Decoding Key Components of Executive Remuneration

Decoding Key Components of Executive Remuneration

Sandro Barbato

How is executive compensation determined? Join Sandro Barbato as he explains the elements that make up remuneration packages at the most senior level in organisations.

How is executive compensation determined? Join Sandro Barbato as he explains the elements that make up remuneration packages at the most senior level in organisations.

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Decoding Key Components of Executive Remuneration

11 mins 46 secs

Overview

With every executive compensation package there are three key components that need to be considered: the fixed salary, the benefits package, and the bonus structure. These elements, along with the achievement of targets and goals on both a long-term and short-term horizon, determine the remuneration of executives.

Key learning objectives:

  • Understand the components that make up an executive compensation package

  • Identify how the bonus structure and benefits package reward top performance

  • Outline how long-term and short-term incentive plans differ

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Summary
What are the key components of executive compensation packages? 

There are three important elements that make up the full scope of an executive compensation package. These include the fixed salary, the benefits package and the bonus. The benefits and bonus structure represent the variable elements within the compensation package, as they are not guaranteed and depend on certain conditions, like meeting specific targets and achievements.  

What are the elements that make up the bonus structure?

The bonus structure is usually made up of a short-term incentive plan and long-term incentive plan. Bonuses are important because fixed remuneration alone does not always reward or incentivise top performance. There is no limit to fantasy when it comes to building an executive compensation package as long as they respect legal frameworks, governance codes and market practices. 

How do short-term and long-term incentive plans differ?

The main difference between short-term and long-term incentive plans is the time horizon. The short-term incentive plan usually considers the past 12 months of performance and if certain targets or achievements were made in that time frame. The long-term incentive plan considers performance for the past three to five years. Most targets can be interchangeable between the two plans. 

How can compensation be paid out? 

Fixed compensation and the short-term incentive plans are usually paid out in the form of cash. Under the long-term incentive plans, bonuses are often paid in shares or equivalents - depending on the agreement between the parties or market practice. 

What is vesting and what are the different vesting types? 

Vesting is the process of gaining full legal rights to something. Related to 
remuneration, the term vesting refers to the period of time before the executive has 
the right to take ownership of the shares or share-equivalents.

The vesting schedule can be as long as the plan runs for. For example, if the plan runs for three years, at the end of the third year, the stock has vested as long as all requirements have been met. Other types of vesting include cliff-vesting, milestone-based vesting or hybrid vesting. 


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Sandro Barbato

Sandro Barbato

Sandro Barbato joined Alliance Advisors in early 2023 having previously worked for IHSMarkit (now part of S&P Global) for over two years and prior to that Morrow Sodali for over 5 years. Having worked on nearly 100 projects globally, Sandro, who is fluent in German, Italian and English, is experienced in assisting and advising clients on Corporate Governance & ESG, Proxy Solicitation, Roadshows, M&As Transactions and Activism. Sandro holds a German degree in business law (Diplom-Wirtschaftsjurist), is a member of the UK IR Society (MIRSoc), the Italian IR Society AIR, and of the AIAF (Italian Society of Financial Analysts) which is the Italian member within the EFFAS (European Federation of Financial Analysts). He is certified as a Financial Modelling & Valuation Analyst (FMVA) and an ESG Specialist,both by the Corporate Finance Institute (CFI). In addition, he is a certified ESG Analyst (CESGA) by the EFFAS Societies and certified in Investor Relations (ICIR) by the UK IR Society

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