Compensation: a glossary of terms

Compensation Terms:

Annual incentives: Annual incentives are amounts paid out yearly based on performance criteria,
Benchmarking: the process of using internal job descriptions to match established salary survey jobs in order to identify the current market rate for each benchmark position.
Benefit: any form of insurance, paid time off, retirement, perquisites, or other non-cash items that are provided to employees in addition to their cash and equity compensation.
Bonus: a targeted payment or reward outside of an employee's regular salary that is offered as an incentive to motivate employees. Special bonuses may be offered during a particularly crucial business cycle, such as a merger or acquisition, or during a crucial production period.
Clawback: a contractual provision whereby money already paid to an employee must be returned to an employer due to extenuating circumstances
Collective Bargaining Unit: A group formed by workers who unite to seek better wages, enhanced benefits, or improved work conditions. By negotiating as a collective, they possess stronger negotiating power than individuals. Such units are often represented by labor unions.
Compensation: Financial remuneration provided to a person for their services. In professional settings, compensation encompasses what employees receive in return for their work. This can be a combination of base salary, commissions, and additional benefits or bonuses tied to their role.
- Hourly pay: The rate at which an employee is compensated for each hour of work. Unlike roles with predetermined annual salaries, hourly-paid positions pay employees based on the actual number of hours they work during a specific pay cycle, whether it's weekly, bi-weekly, semi-monthly, or monthly.
- Salary: an agreed-upon amount of annual compensation, is usually reserved for a full-time worker, often with more responsibility.
- Commissions: most common in sales or performance-driven roles. This kind of pay usually represents a percentage of the total revenue generated and serves as an incentive for employees to perform well. Commissions can also be based on profit margins.
- Bonuses: These are often set as a percentage of a salary or a predetermined lump sum. Some businesses allocate bonuses according to departmental achievements, while others distribute them based on quarterly or yearly outcomes. Unlike commissions which are tied directly to performance, bonuses can also be given during holidays or as a token of appreciation without being linked to specific performance measures.
Compensation Committee: an established Committee of the Board of Directors composed of independent (non-employee) directors who set the level and form of compensation paid to the CEO and other senior executives. This committee also typically has oversight over the broader HR policies of the Corporation.
Compensation Consultant: Third-party experts in the implementation and design of compensation plans, with the goal of creating the proper incentives for employee behavior. Compensation Consultant responsibilities include providing data for and recommending salary and pay grades for new positions and/or promoted positions. These consultants often advise the Compensation Committee of the Board in their deliberations.
Compression: (also referred to as wage compression or salary compression) is when the pay differential between individuals does not reflect differences in experience, tenure or skill.
Double Trigger (Acceleration): acceleration of vesting of Long-term incentive grants based on two factors– typically a change in control and termination
Golden Parachutes: A provision in executive contracts that pays the executive a premium in the event of a merger, and subsequent termination of the executive. This is typically delivered in the form of excess severance payments and accelerated vesting of prior equity grants.
LTI (Long-Term Incentive): a reward system designed to align the executives and the corporation's long-term interests. These awards can come in various forms such as stock options, restricted stock, performance shares, or deferred cash, LTIP plans are an integral part of senior executive compensation.
Merit Increase: A salary boost awarded to an employee reflecting their performance. It's commonly used to encourage and acknowledge diligent work in the professional environment.
Modifier: a salary adjustment paid in addition to regular earnings on a bi-weekly basis for specific conditions such as a high cost of living in a specific location.
Non-Qualified Stock Option (NQSO): a type of employee stock option where the tax deductibility of the option depends on the timing of their exercise rather than meeting specific requirements.
Pay Ratio: The ratio of the top salaries to the bottom salaries. In other words, how much bigger is a company's top executives' income than its workers. The SEC requires that companies disclose the ratio between the total pay of the CEO and the median worker.
Performance Equity: a grant of a specified number of Units/Shares in the Company upon the attainment of one or more performance goals during a performance period established by the Company. This form of compensation is most frequently delivered in the form of PSUs.
Paid Time Off (PTO): A benefits program offered by many companies that allow employees to take off for a specific number of days and still receive compensation. This includes holidays, sick leave, and vacation.
Pay for Performance: A remuneration approach that ties salary, bonuses, or other rewards to an employee's performance. The assessment of performance typically relies on specific metrics or qualitative reviews (such as performance evaluations).
Pay Transparency Laws: laws that require employers to disclose a wage or wage range to prospective candidates and/or current employees.
