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The System of Long-Term Incentives

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The bailout money was last resort for banking industries with which they could try to resurrect; it would be a faulty decision if organizations utilize this money to serve the top executives. Scholars recommended that provision of bonuses as a percentage of bank’ s profit would enhance banking operations as it ensured financial flexibility of banks. Melissa Murray, a spokeswoman for Wells Fargo suggested that it was good to adopt “ pay-for-performance” culture where executives are treated on the basis of their performance (Freifeld, 2009). As a response to all critics, long-term incentives system has been established.

Under this system, the total compensation of employees includes base pay, short-term incentives, and long-term incentives. Base pay constitutes the fixed salary given to an employee for the specified job. Similarly, short-term incentives include all types of annual incentives and ordinary commissions those earned by an employee. Coleman and Fortier (2002) opine that unlike the base pay and short-term incentives methods, the long-term incentives aim the “ improvement of overall performance of the organization by linking employees’ long-term rewards to the organization’ s long-term results” . It mainly includes stock options, performance units, and restricted stock.

The appropriate selection of long-term incentive programs assists the organization to meet its long-term objectives. In addition, the introduction of suitable long-term incentives system in banking industries will add value to the shareholders as well as banks’ customers. The major advantages of long-term incentives are described below. Berger and Berger (324) suggest that this programme facilitates the banks to share the success with its executives; and it would ensure the active employee participation as employees get the feeling that they are the valuable part of the organization.

Such a feeling will drive the executives to take all possible efforts in order to lift their firm to the top of the corporate world. Similarly, long-term incentives policies motivate executives to take certain levels of risks which would contribute to the rapid growth of banks.

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