Imperial Journal of Interdisciplinary Research (IJIR)

Vol-2, Issue-3 , 2016

ISSN : 2454-1362 , http://www.onlinejournal.in

Designing an effective CEO Compensation

Plan
Sanjiv Dhir
Thapar University, India.
Abstract : This study provides an overview of the
factors involved in effective designing of CEO
compensation plan. Executive compensation is a
complex topic and has been extensively researched.
The CEO compensation plan should not only be
confined to monetary terms, but it needs to also
involve conditions where top executives can be a part
of charity or CSR wing of the organization. This
study shall focus on the differences between
monetary
and
non-monetary
compensation.
Qualitative study has been conducted in order to
understand the views of top executives regarding
involvement of former CEO in CSR activities of a
company. The results obtained will be correlated
with theoretical evidence to determine negative
implications of just monetary compensation, and
benefits of involving CEO skills within social
responsibility activities.

of the CEO compensation plan. The research

objectives can be categorized as To evaluate the effectiveness of CEO
compensation plan

To determine parameters which can

enhance
effectiveness
of
the
compensation plan
To link the CEO compensation plan with
overall firms performance
To predict the importance of social work
within the CEO compensation plan
The major research question for this study will be
what factors lead to designing of an effective
CEO compensation plan? This question shall form
the basis for selecting appropriate data collection
tools.

1. Introduction

As per Ellis (2013), since early 1980s, extensive

research has been conducted on managerial
compensation. This form of compensation is referred
to as an incentive mechanism, which is being offered
to the management by shareholders. The structure
followed for managerial compensation enables to
resolve any form of principal-agency problem. A
firms performance is closely knitted with designing
of managerial compensation plan. This form of
relationship suggests that pay-for-performance is
highly insignificant in case of both legal entity and
government controlled firms [4]. According to
Murphy (1998), those CEOs who are politically
connected, within privatized firms, adversely affects
first-day stock return. It is usually argued that board
members constitute bureaucrat directors, with more
politically-connected CEOs in comparison to
directors
possessing
relevant
professional
backgrounds [12]. As stated by Bebchuk and Fried
(2003), performance-based remuneration structure
for the top management can be correlated with
enhanced shareholder value of companies. In
economics, risk sharing research, has given rise to
the agency theory. This theoretical framework
comprises of two main entities such as principal and
agent [1]. As per Sigler (2011) an agency problem is
witnessed to take place when agent or the CEO
possesses conflicting goals in relation to the board or
principal. The varying level of CEO salaries can be

The CEO compensation plan is often regarded as

a debatable topic. There are various parameters
involved in designing a CEO compensation plan. A
certain percentage of CEOs compensation is offered
in cash; however this percentage is strongly linked
with
fluctuating
market
conditions.
The
compensation plan designed for a CEO can be
correlated with firms performance. It is witnessed
that compensation of executives is positively
influenced with increasing performance standard of a
company [2]. The executive compensation plan
comprises of various divisions such as basic pay,
share percentage, fringe benefits, etc [7]. As per
2014 statistics, the average compensation offered to
CEOs in some large-scale enterprises was
approximately $16.3 million. However, effectiveness
of such compensation plan can be evaluated through
determining payback from CEO [9]. This study
focuses on CEO compensation, even after job tenure,
in terms of promoting CSR activities of an
organization.

2. Research aim & objectives

The research aim revolves around effective
designing of a compensation plan. This study will
outline key components for increasing effectiveness

3. Literature Review

Imperial Journal of Interdisciplinary Research (IJIR)

Vol-2, Issue-3 , 2016
ISSN : 2454-1362 , http://www.onlinejournal.in
considered as an outcome of uneven board control
levels [14].

4. Data Collection Tools

The qualitative data collection tool will be used
for addressing research objectives. An interview
session was conducted with board members and
major shareholders of a company, to determine key
factors increasing effectiveness of the compensation
plan design [13]. There were approximately 10 to 12
respondents interviewed for identifying the
compensation parameters even after the job tenure of
a CEO. The major interview question was
significance of CSR activities within the CEO
compensation plan. Board members were questioned
regarding the approval of offering certain percentage
of companys profits to CEOs, after the job-tenure
[11]. An effective compensation plan is designed
based on agreed parameters.

5. Analysis & Findings

Return on investment is an important aspect to
evaluate effectiveness of the CEO compensation
plan. This aspect has been evaluated through
conducting an interview session [10]. The major
interview question asked to shareholders was
what kind of compensation can be offered to a
CEO, after leaving the job position? Maximum
shareholders replied that involvement in CSR
activities would be a suitable approach. On the basis
of such involvement, CEOs can be offered a certain
percentage of overall companys profits [6]. This
interview session even denoted that executive
bonuses constituting 25% of base salary shall be
provided to CEOs. The top management clearly
specified that CEO skills are eventually upgraded
when an individual starts participating in CSR
activities [15]. There was another interview question
asked on what parameter would decide
effectiveness of CSR activities being performed by
former CEO? The corporate reputation of an
organization would be analyzed by obtaining
feedback from clients [3]. These results can be used
for structuring profit percentage, which would be
offered to CEO. Another vital question was factor
denoting the CEO compensation amount to be
offered, after retirement or leaving the job
designation. The shareholders stated that overall
performance of a CEO during job tenure would
decide compensation amount to be paid, after leaving
the job position [5]. These parameters are essential
for designing an effective compensation plan for
CEO. Hence, an effective remuneration plan would
comprise of performance-based pay during and after
job tenure, motivation for top executives to be a part
of CSR wing, etc [16]. A well-balanced

Imperial Journal of Interdisciplinary Research (IJIR)

compensation plan is one which not only involve

monetary benefits for CEO after retirement or when
they leave job, but a more fulfilling, high calling life
with significant contribution towards societal
development.

6. Conclusion
This paper has described various parameters
involved in designing an effective compensation
plan. The job responsibilities of a CEO is not only
restricted to enhancing companys performance, but
they are even responsible for executing required CSR
activities. These aspects will be considered in
compensation plan design for CEOs. The necessary
factors will be percentage of companys profits
offered to CEO, after retirement or when they leave
the job position. This profit percentage would be
higher for those CEOs who have performed well in
their job tenure. On the other hand, there will be a
performance evaluation scale for CEOs who are
actively indulged in the CSR wing of a company,
after they leave their job designation. It is clearly
evident that monetary compensation tends to initiate
greed within individuals [8]; however, sense of
ownership feeling will eliminate such negative
influential force.

7. Acknowledgements
I would like to thank my professor Dr. Padmakumar
Nair for his constant encouragement, guidance and
support.

8. References
[1] Bebchuk, L. A., & Fried, J. M., Executive
compensation as an agency problem (No. w9813).
National Bureau of Economic Research, April 2003.
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[3] CNBC LLC. (2016). Why corporate CEO pay is
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[4] Ellis, N., Executive Compensation-Where have
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Imperial Journal of Interdisciplinary Research (IJIR)

Vol-2, Issue-3 , 2016
ISSN : 2454-1362 , http://www.onlinejournal.in
[7] HBR. (2016). CEOs are different from us.
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