Executive Compensation by General Electricals

Hello and welcome to this video, in this video we're going to talk about a very important
concept of Compensation Management which is Executive Compensation. The case of
General Electric is the right example to narrate here. CEO Jeff Immelt implemented the use
of stock options and alternative stock-based incentive schemes and their significance in a

compensation plan.

So let's first understand that what is the exact meaning of executive compensation and some
peripheral and relevant information pertaining to this concept. Executive compensation refers
to the remuneration packages which are specifically designed for business leaders senior
management and executive level employees of the company. It goes beyond just salaries and
includes bonuses, stock options, benefits, and more. The rationale behind executive
compensation is to attract, retain, and motivate top talent to drive the company's success."

Further, we can understand the concept well by understanding the components of it. Which
are

 Salary – ofcourse it plays a huge role when we talk about exec. Comp.
 Short Term Incentives (STI) – Generally, short term incentives are formula driven
incentives which may extend till a year or 6 months. We may name it like annual cash
bonuses, holidays, weekend shifts, flexi hours etc.
 Long Term Incentives (LTI) - Long-term incentives are usually provided to induce an
executive to achieve results over a period of longer than one year. Often they are paid
in stock for example, equity plan, share plan,
 Guaranteed Severance Package - severance package refers to the bonus which is paid
to the employees towards their long term contribution in the organisation so the
amount depends upon the years of employment you have had with the organisation.
One to four weeks of pay per year of service.
 Perquisites – like club memberships, private planes, accommodation, transportation
etc.
 Insurance – health insurance for self and dependents

Executive compensation, when appropriately structured, can offer several advantages for both
executives and the organizations they lead. Here are some of the key advantages which I
would like to narrate.

Attracting Top Talent:

Competitive executive compensation packages help attract high-caliber professionals with the
skills and experience necessary to lead a company successfully. Offering competitive pay
ensures that the organization can secure the best talent in the industry.

Retention of Key Leaders:

Executive compensation often includes elements such as stock options, equity, and deferred
compensation, which can serve as powerful retention tools. These incentives encourage
executives to stay with the company for the long term, fostering stability and continuity in
leadership.

Motivation and Performance:

Linking executive pay to performance metrics aligns the interests of executives with those of
the organization and its shareholders. Performance-based bonuses, stock options, and other
incentives motivate executives to work towards achieving strategic goals and enhancing the
company's overall performance.

Risk-Taking and Innovation:

In some cases, executive compensation structures encourage risk-taking and innovation.

Stock options and equity awards may reward executives for taking calculated risks that lead
to long-term value creation. This can be particularly important in industries where innovation
and adaptability are critical.

Market Competitiveness:

Offering competitive executive compensation ensures that the organization remains

competitive within the industry. This is essential for attracting and retaining top talent,
especially in sectors where executive mobility is high.

Global Expansion and Leadership:

Competitive compensation is crucial for companies looking to expand globally. It allows

organizations to attract international executives with the necessary skills and experience to
navigate diverse markets and lead successful expansions.

Shareholder Alignment:

Equity-based compensation ties executives' financial interests to the company's stock

performance. This alignment ensures that executives are focused on actions that will enhance
shareholder value, promoting a shared interest in the company's success.

Succession Planning:

Well-structured executive compensation packages contribute to effective succession

planning. By incentivizing and retaining key executives, organizations can groom internal
talent for leadership positions, ensuring a smooth transition when changes occur in the
executive team.
Market Perception:

Transparent and fair executive compensation practices contribute to a positive public and
investor perception. Companies that are perceived as treating their executives fairly and
competitively are more likely to gain the trust and support of shareholders, customers, and the
broader public.

Compliance and Governance:

Following best practices in executive compensation helps organizations comply with

regulatory requirements and corporate governance standards. This is essential for maintaining
the trust of stakeholders and avoiding legal or reputational risks.

It's important to note that while executive compensation offers these advantages, excessive or
poorly structured compensation can lead to controversies and criticism. Striking the right
balance and aligning compensation with long-term sustainable growth is key to maximizing
the benefits of executive compensation.

Case of Newport in line with the Executive Compensation Strategy

Further, we can also quote the example of Newport which is a financial consulting firm
based in US. Which helped a large conglomerate see the “big picture” of its executive
compensation structure and provided a vision for long term improvements.

Let us first understand the situation.

The Situation

The chief human resources officer of a large, multi-industry conglomerate was looking for a
full compensation review to determine if the organization had a competitive executive
compensation package with appropriate incentive pay and long-term compensation options.
They contacted Newport Group’s Non-Qualified business line, who turned to the
Compensation Consulting team for additional insight. The conglomerate had 11,000
employees, an annual revenue of $6 billion and were a part of the following industries: auto
dealerships, sports and entertainment, consumer finance and real estate.

So as we see, the case revolves around the possible compensation options which could be
offered to the conglomerate for their employees.

And here we see some actions taken by Newport’s consulting team,

 First of all the Consulting team completed an initial benchmarking study of the
conglomerate’s compensation structure.
 The team then collaborated with the Non-Qualified business line to better explain how
a strong short and long term incentive package, combined with a modern deferred
compensation plan could help add value to the executive compensation package.
 Over the course of two years, the team created a solution which included an executive
compensation philosophy document and multiple executive benchmarking studies for
the conglomerate’s business lines utilizing the latest competitive salary data from
publicly-held and private peer companies.
  The team also provided intelligence on incentive plan metrics and award amounts,
and a conceptual design for a non-qualified deferred compensation (NQDC) plan.

As an outcome, the solution provided information which empowered the conglomerate to

make informed executive compensation decisions and improve the offerings of its executive
package to enhance the attraction and retention of top team members.