Sample Executive Compensation Philosophy

Sample_Documents

DISCLAIMER: This is a sample template provided for informational purposes only. It does not constitute legal, tax, or financial advice. Organizations should consult their own legal and tax advisors and tailor this document to reflect their specific business needs, geographies, and applicable laws.

Executive Compensation Philosophy - <Company Name>

Document Header

Field	Value
Document Type	Executive Compensation Philosophy
Category	Foundational & Strategic
Company	<Company Name>
Version	<Version Number>
Effective Date	<Date>
Original Issue Date	<Date>
Last Reviewed	<Date>
Next Scheduled Review	<Date> (review cycle: <Number> months)
Document Owner	<Role: e.g., VP Total Rewards>
Policy Sponsor	<Role: e.g., Chief Human Resources Officer>
Approving Body	<Board of Directors Compensation Committee>
Applies To	Executives at or above <Job Level Band> across <Country/Region(s)>
Confidentiality	Internal Use Only

Purpose and Objectives

Define how <Company Name> compensates executives to drive long-term value creation, attract and retain critical leadership talent, and align pay with sustainable performance and shareholder interests.
Provide a consistent framework for setting executive pay levels, designing incentive plans, and administering awards across <Countries/Regions> while allowing for local regulatory compliance and market differences.
Establish governance, roles, and processes to ensure executive pay decisions are fair, competitive, risk-aware, fiscally responsible, and clearly communicated to stakeholders.
Support a culture of accountability, ethical conduct, and inclusive leadership by reinforcing measurable outcomes, prudent risk-taking, and equitable practices.

Scope and Applicability

In Scope

Base salary, annual cash incentives, and long-term incentives for executives at or above <Job Level Band> (e.g., CEO, Named Executive Officers, Business Unit Presidents, and Functional Leaders).
Executive-specific benefits, perquisites, severance, and change-in-control provisions.
Stock ownership guidelines, anti-hedging and anti-pledging expectations, clawback and malus provisions, and post-employment restrictions related to compensation.
Global principles; country-specific addenda may supplement this philosophy to reflect local law and practice.

Out of Scope

Non-executive total rewards programs for employees below <Job Level Band>.
Board of Directors compensation (governed by a separate policy).
Sales incentive plans, commission plans, and spot awards not designated for executives.

Applicability

Applies to executives employed by <Company Name> and its subsidiaries in <Country/Region(s)>, subject to local legal and tax requirements.
Where local law conflicts with this philosophy, local law prevails; exceptions must be documented and approved under the Review and Approval Process.

Guiding Principles

Pay for Performance: A significant portion of executive pay is variable and aligned to multi-year outcomes on strategy, financial health, and long-term value creation.
Market Competitiveness: Target compensation opportunities are positioned relative to relevant talent markets using reliable data and defined peer groups.
Shareholder and Stakeholder Alignment: Incentive measures balance growth, profitability, capital efficiency, risk, and sustainable business practices (including people, customers, and environment).
Internal Equity and Role Differentiation: Pay reflects role scope, impact, and sustained performance while maintaining equitable treatment across comparable roles and demographics.
Simplicity and Line of Sight: Programs are understandable, focused, and support clear goal setting; participants can influence outcomes through their decisions and leadership.
Affordability and Efficiency: Pay programs are designed within budgetary constraints, mindful of dilution, and responsible use of shares and cash.
Risk Management: Incentive structures and governance discourage excessive risk-taking and promote compliance with applicable policies and laws.
Transparency and Ethics: Discretion is limited and documented; plan design and outcomes are communicated transparently, respecting confidentiality requirements.
Diversity, Equity, and Inclusion: Pay practices are reviewed periodically for adverse impact; findings are addressed with corrective actions where appropriate.
Compliance and Governance: Programs adhere to securities, tax, labor, and listing requirements in relevant jurisdictions.

Compensation Philosophy Overview

Market Positioning

Total direct compensation opportunities (base salary, annual incentive target, and long-term incentives at target) are generally positioned at <Percentile> of the market (e.g., median or P50), with flexibility to position from <Percentile> to <Percentile> based on experience, sustained performance, and criticality of the role.
Variability in realized pay reflects performance relative to goals and market outcomes. Realized pay may range from approximately <Percentage> to <Percentage> of target depending on business results and share price performance.
Market competitiveness is assessed using calibrated peer groups and survey data, size-adjusted by revenue, market capitalization, headcount, and complexity indicators.

