Affixing Executive Compensation: How Much is Appropriate?

Affixing appropriate levels of executive compensation can be tricky. This is because it is difficult to remain impartial in affixing salaries and benefits to yourself. This occurs especially in closely-held corporations where there are fewer directors and officers, and the potential for abuse is present. The danger occurs when there are shareholders that require accountability. No matter your role in a corporation, it is important to understand what the appropriate levels of executive compensation should be.

Executive compensation packages are complicated. There are different aspects to compensation that make the true amount of compensation difficult to pinpoint. For example, the compensation can include stock options or perks that cannot have a dollar amount affixed to them. Today, the SEC is requiring more granular descriptions of compensations because there is a concern about lack of transparency and manipulability of compensation levels. The test used to determine whether or not the level of compensation is appropriate is waste, meaning the courts are very deferential. This is because what is truly proper compensation is difficult to comprehend as there are many factors to determine whether or not an executive truly deserves what he is getting. There will be, however, a higher standard of review in closely-held corporations. This is because a smaller group of shareholders are more easily manipulated.

There are, however, two types of executive compensation that have been rejected. The first type that has been rejected is the spring-loaded option. These options occur when directors grant options when the stock is trading low, but right before news is made that will make the stock shoot up. The other type that has been rejected is the backdated option. This option allows options to be awarded in the present, but have them backdated to a time when the stock was trading lower.

There are many reasons why affixing proper amounts of executive compensation is important to a corporation. It ensures there is no waste in the corporation, and may also represent reliability to the shareholders. Many directors do not have experience in affixing compensation, and therefore may be at a loss in determining what the appropriate level is. Perhaps it is in the best interests of the corporation, then, to examine whether the current or future levels of compensation are appropriate. Call the Trembly Law Firm at (305) 431-5678 to schedule a consultation today.