I. INTRODUCTION

Salary is the most basic part of the compensation package. It is normally fixed in amount, although it is variable in the sense that it can be renegotiated. That is, an individual can get raises for good performance or take a pay cut for poor performance. It provides riskless compensation to almost all employees, except for employees working solely on commission, and the occasional CEO (see Chapter 3) who elects not to take a salary. At a minimum, salary (along with the other parts of the compensation package) must be set to be competitive with the individual's other opportunities, that is, his or her opportunity cost. This is necessary to recruit new employees and retain those already employed by the corporation. Examples exist of executives leaving one corporation for another, for more lucrative opportunities, and of executive contracts being negotiated upward because of competing offers.

Although salary needs to be competitive, because it is only one component of the compensation package, it need not always be greater than the salaries offered by competitors for the executives' services. Consider the following example. Joseph Galli, Executive Vice President at Black & Decker, takes the position of President at Amazon.com. His salary declines from $475,000 at Black & Decker ^[1] to $200,000 at Amazon.com. ^[2] Why did he take the job? Amazon gave him a signing bonus of $7,900,000 payable over a 3-year period, and options to purchase almost 4,000,000 shares over a 20-year period. ^[3] The intrinsic...