Target Pay Mix by Role

The pay mix emphasizes variable compensation and long-term equity as roles increase in scope and strategic impact.
Typical market norms for CEOs commonly allocate a majority of target pay to long-term incentives (e.g., 60 percent to 75 percent), with lesser emphasis for other executives. <Company Name> will set company-specific targets as shown below.

Role	Base Salary %	Annual Incentive Target %	Long-Term Incentive Target %	Performance-Based Equity % of LTI	Time-Based Equity % of LTI
CEO	<Percentage>	<Percentage>	<Percentage>	<Percentage>	<Percentage>
Other NEOs	<Percentage>	<Percentage>	<Percentage>	<Percentage>	<Percentage>
Senior Vice Presidents	<Percentage>	<Percentage>	<Percentage>	<Percentage>	<Percentage>
Vice Presidents	<Percentage>	<Percentage>	<Percentage>	<Percentage>	<Percentage>

Illustrative ranges for context only: CEOs often align around 10 percent to 20 percent base salary, 15 percent to 25 percent annual incentive, and 55 percent to 75 percent long-term incentives; other executives typically follow proportionally lower equity weightings. Company-specific targets should be set with market data and governance approval.

Compensation Vehicles

Base Salary: Fixed cash to reflect role scope, experience, and sustained performance; reviewed annually.
Annual Incentive (Short-Term Incentive, STI): Variable cash contingent on annual financial, operational, strategic, and ESG outcomes.
Long-Term Incentive (LTI): Equity-based awards that align executives with long-term value creation and shareholder experience; typically delivered as a mix of performance-based and time-based vehicles.
Benefits and Perquisites: Limited, market-aligned executive benefits that support health, security, mobility, and business effectiveness.
Severance and Change-in-Control: Market-aligned protections to support objective decision-making, subject to double-trigger vesting and mitigation obligations where applicable.

Market Benchmarking and Peer Group Methodology

Market Data Sources

Primary: Reputable executive compensation surveys from <Vendor Name>, <Vendor Name>, and <Vendor Name> for relevant industries and geographies.
Secondary: Public filings and disclosures for a custom peer group of <Number> to <Number> companies approved by the Compensation Committee.
Data Aging: Market data is aged to the midpoint of the compensation year using an annual movement factor of <Percentage>.

Peer Group Construction

Criteria include industry relevance, revenue of approximately <Amount> to <Amount>, market capitalization of <Amount> to <Amount>, operating complexity, and global footprint.
The peer group is reviewed at least annually, with additions or removals based on changes in company size, strategy, or structure.
When peer data is insufficient, regression analysis or size adjustments are applied to survey data to calibrate to <Company Name> scale.

Geographic and Currency Considerations

Compensation comparisons consider local talent markets and cost-of-labor differentials across <Country/Region(s)>.
Foreign exchange rates are applied using a rolling average or spot rate as of <Date>; methodology is documented and consistent.

Base Salary Administration

Base salaries are set with reference to market median for comparable roles, individual experience, sustained performance, internal equity, and affordability.
Annual merit increases are guided by budget pools of approximately <Percentage> to <Percentage> of base payroll, differentiated by performance ratings.
Off-cycle adjustments may occur for promotions, significant market shifts, or expanded scope with appropriate approvals.

Annual Incentive (Short-Term Incentive, STI)

Eligibility

Executives at or above <Job Level Band> are eligible for the STI Plan; specific eligibility and target opportunities are defined in annual plan documents approved by the Compensation Committee.