Performance Measures (types): to measure productivity or performance of employees
- Input-based measures: These metrics center on the resources employed to attain a certain output or result. They consider elements like time, funds, or personnel needed to meet a given target.
- Output-based measures: These metrics emphasize the concrete outcomes of a specific task or operation. They might refer to the quantity of items made, the clientele attended, or the revenue earned.
- Outcome-based measures: These metrics concentrate on the influence of a specific operation or activity concerning a certain aim or aspiration. They evaluate impacts on factors like client contentment, staff involvement, or ecological preservation.
- Process-based measures: These metrics evaluate the efficiency and efficacy of a particular procedure or action. They might look at duration for task completion, the error rate in a product, or the caliber of client assistance.
- Quality-based measures: These metrics pertain to the excellence of a product or service. They might examine customer gratification levels, defect counts in a product, or adherence to regulatory benchmarks.
- Financial measures: These metrics are concerned with an entity's economic achievements. They could include aspects like earnings, profit percentages, investment returns, or expense reductions.
Performance Stock Units (PSUs): PSUs or performance shares are awarded to employees based on how a company performs over time, with the number of shares awarded usually linked to how well the business fares on key metrics over a given period; typically, three years.
Perquisites: typically non-cash benefits that include such things as a company car, special medical coverage, country club memberships, use of the company aircraft, etc.
Restricted Stock Units (RSUs): RSUs can be seen as a commitment by the employer to grant shares to an employee in the future – on the vesting date – provided specific criteria are fulfilled, often tied to the employee's continued association with the company for a set duration.
Salary: The amount of money your employer pays you over the course of a year in exchange for the work you perform. Salaries are typically paid bi-weekly.
Salary Range: This refers to the span of pay, from the lowest to the highest, set for a particular pay grade or job position.
Single Trigger (Acceleration): A contractual clause typically in a merger or acquisition agreement, where only one event, such as the completion of the acquisition, triggers the payout of certain specified benefits.
Stock options versus RSUs: Stock options give employees the right to buy company stock at a set price, while restricted stock units (RSUs) are grants of shares that vest over time. Stock options become valuable if the company's stock price rises above the set price, whereas RSUs have value so long as the company's stock has value.
Stock Options: a financial instrument that gives its owner the right, but not the obligation, to purchase in the future a given number of shares, at an agreed-upon price, during a specified period–typically 10 years
Target Bonus: the amount an individual would receive in annual incentive if the Company, division, and individual perform as expected. It is to signal how much an individual could expect to earn under normal circumstances but there is no guarantee.
Threshold: a minimum level of performance that an employee must achieve before becoming eligible for incentive earnings.
Total cash compensation (TCC): The combination of an employee's fixed/base pay plus any variable pay the employee might receive in cash, including incentive payouts, bonuses, and other lump sums, etc
Total Direct compensation (TDC): Total cash compensation plus the grant value of any LTIs
Total Rewards: the combination of benefits, and TDC. This can include wages, benefits, bonuses, and LTI as well as recognition, workplace flexibility, and career opportunities.
Total shareholder return (TSR): TSR represents a metric for assessing financial achievement, highlighting the complete return an investor gains from an asset, notably stocks. The TSR is computed as ((present value - initial value) + dividends) ÷ initial value. Essentially, it captures the full value a stock delivers to its investors.
Top-Hat Plan: This is a distinct employer-driven retirement scheme that lacks funding. Its purpose is to offer deferred remuneration to a qualified group of employees. Generally, participants in such a plan are senior executives and board members, and their claims stand as unsecured debts of the company.
Vesting: a set amount of time or the achievement of performance targets (or both) before a recipient of an LTI can actually own or sell the equity or cash previously awarded to them. It is the point in time when the executive owes taxes on the previously granted award

Financial Terms (Related to Compensation):

3409A Valuation: An independent appraisal of the fair market value (FMV) of a private company's common stock (the underlying security reserved mainly for founders and employees) on the date of issuance.
Adjusted EPS (Earnings Per Share): This is the company's profit divided by its number of existing shares, once the influence of unique, non-recurring items impacting net earnings has been removed. The Basic EPS might be skewed if the company's net income includes these one-off items.
Diluted EPS (Earnings Per Share): This represents a company's earnings per share considering all convertible securities were transformed into common stock. Convertible securities, which encompass instruments like unvested stock options and RSUs, have the potential to be changed into standard shares. Their conversion can dilute the value of an existing shareholder's equity and lower the company's earnings for each share.
