Executive compensation has traditionally been handled separately and differently than compensation for the other 95% employees in the organization. The goal has been to recognize the unique input of the executive on the performance of the overall organization and utilize compensation strategies that support long-term organizational goals. Although intended to encourage long-term decision -making, developments in executive compensation during the 90's have encouraged executive compensation practices that support the individual executive's goals and do not support the long-term goal of the organization - maximizing shareholder value.
There have been four general categories for executive compensation - direct pay, annual incentives, long-term incentives and "perks". For executives, direct pay is based on the industry and the size of the company as commonly determined by sales revenue. This is in contrast to how salaries for other white-collar workers are usually determined - geographically and by profession. Annual incentives tend to be items such as cash bonuses intended to reward the achievement of key annual performance goals. .
Long-term incentives such as nonqualified stock options became very popular in the 1990's as the dot.com bubble grew. Intended to keep the executive tied to the company and focused on long-term performance, stock options have encouraged executives to make decisions based on enhancing the value of their stock options and maximizing personal wealth. .
Perquisites, commonly referred to as "perks", are not based on performance of the executive or the company. Perks are often viewed as privileges or "entitlements" of the executive's position. Some common perks include company cars or a car allowance, various club memberships, cellular phones, laptops or personal computers, financial planning and tax preparation services, tickets to sporting and entertainment events and enhanced supplemental health and welfare plans.
