3 - Valuing the package

Summary

Chapter 1 introduced the concept of the ‘number’ representing the value of an executive remuneration package. In determining this ‘number’, different valuation techniques and methodologies can be used. This chapter explores these different methods and the relative merits and shortcomings of each. In doing this it will become clear that these methods rely on various assumptions which may vary at any given time and in different situations. Whilst the ‘number’ is a practical and useful way of distilling all relevant information into a simple and easily understood reference point, the reality is that the best result is likely to be an acceptable range around the ‘number’.

Overview

The main purpose in determining a ‘number’ which represents the value of the package is to allow a comparison of the value of different arrangements. This may be to determine the value of the existing arrangements of a potential recruit or to ensure that a package is competitive relative to the rest of the market. It is important to be clear on the purpose as this may influence the methodological approach to be taken. As we will see, there are many ways of valuing different elements, some of which are highly complex, but when considering how to deal with some of these things there are some basic points to keep in mind.