Final answer:
Executive compensation should be structured to reward effort and cover costs, with long-term performance incentives. The board of directors, auditing firms, and outside investors provide crucial oversight. Compensation packages should include clawback provisions to protect the company from liabilities.
Step-by-step explanation:
A company should structure its executive compensation to maximize the executive's job performance while also protecting the company from liabilities should the executive perform poorly or act unethically. This involves having a mix of incentives that reward effort and compensate for costs incurred. It is also prudent to tie a portion of compensation to long-term performance, aligning the interests of executives with those of the shareholders. Furthermore, including clauses in the compensation contract that allow for recovery in case of financial discrepancies can limit company liabilities. The board of directors plays a crucial role in the oversight of this process, accompanied by checks and balances through auditing firms and the influence of outside investors.
Compensation could include a base salary, bonuses, stock options, and other benefits. Stock options and bonuses can be structured to vest over time or to be tied to specific performance milestones, ensuring that executives have an ongoing incentive to perform well over the long term. The company should also have policies for clawbacks in case of ethical violations or misrepresentations which can help reduce the company's liabilities.