Executive Compensation: An Introduction

A well-designed executive compensation plan is important because it rewards both executives and shareholders, whereas a poorly designed one wastes corporate resources without motivating the executive. Executive compensation is also important because it affects compensation levels and composition throughout the organization. It affects the level of compensation because lower-management compensation is often a function of upper-management compensation, and it affects the composition of their compensation package because the same goals may be applied as well. The goal of the executive compensation plan is to align the interests of executives and stakeholders, commonly assumed to be shareholders. This chapter explains the composition and importance of the executive compensation package.