Quick Answer: How does executive compensation relate to equity theory?

What are the theories of executive compensation?

The two economic theories which underpin the pay-for-performance model of executive compensation are agency theory, made famous by a seminal paper by Jensen and Meckling (1976), and tournament theory, advanced by American economists Ed Lazear and Sherwin Rosen in 1981.

What is the pay equity theory?

Pay equity is based on the principle that the payment an employee receives from the employer should be proportional to his or her contributions to the organization. Otherwise, inequity results.

What is the purpose of executive compensation?

Ultimately, the goal of any executive compensation program should be to incentivize senior executives to enhance company performance relative to prior years and relative to its competitors for the benefit of all shareholders.

What is executive compensation consulting?

Executive compensation consultants are responsible for creating comprehensive compensation programs for executives across a spectrum of organizations. These consultants work closely with HR teams to design and manage incentive plans. … Corporate executives are significant stakeholders in organizational success.

Why is Equity Theory important in compensation?

Equity theory explains how employees determine what is fair and how they act upon their perceptions. … As a result, employee perceptions about fairness do matter–whether they are real or misguided. For managers it is better to effectively address these concerns than ignore them.

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Why is equity theory described as a process theory?

Equity Theory. In contrast to the need-based theories we have covered so far, process-based theories view motivation as a rational process. … Equity theory proposes that people value fair treatment, which motivates them to maintain a similar standard of fairness with their coworkers and the organization.

What are major features and components of executive compensation?

Components Of An Executive Compensation Plan

  • Base Salary. The standard wage paid to an executive that typically is the largest share of an annual compensation package.
  • Bonuses (Short-term incentives) …
  • Long-term incentives. …
  • Benefits. …
  • Perquisites.