Factors Affecting Executive Compensation

Factors Affecting Executive Compensation- For making a rational compensation plan it is very important to take into account the factors that affect executive compensation.

The complexity of the Job: The degree of complexity of the job differs according to the grades of the employees in the organization. Also, complexity is directly proportional to the size of the organization, the geographical areas covered, and the size of the product lines.
Competency required: Different jobs require different levels of competencies. Organizations that operate in a comparatively stable environment (like the traditional manufacturing sector) adopt mechanistic-oriented systems which require comparatively lesser flexibility and variety in executives’ competencies. On the other hand, organizations that operate in a highly dynamic environment (like consultancy, information technology, etc.) adopt organic oriented systems which require high flexibility and variety in executives’ competencies.
The capacity of Pay: Executive compensation also depends upon the paying capacity of an organization. Paying capacity is dependent on the company’s earning capacity.
Organizational Philosophy: An organization’s philosophy regarding attracting and retaining key employees also affect the executive compensation level. An organization which beliefs in having the best executives will have a higher compensation package than organizations which do not have any such belief.
International Impact: International human resource management practices impact the executive compensation practices. With economic liberalization, many multinationals have entered India which pays quite high compensation to their executives.
Legal Provisions: Legal provisions also affect the executive compensation level. In India, these provisions are under the Companies Act
Total remuneration payable to managerial personnel – 11%
In case of one managing/ whole-time director – 5%
In case of more than one managing/ whole-time director – 10%