Executives who are paid in a manner that is not commensurate with their responsibilities may need more motivation to act in a manner that is in the best interest of shareholders, which may be expensive for those shareholders.

Even though recent rules and regulations have made it much easier to understand executive compensation in corporate filings, many investors still need to know how to locate and read these essential papers. This post will examine the many forms of executive compensation and the methods investors may use to locate and assess compensation information.

Types of Executive Compensation

A wide range of executive compensation is available, each of which provides its recipient with a unique set of tax breaks and incentives based on performance. The following are the most frequent types:

Cash compensation

This is the total amount of conventional cash compensation awarded to the executive during the year. The corporation will include the starting pay for each important management team member in the proxy statement.

Option grants

This is a list of all the options given to the executive, and the information includes the strike prices and the expiry dates. When implemented properly, stock options are an excellent tool for motivating management to work toward maximizing shareholder value. However, options compensation does come with certain drawbacks to consider. For instance, management is given a significant options grant just about in the money. This indicates that management can exercise their options, convert them to common stock, and then sell the shares to make a quick profit. If the stock price continues to rise, management will continue to be in a position to do so.

Deferred compensation

The payment of this compensation is put off until a later date, which is often done for tax reasons. However, alteration to the rules governing compensation of this kind has contributed to its declining popularity.

Long-term incentive plans

When it comes to taxes, long-term incentive schemes include all forms of compensation that are linked to performance. The way taxes are structured in the modern era gives pay-for-performance compensation an advantage.

Retirement packages

These benefits are provided to executives after they leave their positions within the organization. It is common practice for some executives to be eligible for retirement health benefits in exchange for their years of service and other fair perks. It is essential to keep an eye on them since they may include so-called golden parachutes for unscrupulous executives or be payable regardless of whether the firm achieves its financial goals or is successful.

Finding Executive Compensation

In the public filings companies make with the Securities and Exchange Commission, you may find full information on executive compensation. The SEC requires all publicly traded companies to report the salaries paid to their executive staff, the process by which these salaries are determined and the parties participating in the process. The information itself is available in a variety of public places, including the following:

• Form 8-K: Compensation information disclosure is permissible via the current event filing if the event in question is connected to modifications made to compensation policies and processes.
• Form 10-K: The information about annual compensation is always disclosed via the annual report filing.
• Form 10-Q: Information about quarterly compensation is also included in the report that is filed every quarter.
• S-1/S-3 Forms: The most recent issues provide information on executive compensation that is relevant for prospective investors to consider.

Evaluating Executive Compensation

Assessing the appropriate level of compensation for executives may be a challenging endeavor for an individual investor. Thankfully, there are a variety of technologies that can be used to make the process simpler. These programs do an automated parsing of the SEC filings to extract the statistics and conduct comparisons to provide sense to raw data.

Pay vs. Performance

Comparison of pay to performance is one of the most common approaches when assessing the appropriate level of executive compensation. Regrettably, many CEOs continue to get pay hikes and bonuses despite their companies struggling. It is possible to establish whether or not CEOs are overpaid by comparing their remuneration to the performance of the company's stock.

Comparison of the year-over-year change in executive pay hikes to the year-over-year change in stock price is the particular statistic utilized most of the time. If the change in salary is less than or equal to the change in stock price, then the executive is not overpaid. Overcompensation for underperformance may be detrimental to investors, both in terms of the money paid out and the motivation to perform, when trends emerge indicating that executives are earning a rate greater than stock performance.

Peer Comparison

Comparing the pay of one executive to that of other executives in the same sector is another common method of evaluating executive compensation. Most executives should have salaries comparable to those of their contemporaries; nevertheless, market leaders often have CEOs whose salaries are somewhat higher than the average for their industry.