Corporate Governance : A Framework Of Processes And Practices

This paper looks at the opinions and issues involved within executive compensation. This is important because executive compensation is such an integral part of a company or organization’s functions. Executives are the ones tasked with making the decisions within an organization, and their pay can sometimes be linked to how well or how not well their decisions pan out. To look at these opinions, research and high quality analyses from various data sources were used. Some of these sources included the in-class textbook, “Compensation” by George Milkovich, Jerry Newman, and Barry Gerhart. While other sources used, included peer reviewed journals as preferred by the professor. All of these sources were used to show the relevance between executive compensation and compensation management as an entirety. The results are across the board; there are issues and opinions that clearly contradict each other and individuals take many different stances on the topic of executive compensation. The conclusion is that this will continue to be an ongoing and sensitive topic to discuss within organization structures and plenty more research and data will arise for individuals to gain further and deeper understanding of the complex nature of executive compensation.

However, there have been many cases where the CEO and executive officers receive outrageous compensation even when the companies suffer. Overall, there is a wide disconnect between the incentive of the executives and the financial performance of their company, which needs to be fixed. By passing regulations and rules such as the Dodd-Frank Act, there is hope of shedding light on the connection between the company’s performance and the executives pay. Although it will provide a clear insight, it will not be able to set a strict regulated compensation or define what an executive should earn. Instead regulations will allow for more transparency for the shareholders regarding corporate governance issues such as executive pay. Along with that, it will force companies to take accountability for their actions. If they do poorly, then the executives should be paid less, and vice versa. Overall, there should be a direct alignment between executive pay and the company’s

Kluyver, C. (2013). A primer on corporate governance (2nd ed.). New York, NY: Business Expert Press.

Generally, under-performing companies are the prime targets of hostile takeovers, so it makes sense that aligning shareholder and executive goals is a major way to avoid that. One popular way of aligning these goals is through the use of elaborate, structured compensation plans for executives which directly tie an executive’s salary to the performance of the company, usually and specifically its stock price (Megginson & Smart, 2009). These compensation plans have become the norm for American corporations, and their effectiveness in solving the agency problem is debatable. On one hand, it should drive an executive to strive to maximize the shareholder wealth, and it also helps companies to attract and retain the best available managers. On the other hand, it serves to sometimes wildly inflate the compensation paid to these executives, either by corporations trying to stay competitive for the best talent, or through easily achievable goals and uncapped maximums. The structured plans, if done correctly, are an effective way to help insure the goal of wealth maximization, but they are also by definition agency costs. Hence, agency problems are inherent to our American corporate system.

Directors have awarded compensation packages that go well beyond what is required to attract and hold on to executives and have rewarded even poorly performing executives. These executive pay excesses come at the expense of shareholders as well as the company and its employees. Furthermore, a poorly designed executive compensation package can reward decisions that are not in the long-term interests of a company. Excessive CEO pay is essentially a corporate governance problem. When CEOs have too much power in the boardroom, they are able to extract what economists' call "economic rents" from shareholders (Economic rent is distinct from economic profit, which is the difference between a firm's revenues and the opportunity cost of its inputs). The board of directors is supposed to protect shareholder interests and minimize these costs. At approximately two-thirds of US companies, the CEO sits as the board's chair. When one single person serves as both chair and CEO, it is impossible to objectively monitor and evaluate his or her own performance.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the right to the shareholders to be able to approve the executive compensation for a company, in this case the Kroger Corporation. However, this is only on an advisory basis which is nonbinding. Meaning, if Kroger so chooses, it may not follow the executive compensation decisions made by the shareholders. Ultimately, the power to set the executive compensation is given to the Compensation Committee. Kroger wishes to retain the best management possible, and it does so through competitive pay. Kroger believes that a significant amount of the pay should be based on performance and the proportion of responsibility held by the executive. They also believe compensation should

