Principles relating to executive compensation

By | July 12, 2013

Executive compensation refers to the total reward provided by the firm to the top level of executives in a company such as the positions of CEO (chief executive officer), CFO (chief financial officer) and also other executive positions in the higher level of management (Kolb 2006, p. 1). In the United States, the Treasury Secretary Geithner proposed five major principles relating to executive compensation for the large listed companies. And these principles are flexibly articulated and adopted by the companies, but they do present the principles of the executive pay setting in a clear manner (Pozen 2010, p. 275). These five basic principles will be elaborated as following. The first principle is that executive compensation needs to appropriately reflect and measure as well as reward the performance; the second principle is that the executive compensation needs to be designed to account for the time horizon of risk; thirdly, the executive compensation needs to be in accordance with the appropriate risk management; fourthly, the executive compensation needs to be check to protect the interest of the shareholders as well as the management; last but not least the executive compensation needs to reflect the principle of transparency. By understanding and implementing these five principles, it will assist the design of executive compensation in such a way that on one hand it motivates the executives by rewarding them appropriately to reflect the value they contribute to the company and also the risk that they bear; on the other hand, it will ensure the design of executive compensation to be in alignment with the interest of the shareholder and securing the rule of relatively fair and also high accountability in the executive pay.

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