Target Opportunities

Role	STI Target as % of Base Salary	Threshold Payout	Maximum Payout
CEO	<Percentage>	<Percentage> of target at threshold performance	<Percentage> of target at maximum performance
Other NEOs	<Percentage>	<Percentage> of target at threshold performance	<Percentage> of target at maximum performance
SVP	<Percentage>	<Percentage> of target at threshold performance	<Percentage> of target at maximum performance

Performance Measures and Weighting

Financial: Revenue growth, operating income, EBITDA, EPS, cash flow, or other measures aligned to the annual operating plan (combined weight typically <Percentage> to <Percentage>).
Strategic/Operational: Customer outcomes, product milestones, safety, quality, or key transformation initiatives (combined weight typically <Percentage> to <Percentage>).
ESG and People: Engagement, inclusion metrics, leadership effectiveness, talent and succession health, or climate-related milestones (combined weight typically <Percentage> to <Percentage>).
Measures are selected annually to reflect priorities and line of sight; at least <Number> measures must be objective and quantifiable.

Goal Setting and Calibration

Annual performance curves define threshold, target, and maximum outcomes for each measure, with payout slopes aligned to risk and difficulty.
Threshold is typically set at approximately <Percentage> to <Percentage> of target performance; maximum at approximately <Percentage> to <Percentage> of target performance.
Aggregate STI funding is capped at <Percentage> of target; measure-level caps may also apply.

Individual Modifiers and Discretion

Individual performance modifiers may range from <Percentage> to <Percentage> based on leadership behaviors and strategic impact, subject to plan funding.
Committee discretion is used sparingly to address externalities, major unforeseen events, or to correct formulaic outcomes inconsistent with performance. All discretion is documented, rationale-based, and within plan caps.

Eligibility Events and Proration

New hires and promotions: Prorated based on time in role and effective date; sign-on incentives offset plan awards as applicable.
Terminations: For voluntary resignations and terminations for cause, no STI payout unless required by local law. For retirement, death, disability, or qualified layoffs, pro rata payout may apply subject to plan provisions.
Leaves of absence: Proration aligns with local policies and legal requirements.

Long-Term Incentive (LTI)

Vehicles and Mix

LTI is delivered through a mix of performance share units (PSUs), restricted share units (RSUs), and stock options or stock appreciation rights (if applicable).
Illustrative mix for context: PSUs <Percentage>, RSUs <Percentage>, Options <Percentage>; company targets set annually and approved by the Compensation Committee.

Grant Sizing and Timing

Grant values are set as a percentage of base salary or as fixed-value targets by role, calibrated to market and affordability.
The target value is converted to a number of shares using a <Number>-day average closing price or other approved methodology to limit grant-date volatility.
Regular annual grants occur on or around <Date> following earnings release and within open trading windows, subject to insider trading and blackout restrictions.

Vesting and Performance Periods

PSUs: Three-year performance periods with cliff vesting at the end of the period; vesting range typically <Percentage> to <Percentage> of target based on performance.
RSUs: Time-based vesting over <Number> years in equal annual installments or a cliff after <Number> years.
Options: Vesting over <Number> years; strike price equals fair market value on grant date. No repricing or cash buyouts without shareholder approval.

Performance Metrics for PSUs

Relative total shareholder return (TSR) vs. peer index with a threshold at <Percentile>, target at <Percentile>, and maximum at <Percentile>.
Absolute financial performance such as cumulative EBITDA, revenue growth, or return on invested capital (ROIC).
Multi-metric scorecards balance growth, profitability, and capital efficiency; weights are set annually (e.g., TSR <Percentage>, ROIC <Percentage>, revenue growth <Percentage>).

Dividends, Dividend Equivalents, and Adjustments

Dividend equivalents on unvested RSUs and PSUs accrue in cash or shares and are payable only upon vesting; no payments on unearned or forfeited awards.
Capital structure adjustments follow plan terms to maintain economic equivalence (e.g., stock splits).

Share Usage, Dilution, and Burn Rate

Annual burn rate targets not to exceed <Percentage> of weighted average common shares outstanding, with a rolling three-year average of <Percentage>.
Overhang monitored to remain below <Percentage> absent shareholder-approved exceptions.

Termination and Change-in-Control Treatment

Standard termination provisions: Unvested awards are forfeited on voluntary termination or termination for cause. Retirement, death, or disability may result in prorated or continued vesting per plan.
Change-in-control: Double-trigger vesting applies (change-in-control plus qualifying termination). Performance awards vest based on actual performance to the transaction date or target if not measurable, unless otherwise required by local law.

