8. Executive Compensation and Incentives

In this chapter, we examine executive compensation and incentives. Executive officers develop the corporate strategy and business model, and oversee daily management of the firm. As with any employee, executives require compensation for their work.1 Compensation packages must be sufficient in terms of their level and structure to attract, retain, and motivate qualified executives to create shareholder or stakeholder value.

The compensation committee and the independent directors on the board approve the compensation program. In theory, this should be a simple exercise. The “right” amount of compensation to be paid is the minimum amount it takes to attract and retain a qualified individual. After all, this ...

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