Contemporary Issues Of Finance And Its Impact On The Growth Of Executive Compensation

CEO compensation has been a heated debate for many years recently, and it can be argued

Executive compensation has been at the forefront of discussion for a long period of time. Analyzed by academics, highlighted by the media, questioned by Congress, and scrutinized by the general public, the topic warrants much debate. In the 1990’s, total executive compensation increased substantially as companies began offering stock option programs; CEO’s of S&P 500 saw an average increase of 150%.

Compensation systems can take on many forms, all of which have positives and negatives related to it. However, certain components are noted to be determinants of solid compensation plans. One agreement of a solid compensation system is the use of incentives. “Clearly a successful companies set objectives that will provide incentives to increase profitability” (Needles & Powers, 2011). Incentive bonuses should be measures that the company finds important to long-term growth. According to Needles & Powers (2011) the most successful companies long term focused on profitability measures. For large for-profit firms, compensation programs should offer stock options. The interweaving between the market value of a company’s stock and company’s performance both motivate and increase compensation to employees As the market value of the stock goes up, the difference between the option price and the market price grows, which increases the amount of compensation” (Needles & Powers, 2011). Conclusively, a compensation plan should serve all stakeholders, be simple, group employees properly, reflect company culture and values, and be flexible (Davis & Hardy, 1999; The Basics of a Compensation Program).

7. Option compensation will continue to be a critical component of compensation for executives as it simplistically aligns the executives’ pay to shareholder value in its simplest sense. I don’t believe that options compensation is the primary driver of behavior when things shift from the legal to the illegal. As with most senior executives in industry, ego is a huge driver in individual behavior. Compensation is important, but the recognition of your performance is sometimes even more important. We have created a performance driven culture without the necessary control framework for people to operate within. One minute you are doing a great job, the next you have crossed an imaginary line. The frameworks don’t do enough to quantify behavior as legal and illegal leaving inconsistent rules for organizations to operate within. How does Enron compare to the subprime mortgage debacle, or to Steve Jobs backdating options. There remains too much room for interpretation.

Executive Compensation has many different definitions. For simplicity of this paper, the definition used will be that of the Center on Executive Compensation which is defined as a “broad term for the financial

Stock options are often used to increase motivation for the high level managers and executives to improve a company's growth. There are some problems with stock options though. One of the roots of these problems is a practice of backdating option grants. This is done to present a stock price at a lower level than it actually was on a date of granting. The article "On the Use (and Abuse) of Stock Option Grants" has some interesting information about how backdating practices led to the interest explosion back in 2006. SEC was and is working hard to fix the problem. The companies must expense stock options at the "fair" value and there are additional disclosures required. It doesn't fix the problem altogether though. There are still many loopholes

It was reasonable for a CEO’s compensation to increase as the company expanded and became a larger entity, and the newly-granted shares and increasing stock options further aligned the CEO’s personal interests with those of the company and shareholders. In this sense, the second compensation package was also well-structured and not excessive. Seeing Sunbeam’s revenue rising and stock price climbing steeply upwards, Sunbeam’s shareholders and directors were fully convinced by Dunlap’s leadership, so they might perceive the increase in compensation amount necessary to retain and better motivate Dunlap to enhance the company’s value. Nonetheless, they neglected the fact that the increased portion of the equity-based compensation also further motivated the CEO’s dangerous behaviors pertaining to improper earnings management.

The goal of compensation in our case, is to attract and encourage executives to diligently pursue the interest of the shareholders that have a stake within the firm. Richard Long (2010) discuses the steps of formulating a strategic compensation plan which involves; the defining the required behavior, role of compensation, determine the compensation mix, compensation level, and evaluating the proposed strategy. If we want to attract the best and most talented individual to work as the executive of a firm, the package must be attractive enough to pull the individual already making millions to work at another firm. Some typical compensation packages for executive pays include; cash/base salaries, bonuses, stock options, and stock ownership (Richard, 2010). The executive compensation proposal from the board of directors / shareholders consist of mainly stock options, restricted stock, and long term- contracts and retirement plans, which shareholders use to motivate the CEO to maximize the firm value (Martin, 2006). Most of the wealth comes from the stock options, in which the CEO is more inclined to raise the firm’s stock value over time to produce better value for shareholders which in return, better compensation for the CEO. Martin (2006) also noted it is important the stock options are more for long term