Stock Ownership Guidelines

CEO: Maintain ownership of shares with a value equal to <Number>x base salary.
Other NEOs: Maintain ownership equal to <Number>x base salary.
Other Executives: Maintain ownership equal to <Number>x base salary.
Retention Requirement: Until guidelines are met, retain <Percentage> of net after-tax shares from option exercises and stock vesting.
Compliance Measurement: Assessed annually using a trailing <Number>-day average share price; temporary non-compliance due to market movement does not trigger a breach.
Exceptions: Approved by the Compensation Committee for hardship, legal, or regulatory reasons.

Prohibited Transactions and Holding Policies

Anti-hedging: Executives may not enter into hedging or derivative transactions that offset or reduce the risk of owning <Company Name> securities.
Anti-pledging: Executives may not pledge <Company Name> securities as collateral for loans without prior Committee approval.
Post-vest Holding: For specified roles, a minimum <Number>-year post-vest holding period applies to <Percentage> of net after-tax shares.

Clawback and Malus

Clawback Policy: Incentive compensation may be recouped for a period of up to <Number> years following payment or vesting in cases of financial restatement, material misconduct, violation of company policy, or actions causing significant reputational or financial harm.
Malus: Unvested awards may be reduced or forfeited under the circumstances above prior to settlement.
Administration: The Compensation Committee determines application, amounts, and methods of recovery, in consultation with Legal and Finance, and subject to securities listing standards in <Country>.

Executive Benefits and Perquisites

Limited and market-aligned to support health, security, and mobility (e.g., supplemental disability, life insurance, executive physical, relocation, tax preparation for expatriates).
Perquisites are minimized, fully disclosed as required, and approved annually. Typical annual perquisite allowances may not exceed <Amount> absent Committee approval.

Employment Agreements, Severance, and Change-in-Control Protections

Employment agreements may be used sparingly to address critical roles or complex jurisdictions, with terms aligned to this philosophy.
Severance Guidelines:
- CEO: Up to <Number> months of base salary and target bonus; continuation of benefits for <Number> months; outplacement up to <Amount>.
- Other Executives: Up to <Number> months of base salary and a pro rata bonus; benefits continuation for <Number> months.
Change-in-Control: Double-trigger only; no excise tax gross-ups. Equity vesting treatment aligned with plan rules and market norms.
Restrictive Covenants: Non-compete, non-solicitation, and confidentiality provisions appropriate to role and compliant with local law; violations may result in forfeiture or clawback.

Hiring, Promotions, and Special Awards

Offers reflect market positioning, internal equity, and candidate experience; sign-on bonuses or new-hire equity may be used to replace forfeited compensation with appropriate clawback (e.g., 12–24 months).
Promotional increases consider expanded scope, performance, and market data; adjustments are timed to annual cycles unless business need dictates otherwise.
Special recognition or retention awards require demonstrated business need, clear performance or retention rationale, and Committee approval if outside established guidelines.

Risk Management and Pay Equity

Annual risk review assesses incentive plan leverage, goal rigor, metric balance, and potential for unintended risk-taking. Corrective design changes are implemented as needed.
Scenario analysis and back-testing evaluate potential payouts across economic cycles and strategic outcomes.
Pay equity analyses are conducted at least annually across comparable roles and demographics within executives; any identified gaps not explained by legitimate factors are addressed with action plans.

Roles and Responsibilities

Board of Directors and Compensation Committee

Approves this philosophy, peer group, incentive plans, equity plans, and all CEO and NEO compensation decisions.
Reviews pay versus performance, risk assessments, dilution, and compliance with listing standards and regulations.
Oversees clawback enforcement, stock ownership compliance, and use of discretion.

Chief Executive Officer

Recommends compensation for executive team members (excluding CEO), informed by market data, performance, and succession considerations.
Sets and assesses individual objectives for direct reports in collaboration with the Committee.

Chief Human Resources Officer and Total Rewards

Designs programs, develops plan documentation, calibrates market data, and ensures operational excellence and compliance.
Partners with Finance and Legal to model costs, assess risks, and manage governance.
Coordinates external advisors, ensures data integrity, and reports outcomes to the Committee.