EBITDA: A popular metric that evaluates a company's profitability, EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. To derive EBITDA, one adds back interest, tax, depreciation, and amortization expenses to the net income. By omitting expenses related to non-cash depreciation, amortization, tax, and debt—dependent on the capital structure—EBITDA aims to showcase the cash earnings generated from the company's core operations
EPS (Earnings Per Share): This metric is the division of a company's net profit by its total number of outstanding common shares. Essentially, EPS demonstrates the amount of profit a company earns for every share of its stock, serving as a prevalent indicator to gauge corporate worth.
Institutional Shareholder: An institutional shareholder refers to a nonbank organization that own securities in quantities large enough to qualify for preferential treatment and lower commissions. Institutional shareholders encompass entities like insurance companies, pension funds, hedge funds, mutual funds, sovereign wealth funds, endowment funds, and other money management firms. Because of their large stake in companies, institutional shareholders often have a considerable influence on the company's management and decisions.
Institutional Shareholder Services (ISS): a shareholder advisory firm that assists shareholders with research in asset management, proxy voting, and corporate governance. ISS makes recommendations to institution shareholder clients on how to vote on items raised in the proxies including equity compensation plans, say on pay recommendations, the election of directors and the approval of the auditing firm.
IPO (Initial Public Offering): This refers to the act of introducing shares from a previously private company to the public market for the furst time. Through an IPO, a company can garner equity investments from the general public.
Net Income: This represents the residual profit once all outgoings and expenditures are deducted from the company's revenue. Often termed as net profit, it serves as a gauge for investors to assess a company's total profitability, indicating the efficiency of its management.
Pay Gap: a difference in compensation between two classes of individuals: a reference class, which is a member of the highest-paid group, and an individual from a less compensated group. Pay gaps are also examined between protected employee groups (e.g. minorities and women) and non- protected groups.
Privatization: Transition when a government-owned business, operation, or property becomes owned by a private, non-government party. Such transitions often enhance efficiency and cost-effectiveness, with private enterprises typically being able to deliver services or goods more swiftly and proficiently.
Public Company: Often referred to as a publicly traded company, this is an entity whose shareholders are entitled to a portion of the company's assets and earnings.
Return On Assets (ROA): This metric showcases a company's earning capability relative to its collective assets. It's determined by dividing the company's net profit by its total assets.
Return On Invested Capital (ROIC): This is a measure to assess how efficiently a company channels its capital towards lucrative endeavors or investments. In essence, ROIC represents the earnings a company generates surpassing the average costs incurred for its debt and equity capital. It's calculated by dividing the net operational profit after taxes by the capital invested in the business.
ROE (Return On Equity): A financial performance metric, ROE is computed by dividing the net earnings by the equity held by shareholders. It serves as an indicator of a company's profit generation capacity and its adeptness at producing returns. A higher ROE signals that the management is proficient in leveraging its equity financing to boost growth and income.
Revenue: This signifies the total earnings from sales over a specified duration, like a quarter. Revenue might be denoted as net sales, accounting for reductions or deductions related to returned or flawed goods.
Retail Shareholder: A retail shareholder, also known as an individual shareholder or small shareholder, refers to individuals or smaller entities who purchase shares for personal investments, usually in smaller quantities compared to institutional shareholders. These shareholders can be everyday individuals who buy shares through a brokerage. Retail shareholders may have less influence over company decisions compared to institutional shareholders because they own a smaller number of shares. However, in aggregate, they can significantly impact a company's share price.
Say-on-Pay (SOP): A term referring to a rule that grants shareholders the right to vote on the pay of executives. This policy is designed to increase transparency and accountability in companies by allowing shareholders a voice in executive compensation.
Severance: the compensation and/or benefits an employer provides to an employee after employment is over. Severance packages may include extended benefits, such as salary continuation, health insurance, and outplacement assistance to help an employee secure a new position.
Share buybacks: when a company buys its own outstanding shares to reduce the number of shares available on the open market. It reduces the number of shares outstanding, thereby inflating (positive) earnings per share and, often, the value of the stock.
Shareholder (Institutional and Retail): A shareholder, also referred to as a stockholder, is any person, company, or institution that owns at least one share in a company. They may also have the right to vote on the company's policies and who is on its board of directors, depending on the type of shares they own.
SPAC (Special Purpose Acquisition Company): A shell company formed to raise capital to acquire an existing company.
Stock Exchange: A marketplace where buyers and sellers trade securities, particularly stocks. This can be a physical location, like the New York Stock Exchange, or an electronic platform, like the NASDAQ. Stock exchanges enable transactions in company shares, and they enforce rules for fair trading. They serve as a primary mechanism of liquidity in the financial markets and provide a transparent, regulated environment for financial transactions.