The issue of chief executive officer compensation is the subject of dilemma in the United States. This dilemma often triggers questions as to who decides what compensation is rewarded, as well as how compensation is rewarded. The government strongly resents the current pay-ration between CEOs and the average salary of American citizens. Since the financial crisis, people have shown their displeasure with the hefty compensation chief executive officers receives. But when stunning management failures and unprecedented destruction of shareholder value are brought into the light, it becomes increasingly difficult to defend current executive remuneration policies with these economic underpinnings. For example, the “Occupy Wall Street” movement began in 2011 in protest of the increasing disparity of wealth among other reasons lying within corporate America. The peak of CEO compensation came in 2001, and it is still difficult to argue whether the financial crisis of 2008 or the change in compensation strategy has slightly stagnated the exponential growth the started in the mid 1970’s.

Subramaniam, 2001), what, exactly, is the problem with executive pay? Are CEO pay packages simply too grossly large on some absolute scale, driven by unfettered greed beyond the bounds of what is ethically reasonable? Or is the real problem the growing disparity between executive pay and the wages of entry-level workers? Alternatively, is there a problem with CEO pay from the standpoint of distributive justice, or fairness? Or is the problem simply that executive compensation does not work properly – that it does not provide the proper incentive alignment suggested by the underlying theory? I broadly explore these questions by examining

It is with this background of wide discrepancies in compensations between executives and other employees and the fact that executive receive huge compensation packages despite their performance that critics have raised the issue of equity and ethical concerns. The free market system has a culture of rewarding employees based on their ability, merit and performance but executive compensation defies this culture (Mullins, 2007). The equity issues are compounded considering that in countries such as America many workers earn in a year what there bosses earn in an evening (Mullins, 2007). Even among stock investors and anti-globalization campaigners, the issue of pay package is a shared concern with claims that executives pay is extremely high. Recent examples include Freddie Mac CEO, Richard Syron, who received $14.5 million in 2007 and where $2.2 million of this amount was a “performance bonus” (Encyclopedia of Management, 2009).

Given the effect a CEO can have on a company's success, we can understand why their compensation packages

I agree that for the companies or executive the advantages surpass the disadvantage on stock option compensation package grant tied to company performance, however for average or lower level employees who are in the mercy of the key executive’s business decisions. Employee stock option provide advantages to companies such as ability to attract highly motivated and entrepreneurial executives and the capacity to hire and fulfill incentive without draining earnings or company’s equity or spending cash. Obviously, employee stock option benefit companies at it provides tax benefit and no accounting cost, while encourages executives to act in shareholder’s interest and risk taking or aggressive business decision for substantial return and favorable stock price. However, the risk cause by executives manipulating stock price and making wrongful investment decision can’t be ignored as well, as executives could manipulate stock price through fraudulent earnings to deceive investors and the market, then when stock price is at peak, executives exercise their stocks option leaving the company stocks underwater, which I do think what happen with Cendant Corp.

s the overpayment of CEOs and the effects these high base salaries have on businesses. Understanding that well compensated CEOs are generally quite productive and well deserving; there are those that seem to drop the ball and the business suffers. CEOs are hired in with contractual compensation packages, which do not give stipulations to cover incidents such as decreases in stock value, company downsizing, or bankruptcy. Many argue that CEOs are not compensated enough for the pressures they endure, that they are generally they first to receive pay

The question of whether CEOs earn their pay has been created widely sound debates and attracted comprehensive attention from investors, employment economists, financial economists, as well as unfavorably criticized by the public at large (Conyon, 2006; Larker and Tayan, 2011). The debates on executive compensation in general, and on Chief Executive Officers (CEOs) compensation in particular have been passed for years and agglomerated a multitudinous amount of studies (Devers et al., 2007). Criticisms from the public and heated debates from the academics began from the 1990s when executive compensation soared higher than company profitability (Bedchuzck and Fried, 2004). This led the popular press to claim that executive compensation was not correlated to firm performance (Tosi et al., 2000). As a result, one of the most impetuous questions posed out that whether executive pay had been associated authentically with firm performance or not while the empirical executive remuneration studies revealed that firm performance hardly ever exceeded 50 percent in determining top executive compensation, and pay-for-performance sensitivity was so weak (Grabke-Rundell and Gomez-Mejia, 2002).