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Compensating Executives Based on Performance

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  • Mohammed R. Ahmed

Abstract

The question of fair executive compensation could be resolved if we develop a framework and measures to determine whether executives are compensated fairly by firms. Executive compensation is a business decision, and it should be based on business performance. This paper presents tools for investors and analysts for analyzing executive compensation, and provides for the board of directors a framework for developing a fair executive compensation policy. The model for executive compensation includes four variables: culture, governance, disclosure, and oversight, for creating an environment for the board of directors to evaluate and formulate a fair compensation policy. The model includes two measures: (1) an executive compensation ratio¡ªa measure for comparing executive compensation to the value created for the firm during a period of time and (2) a comparative compensation ratio¡ªa measure for comparing executive compensation with employee compensation. The researcher recommends that the management share these measures with the public in both quarterly and annual reports.

Suggested Citation

  • Mohammed R. Ahmed, 2016. "Compensating Executives Based on Performance," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 7(6), pages 1-9, November.
    • Handle: RePEc:jfr:ijba11:v:7:y:2016:i:6:p:1-9
    DOI: 10.5430/ijba.v7n6p1
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