Executive compensation is very important for organizational and stakeholder growth. The main goal of any compensation, especially the executive compensation, is to align the interests of both executives and stakeholders. To retain the talent and control poaching, organizations have to concentrate on executive compensation along with all other employee rewards. To maintain a proper strategic compensation plan, it is important to understand the corporate governance of the organization. This article focuses on the basic theories of compensation and examines the issues behind the CEO compensation and its implications.

An organization attaches priority to executive compensation because the leader is the backbone of any organization. This compensation package is designed to suit the individual and benefit him/her at the maximum level. This compensation package includes the salary, bonus, stock options, stock grants, other stock-based forms of compensation, pension and finally other benefits and perquisites. KPMG'S Chingos breaks down this compensation into three categories, 20% salary, 60% stock or stock options and 20% incentives. The corporates try to link compensation to performance of the CEO. But in most of the cases it is based on the size of the organization rather than CEO's performance. At present, the organizations are designing the pay packages in such a way that the fixed component is relatively smaller and variable component is larger since compensation quantum is contingent to performance of the organization.

To understand the composition and importance of the compensation theory one should know a few concepts, which will provide insights into building suitable compensation package.

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