It’s Difficult to surf the business news without coming across reports about the salaries, bonuses and stock option packages awarded to chief executives of publicly traded companies. Making sense of the numbers to assess how companies are paying their top brass isn’t always easy. Investors must ensure that executive compensation is working in their favor.How Do CEOs Pay Themselves?
Here are a few guidelines for checking a company’s compensation program.
How Do CEOs Pay Themselves?
These days, CEOs often receive base salaries well over $1 million. In other words, the CEO gets a terrific reward when the company does well. But they still receive the reward when the company does badly. On their own, big base salaries offer little incentive for executives to work harder and make smart decisions.
Be careful about bonuses. In many cases, an annual bonus is nothing more than a base salary in disguise. A CEO with a $1 million salary may also receive a $700,000 bonus. If any of that bonus, say $500,000, does not vary with performance, then the CEO’s salary is really $1.5 million.
Bonuses that vary with performance are another matter. CEOs who know they’ll be rewarded for performance do tend to perform at a higher level because they have an incentive to work hard.