Other Terms:

(Board of) Directors: This is the committee responsible for overseeing a company's direction and management, chosen by shareholders for public firms. They convene periodically to determine strategies and supervise operations. It's mandatory for public companies to maintain a board of directors, and many private entities and nonprofit groups also establish such boards.
Benefit Corporation (B-Corp): A type of for-profit corporate entity that includes a positive impact on society, workers, the community, and the environment in addition to profit as its legally defined goals.
Blackout Period: A specified duration set by a policy or rule during which specific actions are restricted or prohibited. It's predominantly designed to deter company insiders, such as Executives and Directors, from trading shares based on privileged information. In the context of an employee retirement scheme, a blackout period momentarily halts participants from adjusting their plans.
Board Chair: Often referred to as the Chair of the Board (COB), this individual wields the most influence and authority within the board of directors, offering leadership to the entity's key personnel and executives. The board chair acts as a bridge between the board and senior management, ensuring the company's obligations to its shareholders are met.
CEO (Chief Executive Officer): The individual at the top of an organization. The CEO's primary tasks involve steering critical business strategies, overseeing day-to-day operations, and managing the company’s resources.
CFO (Chief Financial Officer): They assess the financial standing of the company, propose measures to counter financial challenges, and adhere to SEC mandates when presenting financial documents.
CHRO (Chief Human Resources Officer): The senior executive in charge of human resources functions. Their responsibilities span from scouting and nurturing talent, fostering employee engagement, designing compensation packages, offering benefits, to upholding employment law standards.
C-Suite: Refers to the highest-ranking executive roles in an organization, where "C" stands for "chief." This includes but is not limited to CEO, CIO, and CFO.
CD&A (Compensation Discussion & Analysis): A section found in a company's annual proxy statement that provides a detailed explanation of the company's executive compensation policies and decisions. It is intended to provide shareholders with a clear, comprehensive, and understandable picture of the company's compensation practices.
Change-in-Control (CIC): This refers to a provision in a contract, particularly executive employment contracts, that provides certain protections or benefits if the company undergoes a significant change in ownership or control. These benefits may include accelerated vesting of stock options or payment of a severance package.
ESG (Environmental, Social, and Governance): These are key factors used to measure the sustainability and societal impact of an investment in a company or business. It encompasses how a company handles ecological responsibilities (Environmental), manages relationships with employees, suppliers, and the community (Social), and its leadership, executive pay, and shareholder rights (Governance).
Free Cash flow conversion (FCF): A formula used to measure a company’s ability to convert operating cash flow to free cash flow. It essentially gauges the proportion of sales that become free cash flow. Free cash flow is the leftover amount after the business settles its operational expenses and sustains its capital assets.
Market Cap: One measurement of a company's size. It represents the total value of a company's circulating shares, including both publicly traded and restricted shares owned by corporate insiders and executives. It's calculated by multiplying the current share price with the total number of shares in circulation. It is calculated by multiplying the current share price times the number of outstanding shares of stock.
Named Executive Officer (NEO): Refers to the CEO, CFO, and the three most highly compensated executive officers. Their total compensation, as defined per Subsection 1.3(6) of Form 51-102F6 - Statement of Executive Compensation, individually exceeds $150,000.
Peer Group: A collection of companies or individuals that exhibit comparable traits or operate within the same industry or domain. They might parallel in terms of scale, adopt similar business approaches, or cater to a shared customer base. Businesses frequently utilize peer groups as reference points in fields like executive pay, fiscal outcomes, and strategic planning.
Proxy Statement: a document containing the information the Securities and Exchange Commission (SEC) requires companies to provide to shareholders so they can make decisions about matters that will be brought up at an annual or special stockholder meeting.
Stakeholder: An individual or group that holds a interest in a company and can influence or be influenced by the company's actions. Common stakeholders in most corporations include its shareholders, workforce, clientele, and vendors.
Termination for Cause: This condition mandates that an employer places the employee on a corrective action plan, typically lasting 60 or 90 days. During this time, the employee is expected to rectify their work behaviors or performance. Failure to meet the required standards by the end of this period could result in a dismissal for cause, which is a termination with adverse implications.
Termination without Cause: This situation arises when an employee is let go for reasons unrelated to misconduct or inadequate performance. Here, the employee isn't at fault, and the employer typically needs to provide prior notice or a compensatory amount, often termed as severance. Such terminations can stem from reasons like budgetary concerns, organizational realignments, or workforce reductions.