6 Types of Executive Compensation to Consider
July 31, 2019
EisnerAmper Private Business Services advisor Tim Schuster looks at executive compensation, an increasingly broad issue that impacts both companies and prospective executives. Going beyond merely salary, Tim covers option grants, deferred compensation, fringe benefits and more. He also examines what to be aware of when preparing an executive compensation package.
DP: I like this topic because it can apply to our listeners who are looking to make the most of their executive compensation, and its good information for business owners who are in the process of hiring executives.
TS: It is and it actually applies to both sides of the coin so to speak.
DP: Yeah. So in looking at my list, let's start with everyone's favorite: compensation.
TS: Ah, the moolah. This typically consists of a base annual salary for the most part.
DP: Okay. So pretty straight forward. That's your guaranteed money. Tell us about incentives.
TS: So this could be additional compensation, think of maybe bonuses per se, tied to either short-term or long-term performance goals, sales targets, and so forth.
DP:Again, pretty straight forward. Now tell our listeners about option grants.
TS:The best example here is stock options, which may or may not be tied to some performance metric. In this case, the stock is generally restricted, which means that it's not fully transferable from the stock issuing company to the person receiving the stock award until certain conditions or restrictions have been met. So upon satisfaction of those conditions, the stock is no longer restricted and becomes transferable to the person holding the award. So there are different forms of stock options and, honestly, for this area you really need to consult an advisor.
DP:Sure. It could get a little complex. What about deferred compensation?
TS:As the name implies, this is some form of compensation that is delayed until some point in the future. This is usually an incentive to keep high-ranking employees at your company for a specific period of time. It may be 10 years or until retirement. You want to make sure they have the guarantee they're going to stay.
DP: Now you bring up retirement. What are some types of retirement packages out there?
TS:This actually goes beyond just a cash buy out, say at retirement. It can also include something as equally important as a provision for health insurance or a pension plan or 401(k) and the aforementioned stock option in deferred compensation.
DP:Then there's that catchall of fringe benefits.
TS:There's always a catchall for this. Executives are often in a position to ask for perks such as a company car, housing allowance, country club membership and so forth.
DP: Got It. Now on the employer side, what are a few things that they should be aware of when putting together an executive compensation package?
TS: So first and foremost, all these compensation types have tax implications, which may be complex and significant. Second, there are other government regulations on executive compensation. I would recommend that if you were considering different types of executive compensation, reach out to your trusted business advisor because this is an extremely complicated area.
DP: Sure. Good advice. Well it's about that time. It's time for one of your New Jersey Historical Society Fun Facts.
TS:Oh, of course. This is an interesting one actually. Typical New Jersey nonetheless. So the depression hit New Jersey back in 1933 and in order to obtain some extra cash, the state would actually issue begging licenses to residents so you can't even beg for free in New Jersey.
DP: Interesting. Well thanks again, Tim, for this valuable information. And thank you for listening to “The Bottom Line” as part of the EisnerAmper podcast series. If you have any questions or there's a topic you'd like us to cover, email us at email@example.com and visit eisneramper.com for more information on this and a host of other topics and join us for our next EisnerAmper podcast when we get down to business.