Question

Which statement about the annual base pay for an executive is true?

A. It is very easy to set the annual base pay for a CEO because of the predictability of internal and external factors.

B. A target plan bonus ties cash bonuses to the executive attaining specific performance criteria.

C. For most executives, annual base pay represents a small part of their total compensation.

D. The IRS does not limit the amount of an executive's annual pay that can be categorized as a business expense.

E. It takes a short amount of time before the strategic decisions taken by a CEO pay off, thus justifying the CEO's salary.

Answer 1

For most executives, the compensation is a basket of annual pay, deferred pay and fringe compensation.

• Annual base pay:
  • Is the minimum amount to be paid to the executives
  • Includes salary and bonus
  • This component is very low
• Deferred pay:
  • Renders payment to the executive at a future date based on the performance of his decisions
  • These are the long term incentives, and form the major part of executive compensation
  • Includes stocks, golden parachute, etc.
• Fringe benefits:
  • The other perks of being in business
  • Includes company cars, jet, health benefits, etc.

So, Option C i.e. “For most executives, annual base pay represents a small part of their total compensation.” is True.