Effectiveness of Executive Compensation Scheme Assignment

Effectiveness of Executive Compensation Scheme - Assignment Example The Tournament theory suggested that a small and a minute difference in ability basically leads towards high compensation. In simple terms, this definition basically fails to consider the main and the important significance of the executive compensation scheme or ECS in the overall governance of the organizations, for instance how and why these kinds of different bonuses are basically awarded and what actual benchmark is used.   ECS have basically four main and important components which are:- The base fixed salary.- The stock options.- The long term incentive plans.- The annual bonuses which are usually being monetary or shares.All the stock options are normally based on the company's overall performance. Although the presentation and the features of the stock option are usually vivid and clear, the exact amount of the compensation can also be unclear as the amount could have been set many years ago and the share prices may also have changed. Furthermore, the executives may circum vent this in order to improve their performance with the help of accounting decisions in the earlier years before the turnover, which basically increases the reported results, or with the help of income-smoothing practice, which basically borrows the income from the future.   Bonuses are basically shown separately to the share options in the company proxy statements. Although the cash compensation and all the other types of the compensation are disclosed separately in different other places like footnotes it is therefore termed as the complexity of the separation that can usually cause the reports to be more unclear for all the shareholders long term interest.   This basically suggests that the executives wield at least some kind of pressure on both the level and also on the structure of their compensation.   For instance, most large US firms have a well-organized remuneration committee which basically consists of two or more two outside directors.   Although all the major d ecisions which are related to the top-level compensation are passed through this organized committee, the committee then rarely conducts the market studies of the competitive compensation levels or the initiates or they propose new ECS or the executive compensation schemes.