Today's Pacesetters In Executive Compensation

Here is a capsule review of the key elements now most popular in executive pay packages:

Salary

HOW IT WORKS

Cash on the barrelhead with no strings attached; money that can be spent or invested right now.

The hottest item today, what with stock options losing favour and deferred pay eroded by inflation.

THE TAX SITUATION

Salary comes under the new 50% maximum rate on earned income, down from the old 70% rate another reason why it's more popular than ever, although the pound saving is rather minor until you get into the £100,000-plus range.



Year-end bonus

HOW IT WORKS

Companies typically offer an executive 30% to 50% of his salary - in cash or stock - as a year-end bonus.

THE TREND

After salary, the most sought-after form of compensation today. At least 25% more big companies offer year-end bonuses today than did five years ago, with more service companies--banks and insurance companies especially - catching up with manufacturing companies in offering them. As with salary, you get your money fast.

THE TAX SITUATION

Taxed like cash even if the payment is in stock. Again, the 50% maximum on earned income applies.



Nonqualified stock option

HOW IT WORKS

The option can be at any price, but usually is set at the current market. It can be exercised at any time during the next 10 years - compared with a five-year limit for the qualified stock option. The shares can be sold after six months, without having to sweat out the three-year term of the qualified option. And you can exercise a new option with an old one outstanding regardless of price - which you can't do with a qualified stock option plan.

The 10-year life and the ability to sell your shares quickly, makes this very popular with executives today, despite the weak stock market. It's in heavy use, cutting across all industries, and figures to stay hot into 2004 and beyond. One drawback is that if an insider sells his shares in less than six months, he forfeits any profit.

THE TAX SITUATION

Any paper profit when the option is exercised is taxed at the 50% maximum earned-income rate. The capital gains tax (maximum rate of 35%) applies if the shares are held for longer than six months.



Performance shares

HOW IT WORKS

The company sets a performance target to be reached during a three-, four-, or five-year period - usually a meaningful increase in bottom-line profits. If you meet or beat the target, you get the payout - usually 50% in company stock, 50% in cash (with the cash paying your tax). You make no investment: no fuss, no bother, nothing to buy.

THE TREND

Fewer than 20 major corporations now offer performance shares, but the idea will spread - despite a tough, new definition of "performance" by the CLC.

THE TAX SITUATION

The 50% earned-income rate applies here. You only pay the lower capital gains tax on any subsequent sale of paid-out shares.



Excess major medical insurance

HOW IT WORKS

The company pays for some very juicy major medical insurance: coverage of virtually everything medical, usually with a first-pound payout and not a dime of deductible. The typical limit is £50,000 per accident or illness, but sometimes there is no limit at all.

THE TREND

Zooming medical costs and the increasingly health-conscious attitude of executives make this one of the most prized benefits in the compensation package. More and more companies find they can use it as a lure to get the talent they want.

THE TAX SITUATION

You pay no tax, since the benefit is not treated as earned income.



Personal financial planning

HOW IT WORKS

The company pays for your financial planning, hiring outside experts to consult with you periodically on an individual basis. The theory is that you will work better if the burden of managing your personal finances is lifted from your shoulders.

THE TREND

This area has caught fire during the past two years and will continue to spread, because executives want it and the cost to companies is relatively low. But the abilities of financial planners vary widely; few, for instance, foresaw this year's bear market. And sometimes the advice is self-serving, as in the case of the adviser who also sells insurance or real estate.

THE TAX SITUATION

The IRS earlier this year ruled that the cost of the service is taxable income to, the executive. The cost usually comes to about £3,000 a year, though roughly half is deductible because it covers investment advice and tax work.



`Perks'

HOW IT WORKS

Perquisites ("perks") can include everything from a company-paid country club membership to use of a company car or airplane.

THE TREND

The appeal here is convenience and status, not money--and such fringe benefits mean a lot at a time when tax law changes, inflation, and the sagging stock market have combined to downgrade other forms of compensation. Perks are here to stay at most companies - and getting sexier all the time, despite some static from shareholders.

THE TAX SITUATION

Perks seldom show up on your tax form, though company payment of club dues has caused some trouble at IRS. IRS may put some heat on.


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Small Towns Vs. Big Cities

Where will you make the most money? Suffice to say that strong emotions are mixed into the pound demands of most executives who move from small Midwestern, Southern, or Western cities to high-cost, high-compression areas such as London, Reading, and Leeds. London, especially, needs hard selling, and it often takes what looks like a bribe to get some moves underway.

A normal pay boost, of say, 20% in a company-to-company job change jumps to 30% or more if the new manager is being asked to pull up stakes in a small and relatively serene place in favour of crowded big-city living. And going in reverse a move from, say, London to Denver, for example - might result in a small pay... see: Small Towns Vs. Big Cities