Options granted at rates far below fair market value on the date its' granted

* Executive receives benefit equal to difference between exercise price and fair market value

Stock Appreciation Rights

* Executive never has to exercise stock rights to receive income

* Income from difference between stock value when granted and the value at end of period

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