As an investor, you always want returns. One way of getting returns is indulging yourself and your resources in productive organizations that guarantee superb returns on your investments. One integral part of a company’s smooth operations is the senior management, which is directly responsible for the running of proceedings around the company. As such, these senior individuals in the organization are entitled to their own incentives to keep them motivated and more involved in their practice. The concept of CEO compensation has always been subject to many people, particularly investors and subordinate staff. There is always the question; does the executive control his or her own salary? Or do the executive’s compensations and bonuses directly affect the investor’s willingness to collaborate with the organization? Below are the key things investors should understand about executive compensation, before considering pushing forward with an investment.
Know the different Types of Compensations of the Executive
Executives have a variety of compensation packages at their disposal. Among the most common are retirement packages, cash compensations, which executives receive for a financial year, and long term investment plans, which entail all compensations linked with performance for tax purposes, among others.
There are also other forms of compensation such as travel reimbursements and other rewards. Once you as an investor understand all these packages, you may be able to evaluate whether a particular CEO is compensated accordingly such that he or she holds everyone’s best interest at heart.
Familiarize with the Company’s compensation scheme
One way you can find the company’s information on compensation is via the company’s compensation program in its regulatory filing. For the CEO compensation, their information can be found in public filings with the Securities and Exchange Commission (SEC)
Summary tables can also be useful in providing information on the CEO stock option holdings, which will reveal the figures executives receive annually, as well as the frequency of stock option grants.
Evaluate the Executive Compensation
This process is not rocket science, but at the same time, it could prove challenging for an individual investor. Today, however, there exist some useful tools that can be used in making the task a lot easier, as they peruse through the SEC database to come up with raw information numbers that can be used for evaluation.
One popular way of evaluating executive compensation is through the use of comparison. An investor could compare the pay against the performance as higher performances by the company would ultimately lead to a higher pay and bonuses. This may not always be the case, though, as executives could still enjoy a decent pay, even if the company is going through a bad spell. Ideally, the stock price and the pay have a correlation, and a change in stock price with no change in CEO compensation will indicate an imbalance somewhere.
A fairly simple method of evaluating executive compensation would be to directly compare the executive to his or her industry equals. The basic expectation is that he or she should be paid within the range of the peers. In some cases where the executive is the founder of the franchise, he or she might enjoy a more hefty compensation.
In conclusion, it would be unwise for an investor to overlook the concept of CEO compensation, as complex as it may look. Investing in a company where the executive is not adequately compensated could have serious repercussions as cases of misappropriation are bound to be plenty. With the new tools for evaluation coming to the market, it should be easier for the investors to know exactly what they are getting themselves into for the long hall.