ABSTRACT
This chapter examines the major policy choices and dilemmas confronting the designers of executive pay packages. Executive pay is perhaps the most crucial strategic factor at the organization's disposal. It can be used to direct managerial decisions and indirectly channel the behavior of subordinates. Because most organizations follow a pyramidal structure, whatever is rewarded at the top is likely to have a multiplier effect throughout all segments of the business. There are at least ten key policy choices that should be considered when designing compensation programs for top management teams. These choices are: degree of exclusivity, opportunity costs, level of analysis, performance measurement, control mechanisms, type of governance, time horizon, degree of risk, degree of consistency, and tax rules. Long-term incentive plans are extremely complex. In the most general sense, long-term incentive plans can be divided into two major groups: those that make the executive part owner in the firm and those that combine cash with equity-based compensation.