Finance

Validates performance calculations, accruals, financial metrics, and budget impacts.
Supports modeling of share usage, dilution, and financial statement effects.

Legal and Compliance

Ensures alignment with securities, tax, and labor laws in <Country/Region(s)>; monitors regulatory changes.
Administers insider trading policies, disclosure controls, and documentation standards.

Internal Audit

Periodically tests plan administration, calculations, and controls; reports findings and remediation.

Implementation Guidelines

Annual Cycle Overview

Confirm peer group, market data sources, and size adjustments
Propose and approve target pay mix and incentive target opportunities by role
Set annual STI metrics, weights, and goals; draft LTI performance measures and grant values
Obtain Compensation Committee approval of plan designs, targets, and budgets
Communicate plan details to participants; update plan documents and grant agreements
Administer midyear health checks; track performance and adjust forecasts as needed
Calculate year-end results; conduct risk and discretion reviews; prepare payout recommendations
Obtain Committee approval for payouts and new-year targets; disclose as required
Conduct post-cycle audits and lessons-learned to inform next cycle

Controls and Documentation

Maintain signed plan documents, grant agreements, and award schedules for each participant.
Document all uses of discretion, including rationale, alternatives considered, and approval evidence.
Implement segregation of duties in calculations, reviews, and approvals; maintain change logs.

Vendor Management

Select and review vendors (e.g., administrators, tax advisors, valuation firms) using due diligence on security, service levels, and cost.
Define roles and responsibilities through statements of work; review performance annually.

Performance Goal Setting and Evaluation

Principles for Goal Setting

Goals should align to the Board-approved operating plan and long-term strategy, with objective thresholds, targets, and maximums.
Use multi-year context and external benchmarks to set rigor consistent with expected macro conditions.
Calibrate difficulty and payout leverage to discourage excessive risk while rewarding outperformance.

Evaluation Methodology

Financial metrics are measured on a GAAP or non-GAAP basis as defined in plan documents; any adjustments are predefined and consistently applied.
Strategic and ESG measures are evidenced with objective milestones, third-party validation where feasible, and clear completion criteria.
Final payouts reflect formulaic results subject to limited risk- and quality-of-earnings adjustments approved by the Committee.

Compliance and Regulatory Considerations

Securities laws and listing standards in <Country> and applicable local jurisdictions, including disclosure and shareholder approval requirements.
Tax treatment and reporting in <Country/Region(s)>, including withholding on equity, mobile employee tax issues, and potential limitations on deductibility.
Labor and employment regulations, including rules on incentive eligibility, deferral requirements, and restrictive covenants.
Data privacy requirements for handling personal data of executives across <Country/Region(s)>.

Review and Approval Process

Review Cadence

This philosophy is reviewed at least every <Number> months or upon material changes in business strategy, market conditions, or regulation.
Interim updates may be proposed by Total Rewards and Legal when required.

Change Approval Steps

Total Rewards drafts proposed changes with rationale, market references, and impact analysis
Legal reviews for compliance and disclosure considerations
Finance evaluates cost, dilution, and accounting impacts
Executive Management reviews and endorses recommendations
Compensation Committee reviews, requests revisions, and approves final changes
Implement changes, update documents, and communicate to stakeholders
Record approvals and archive prior versions for audit

Exceptions

Exceptions to this philosophy require a documented business rationale and must be approved in advance by the Compensation Committee or its delegate.
Exceptions are time-bound and will be revisited at the next review cycle.

Document Control

Attribute	Detail
Document Title	Executive Compensation Philosophy - <Company Name>
Version	<Version Number>
Effective Date	<Date>
Next Review	<Date> (or earlier if business or regulatory changes occur)
Owner	<Role>
Sponsor	<Role>
Approvals	<Approval Body and Date(s)>

