THE BEST APPROACH TO EXECUTIVE COMPENSATION

Executive compensation is one of the most debated topics. It is seen by most to be undeservedly high and has attracted serious criticism from both investors and government. The ratio of the salary of CEO’s to that of the lowest level worker has seen a drastic increase in the last decade. Such increasing income inequality was tolerated as long as the rising tide was lifting all ships. While the US government is moving towards a tightening of the screws by introducing new regulations, the Indian government is now relaxing the 5% cap on managerial remuneration imposed by the Companies Law. It is really unfortunate that the current set of practices regarding executive compensation is very short term focused. The rewards paid are based on claims not actual results. The world of business has witnessed an unusually large number of corporate scandals in its relatively short history. There seems to be a lack of accountability. Executives are not really held responsible for their decisions. There seems to be only one direction in which executive compensation is headed - towards disaster. A good executive compensation system should take into consideration the total basket of employee’s needs and not just the short term financial ones. It should feature non monetary needs of the employees and focus on the basic objective of retaining and motivating good people. Most importantly it should be long term performance based. Each decision of a manager has a time duration in which its outcome and impact can be reasonably assessed. The incentive part of the compensation should be held in a performance incentive escrow account. When the decision has produced the expected and desired results, the funds from this account can be released. If the decision turns awry, the executive has to be penalized by deductions from the escrow account. The funds in the escrow account can be invested as per the discretion of the executive. This would ensure that the executive works for the long term interests of the company rather than maximizing his current annual emoluments. The major challenge would lie in convincing the business world of the need for introspection on this critical issue and to induce a willingness to develop a new, viable and appropriate approach to executive compensation incorporating the relevant issues. To this end the paper focuses on the core aspects of compensation and offers analysis and suggestions that can form the basis of a just new world of managerial remuneration.