A compensation package is usually design to motivate the executive performance in accordance to the risk tolerance and the company objective of a firm. Hence, an executive compensation is known to be an important role where the CEO of the firm oversees how the company is operating. At certain times as the CEO of the company does not share the same information, agency problem could arise due to this. An agency problem arises when there is a separation of ownership and control in the company. A shareholder usually provides the executive compensation in order for the CEO of the company to take action in accordance to the shareholders interest.
A number of studies have been taken in relationship to the CEO performance and the company performance. Therefore there is a close relationship between the compensation function and the CEO performance. A number of determinants on the compensation of the pay such as CEO characteristics, compensation package features, and firm characteristic would be discussed within the literature review. The determinants of the CEO compensation could be characterized in accordance to the CEO’s age, tenure, title and ownership. In addition to that, the compensation package features could be further broken down to the supplementary retirement plan and the termination benefits agreement. Hence, as the compensation is closely related to each other, the firm characteristic would be closely linked to the size, growth opportunities and the risk of the company.
Executive compensation packages could be further divided into mix of short term incentives, long term incentives and guarantee. Under mix of short term incentives would include salary, annual bonuses, benefits and perquisites. The long term incentives would include the relationship to of the stock option and restricted shares in relation to the performance of the company. Lastly the guarantees under the executive compensation would include the severance agreement, change in control provision and last but not least the pension package.
Recent studies have also shown that there is a trend in Australia executive compensation. These trends in Australia executive compensation is based on salary, annual bonus, LTIPs, and EPS growth and relative shareholder return growth. Furthermore, the literature review would contain simultaneous equation model, which will discuss on regression and pay for performance. Pay-for-performance equation is used to measure the revenue growth of the firm, total shareholder return, return on assets, return on equity, and optimal incentive. Lastly in this literature review, ethical issues which are concern with executive compensation are going to be discussed as well. Ethical issue such as incentive compensation and manipulation in accordance to the financial crisis, excessive payment and…