This was a very interesting article, in my opinion it brings to mind the derived phrase, which came first the chicken or the egg. Meaning, is corporate governance an attempt to control the results of unethical practices of corporations or is it meant to deter them. In reading this article, it is clear that certain corporations practiced unethical business behaviors for self-interest, but the questions this author have are: 1. Should corporate governance be regulated by the legislature as well as the organization and to what degree, 2. Is corporate governance, there to protect the shareholder or the stakeholder, 3. How effective is corporate governance on a global level. The need for a governance system is based on the assumption that the separation between the owners of a company and its management provides self-interest executives the opportunity to take actions that benefit themselves, with the cost of these actions borne by the owners (Larcker & Tayan, 2008).

Executive compensation is defined as the reward given to corporate executive employees for their job performance. Corporate executive employees are the higher echelon company employees and may include the chief financial officers, chief executive officer, upper level managers and the company president. Executive compensation mostly consists of base salary, bonuses, long-term incentives benefits, and prerequisites whose main purpose is to motivate the executives to steer

The compensation was traditionally a method to align the goals of executives and stakeholders. Although in theory it would encourage desirable conduct, in real life we saw examples when executives took advantage of their governing position and participate in fraudulent activity to gain money at the expense of the shareholders. I will suggest the potential steps that could be made to prevent similar situation from happening and rebuild public between executive, shareholders, and stakeholders.

The relationship between executive compensation and firm performance is a topic of major concern amongst academics, professionals, and regulators. In an effort to identify a relationship between executive pay and firm performance, scholars have conducted research since 1925 and have established that compensation packages are the primary means of incentivizing managers to achieve certain financial targets or goals. These goals include certain performance measures that can be broken down into three main categories: accounting based, measures, market based measures, and non-financial based measures. Additionally, compensation packages have become an increasingly researched topic due to the surge in levels of compensation in

Executive pay packages differs widely from standard salary or hourly employee compensation. Most executives are paid through contingent compensation and structured with rewards. They utilize six compensation components; Base Salary, Short-Term incentive, Long-Term Incentive, Employee Benefits, Perquisites, Severance/Change-in-Control Payments. All six of these components are structured into a pay plan by a corporation or institution’s Compensation Committee. This committee is made up of directors who are handpicked by the Board of Directors. The committee acts independently and works based on a compensation consultant who reviews the recommendations to help manage themselves.

In the view of many these increases of there pay were not justified , and was a contrast to shareholders investment money going down in value due to decrease in share prices of the company. What this showed was in some instances the objective of the executive’s were given priority of the shareholder which ultimately led to the shareholders losing out , and so introducing such power allowed shareholders to allocate pay rewards more closely aligned with corporate objectives and performance. These reasons overall echo the idea that it allows shareholders to have a greater say on how the company should be run by controlling the pay of executives as before this shareholders would be very limited in the say of pay with the only option being to replace committee members and directors. This in itself would not be a likely option as it could become costly in the long run and create uncertainty which may have more negative impacts.

In the ideal corporate governance system, the definition of a good senior management executive is one that takes into consideration shareholders’ needs above his own. They work diligently to run the corporation both on a day to day basis and to ensure its success in the long run. However, there are often many incentives that disalign the interests between the shareholders (principal) and executives

Executive compensation has come under increasing scrutiny in recent literature in the wake of the growing publicity surrounding managerial failures and executive self-interest. Financial experts have long been examining the problem of aligning the performance of executives with their salaries and benefits. Public discontent with the visible top-heaviness of the compensation structure has brought this issue into the spotlight throughout the business world. Experts point to the flaws of traditional payment schemes and offer a number of different solutions. Shareholder value and the success of the firm can be significantly affected by executive performance. Hence, understanding

Executive compensation is a form of financial compensation that is determined by the compensation committee. The compensation committee sets the package so it correlates with factors that have an effect on the company. According to an economic theory known as the “Optimal Contracting Theory.”, top executives and shareholders negotiate through the board of directors to maximize their respective interests (Managerial). A principal/agent problem arises because shareholders need to get the