Glossary of Terms

Annual Incentive (STI): Variable cash compensation tied to one-year performance against defined metrics.
Clawback: Recoupment of compensation paid or vested based on specified triggers such as restatement or misconduct.
Committee: The Compensation Committee of the Board of Directors or equivalent governing body.
Double-Trigger: Vesting that requires both a change-in-control event and a qualifying termination.
Grant Date Fair Value: Accounting value of equity awards on the grant date using <Valuation Method>.
LTI (Long-Term Incentive): Equity-based compensation aligned to multi-year performance and shareholder outcomes.
Malus: Reduction or forfeiture of unvested awards due to specified events before vesting.
NEO (Named Executive Officer): Executives identified for disclosure under applicable regulations in <Country>.
Overhang: Total outstanding and available equity awards as a percentage of common shares outstanding.
Pay Mix: Relative weighting of base salary, annual incentive, and long-term incentives at target.
Peer Group: Set of companies used as reference for market competitiveness and performance comparison.
Performance Share Unit (PSU): Equity award that vests based on achievement of predefined performance metrics over a multi-year period.
Restricted Share Unit (RSU): Time-based equity award that vests over a defined period.
Stock Appreciation Right (SAR): Right to receive the appreciation in value of a specified number of shares.
Target Opportunity: The intended compensation value or percentage upon achievement of defined target performance.
Total Direct Compensation (TDC): Sum of base salary, target annual incentive, and target long-term incentives.
Total Shareholder Return (TSR): Stock price appreciation plus dividends over a period, expressed as a percentage.
Vesting: The process by which an award becomes earned and payable.

Communication Section

How <Company Name> Pays and Rewards Executives: A Message to Employees and Managers

At <Company Name>, our executive compensation is designed to support the company’s long-term success and the interests of our employees, customers, and shareholders. We want all employees and managers to understand how we pay our executives and why that approach helps us achieve our mission.

First, we believe in pay for performance. A meaningful portion of executive pay is at risk and depends on results. Each year, our Board’s Compensation Committee sets goals that align with our business plan. When performance meets expectations, executives earn their target incentive; if we outperform, incentives can be higher within capped limits; if we fall short, incentives can be reduced or not paid. This connection ensures leaders are rewarded for the results that matter most to our company and to you.

Second, we focus on the long term. Executives receive a significant share of their compensation in company equity that vests over multiple years. This aligns leadership with the experience of our long-term stakeholders. When our company’s value grows over time, executives and shareholders share in that success. When value declines, that impact is reflected in realized pay.

Third, we commit to fairness and market competitiveness. We compare our programs to those of similar companies in our industry and regions, and we review pay decisions for internal equity. Our goal is to offer competitive opportunities that attract and retain leaders with the skills to guide <Company Name> through changing markets, while ensuring stewardship of company resources.

We also hold leaders to high standards. Executives are expected to own and maintain a meaningful amount of <Company Name> stock, refrain from hedging or pledging company shares without approval, and comply with our code of conduct and all company policies. We maintain a clawback policy that allows us to recover incentive pay in the event of significant misconduct or a financial restatement, in line with applicable rules in <Country>.

Here is how the major pieces work together:

Base salary provides a stable foundation for the role and reflects experience and sustained performance.
The annual incentive rewards results over a single year, such as growth, profitability, customer outcomes, and progress on key strategic initiatives.
Long-term incentives align executives with multiyear value creation through equity awards, typically split between awards that vest only if defined performance goals are met and awards that vest over time.

We keep our programs straightforward and transparent. Each year, we share high-level information with employees about our goals and results, subject to confidentiality and regulatory requirements. We believe this approach reinforces a culture of accountability and teamwork.

If you have questions about how these programs work or how they relate to broader rewards at <Company Name>, please reach out to <HR Contact/Total Rewards>. We value your feedback and remain committed to compensation practices that support our strategy, reflect our values, and help all of us grow together.

Note to employees and managers: This section is a plain-language summary. Full details are contained in formal plan documents and policies, which govern in the event of any differences.

Document Information:

Document Type: Executive Compensation Philosophy
Category: Foundational & Strategic
Generated: August 22, 2025
Status: Sample Template
Next Review: <Insert Review Date>

Usage Instructions:

Replace all text in angle brackets < > with your company-specific information
Review all sections for applicability to your organization
Customize content to reflect your company's policies and local regulations
Have legal and HR leadership review before implementation
Update document header with your company's version control information
At bottom of the document you find a short example on how the content could be communicated to end-users, for instance employees.

This sample document is provided for reference only and should be customized to meet your organization's specific needs and local legal requirements.