Compensation Package for X LLC CEO

Compensation Package for X LLC CEO

The performance of X LLC is comparatively high. As a medium-sized corporation, the company is expected to realize annual revenue of between $ 10m-1billion as established in a business review of medium-sized company revenues by Merritt and Seidel (n.pag). The designing of this compensation is guided by the company’s objectives, mission, corporate governance structure, and goals. The compensation is designed into various components that are elaborately highlighted to give the stakeholders a clear understanding of how the total average compensation figure is reached.

The Compensation System

The compensation system used in this case is designed into direct and indirect compensations. Direct compensation takes into account elements like base pay, incentive pay, and deferred pay. The base pay makes up the basic salary. The incentive is broken down into long-term and short-term incentives. Indirect compensation is broken down to protection program, services and perquisites,  severance, and pay for durations not worked. Protection programs include pension, medical insurance, social security, disability income, and life insurance. Pay for times, not worked cover components such as jury duty, holidays,  sick leave, parental leave, and vacations. Under services and perquisite, the company will compensate for low-cost meals or provide free meals, financial planning, and recreational facilities like cars.

Justification

According to Hallock, the size of the company is a significant variable determinant in executive compensation (10). In essence, a small-sized company will compensate its chief executive in line with the company’s revenue. In most cases, the revenues of small-sized companies are between two million to ten million USD.  Such a company is expected to pay its executive much lower than a medium-sized company whose revenue goes above ten million dollars. The company, under consideration, in this case, is medium, and therefore its revenue is expected to range between ten million and one billion dollars. The performance of the organization through the next decade will, however, depend on the CEO’s output. The basic salary range paid to a CEO is highly dependent on the level of experience, and the type of industry in which the organization is operating (Price n.pag). The CEO is thus expected to be at the experienced level or higher to facilitate proper management and leadership of the organization. Comparatively, the basic salary is placed within the average value. This compensation was instituted in line with the average basic salary compensation in the southern region of the south region. A review by Murphy and Jensen on the average basic salary pay for CEO reveals that CEOs in the southern region are still paid comparatively lower as compared to other parts of the States (n.pag). This package is, however, conscious of the impacts a lower pay would have on the output of the CEO na d has thus raised the pay to slightly above the $150k average.

Incentive

The CEO will be directed by short-term and long-term goals set by the board of directors. The goals set will depend on the nature of the business and the level of achievement of the goals. In most cases, the goals are set in a way that drives the company into a highly competitive market position. Borrowing from the corporate statement by SOWELA Technical Community College, which highlights the institution’s belief that competitive markets for executives drive an increase in compensation, the CEO, in this case, should be assured of instantaneous increases in various components of the compensation. The increase will, however, be determined by the level of increase in the organization’s performance. The increase will be in line with the provisions of Hallock, which standardize the increment to one-third of the company’s performance increase for each year or month (11). The long-term incentive makes the largest part of the incentive compensation.  Long-term compensation can be awarded after three years or more as established by the organization and based on the structure of payment designed by the board of directors. Some of the factors which might influence the long-term incentive compensation include the performance of the CEO, total returns to shareholders, return on assets and earnings per share. These factors, however, vary depending on the nature of the business and the dynamics of the industry.

Benefits

A survey by the Chief Executive Group LLC reveals that most CEOs are compensated benefits that are similar to other salaried employees In the organization (2). Their benefits thus often come in similar packages with components such as social security, vacations, and holidays among the others stated in this list. While establishing the pay range, the compensation package involved a review of the range of payments distributed for all employees across the United States in the private sector. Most of the benefits placed on the package are regular benefits which are paid by most or all legal organizations. With the emerging trends in critical diseases like cancer, it is expected that, above the medical insurance and welfare compensation, the company also offers free medical consultations for its employees to which the CEO will be eligible.

Severance Package

Murphy and Jensen, in their review state, most organizations no longer pay their CEOs based on the performance (n.pag). Organizations are rather using a blind method of distribution of pay across the package components; a case with has led to several problems. In line with this fact, this distribution is conscious of the impact the amount of compensation paid to the CEO may have on the other employees, especially those with similar years of experience. The figures, in this case, are, however, justified by how they are paid or distributed across the various components rather than how much is paid in total to the CEO as a compensation package. The severance package is considered essential in this package to cover up for cases of involuntary or voluntary termination of the CEO. The business environment has become quite competitive, and organizations can no longer ignore the rising cases of attrition. The severance package also functions as an instrument of retention that sustains the CEO in the company even during hard times. Price note that the severance package has, in other cases, been used by organizations to attract high performing CEOs from other organizations who are caught between wanting to leave and continuing in the organization due to the fear of not getting any better jobs in the future.

Works Cited

Chief Executive Group LLC. “CEO and Senior Executive Compensation in Private Companies.” Chief Executive Research (2014): 1-7.

Hallock, Kevin F. “The Relationship Between Company Size and CEO Pay.” Research for the Real World (2011): 10-11.

Murphy, Kevin J., and Michael C Jensen. “CEO Incentives—It’s Not How Much You Pay, But How.” Harvard Business Review (2020).

Price, Nicholas J. “How to Create a CEO Compensation Package.” (2018).

SOWELA Technical Community College. “Chief Executive OfficerCompensation Package.” (2020).

Suttle, Rick. “The Average CEO Salary in the U.S. Insurance Industry.” Hearst Newspapers, LLC (2020).