Question

CASE :

A recent campaign by organized labor unions has brought the issue of executive compensation into the
public eye. Media coverage of executive compensation concerns has been extensive over the past few weeks
with articles in national publications and a featured story on a television special, in addition to stories on
local news stations. This extensive coverage has highlighted public concerns of the high level of pay that
top executives receive. The union promotes an executive compensation awareness campaign every year as a
strategy to build awareness of perceived inequities between the pay of CEOs and frontline employees. Such
awareness often prompts employees to consider forming a union, resulting in the growth of national unions.
The publicity has caused some turmoil at Oakwood Lawns. For the first time, the company’s CEO pay
is featured as an example of perceived excess in the executive suite. Several field managers have been in
touch with Don Henry, the director of human resources, to report that employees are outraged at the rate

of pay of the company CEO and other top executives. In addition to the company’s desire to remain union-
free, Don also knows that such outrage could lead to low morale and other problems at Oakwood.

The union targeted Oakwood because it is a big company that has faced some financial challenges. The
landscaping company has more than 15,000 employees in offices throughout the Midwest, and most of its
employees are frontline laborers. The media coverage has been extensive in the area, and many company
employees who viewed the story were surprised to learn the CEO is among the highest paid in the United
States. The news was especially difficult to hear as the company recently announced that employees would
not receive an annual pay increase due to the financial challenges the company is facing.
Oakwood CEO’s annual salary is $975,000. Add in a bonus, stock awards, retirement benefits, and

other benefits, and his total compensation is close to $10 million a year. The average landscaping techni-
cian is paid $28,000 annually. The disparity is clear, and Don must now plan a response to address the

employees’ concerns.

11-11. Summarize three forms of deferred (stock) compensation.

11-12. What are the objectives of the say-on-pay rule? Do you think that shareholders should be limited to taking an advisory vote or should shareholders be able to deter- mine an executive’s compensation?

Answer 1

11-11. The 3 forms of deferred compensation are:

• Top hat plans: The deferred compensation which is paid by the employer to the highly compensated employees, usually the employees belonging to C-suite. These are also known as the supplemental deferred compensation benefits.
• Qualified deferred compensation: The retirement plans and pension plans come under qualified deferred compensation. This allotted fund is only for the welfare of the employee and the employer will have no right on the fund.
• Non-qualified deferred compensation: NQDC are also known as golden handcuffs, it is used as a way to retain high performing and strategic employees and prevent their poaching. It usually comes with a non-competing clause where the employee cannot leave the company and join competition.

11-12. Say on pay rule is a compliance through which the compensation paid to the C-suite and executive employees of the company. The shareholders will have a discretion on the amount which will be paid to these executives.

Shareholders are the people who invest their capital in business and fund it to facilitate its operations. Hence shareholders have a major role to play in the compensation and benefits structure of the company. The shareholders can keep the executive compensation in check and link it to the performance of the company. This will keep the executive compensation in fair pay range and hence pay equity in the company will also be maintained quite fairly.