According to business dictionary (2014), Corporate Governance means “the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company 's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community)”. Executive compensation contains the salary, bonuses, welfare, allowance and so on. It plays an important role in Corporate Governance. After reading some news about shareholders and executive compensation in BBC news and the times online. I have an understanding about shareholder and executive compensation. Whether shareholders should have a say on executive compensation is a controversial issue. Some people think shareholder’s concern about executive compensation may have a control of high pay in UK to some degree, while others hold an opposite opinion. They think shareholders should not have a say on executive compensation and only focus on their profit. They should give directors freedom to manage the firms by themselves. From my point of view, shareholders should have a say on executive compensation. It is beneficial for companies to grow with the control of shareholders. In this essay, I will assess the importance of shareholders on executive compensation, and some of my personal views and suggestions will be added as well.
With the help of shareholders, some companies pay executive more acceptable. Take BG group as an example, oil and gas giant BG
In “The Overpaid CEO” Susan Homberg and Mark Schmitt bring to attention how CEO pay in America is ridiculous in numbers as opposed to other parts of the world. Looking back, in the nineteen hundreds CEO pay was relativity average. As businesses and companies began to expand there was a demand for higher pay. Between 1978-2012 CEO pay increased by 875%! Many rules and regulations were put in to place to limit the pay of a CEO, such as the Securities Exchange Act that I will explain later on, regardless CEO pay kept getting higher and higher as many loopholes were found. Bonuses pay a large part in the salaries of CEOS’, as an effect CEOS’ tend to partake in risky behavior in order to score those big paychecks.
This paper will discuss the reasons why CEOs are not being overpaid. It will apply the utilitarian ethical principle to many a few aspects to CEO compensation and whether or not it is justifiable for such pay. The paper will look at whether or not their performance is justifiable for the pay because they play such a big role in the livelihood of the company along with the principle agency theory and how it is being addressed for the benefit of the shareholders and others involved with the company, the supply and demand of the CEOs, and the paper will describe the comparison of other professions to help link the idea of CEOs being fairly compensated.
Executive Compensation. I’m in agreement with Thomas Piketty that the one cause of rising inequality in the United States “the rise of supersalaries” for top executives (Piketty & Goldhammer, 2014, p. 298). The average American estimates CEO to worker pay ratio at about 30-to-1, which is more than 4 times what they believe to be ideal. The career review site Glassdoor reported from 2014 data that the average pay ratio of CEO to median worker was 204-to-1 and that at the top of the list, four CEOs earn more than 1,000 times the salary of their median worker with the very top pay ratio of 1,951-to-1. In some cases a CEO makes in one-hour what it takes the average employee six-months to earn. In comparison, the Washington Post reported for the
CEOs usually get paid a lot more than any of their employees and it is believed that the ratio between the CEOs salary and the average employee salary has continued to increase throughout the years (Mackey, 2014). The increase in the CEOs salary is mainly attributed to two factors: First, the required skills and the high responsibilities that are associated with this position. Second, the number of qualified people who could fill such a position is really limited (Executive Compensation, n.d.). This does explain the
The problem is why do CEO gets paid 354 times greater than average employee salary of the company
Take severance packages for example. When the average employee in no longer benefitting the company, chances are they will be let go. Besides a final paycheck for hours worked and the possibility of unemployment collection, they do not receive anything else from the company. When a CEO is no longer performing up to standards, they are forced to resign but walk away with much more than a final paycheck. Chuck Prince of Citigroup was shown the door after the company lost $64 billion in market value, yet he left with $68 million and a cash bonus of $12.5 million (Nickels, McHugh & McHugh, 2010). Not only are CEOs paid a substantial amount more for their work, they are paid a substantial amount more to leave the company all together. In 2009, President Obama and Congress put limits on executive compensation of firms receiving money under the federal government bailout programs. The payout to CEOs leaving their companies was limited to $500,000 but it wasn’t for all companies across the board. This new limit only applied to companies who had borrowed money from the government during periods of economic downfall and hadn’t yet paid it back. Despite the decrease in monetary payout, CEOs were still allowed a decent portion of restricted stock which amounted for a fairly large payout when the stock could be sold a few years down the line.
Federal governance in executive pay is essential to a stable and healthy economy. I offer that the issue of Federal governance in executive pay is bigger than equity in compensation. “Taxpayers and politicians and others disapprove of these levels of compensation precisely because the leaders of these firms, in the words of Treasury Department officials, nearly caused the financial system worldwide to collapse.”
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
I agree with the advisory votes provision of the Dodd-Frank Act, because it serves as a valuable means of gauging the pulse of the collective shareholders’ interests. Since executive compensation is an important tool intended to align the interests of both the corporation and the shareholders, a system of assessing the shareholders’ interests is necessary – without it, the shareholders’ interests are in many ways left to speculation. Given the varied geographical locations of the shareholders and the regulations governing their ability to interact with one another, the advisory votes mandate affords the shareholders a collective voice and provides the board of directors with valuable feedback.
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.
While these citizen protests and legislative actions could be an overreaction to a few isolated cases of executive compensation excess, the data suggests otherwise. According to the AFL-CIO (2013), executive pay has increased dramatically over the past several decades compared to worker compensation. In 1982, the pay ratio between executives and workers was 42:1, but by 2012 it had increased to 354:1. This 8.4-fold differential in compensation suggests that the productivity of executives has also increased 8.4-fold relative to productivity of workers. If executive pay is positively correlated with a firm's bottom line, then higher pay should predict success. Unfortunately, researchers have found the opposite to be true.
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.
One reason I can agree with this reasoning which happens if you compare the work of someone beneath an executive their pay grade is going to be significantly lower. If you compare the pay rate of a school teacher who has a major impact on lives daily to an executive they are getting paid way below standard. The average pay for an executive is $100,000 as to a teacher’s salary of $50,000 now you do the math on that one. I can clearly say in this event, I do believe that executives remain paid too much in comparison to a
As Murphy (1998) rightly points out, CEO compensation has become one of the most debated issues in the recent past. A lot of research in this field has been conducted to determine the relationship between CEO pay levels with the corporate performance, firm size, board vigilance, CEO’s human capital, tenure & age. But the results of these researches are not very hopeful and have yielded conflicting results. This review aims at understanding these relationships and also tries to provide an ethical perspective on CEO compensation.
This report explores the issue of the pay that top executives make, and the reasons why they do. It also suggests improvements that can be made to make the system better. High Pay Seems Small When Compared To Company Profits Many companies pull in profits that are extremely high. When an employee of such a companies salary is compared to the amount of profit that the company earns, it starts to seem reasonable. It only makes sense that if the employee is directly responsible for the success of their company, then they deserve to get their payback. It seems ironic, but many salaries even look small once compared with a companies profits. Top Executives Are Under A Lot Of Pressure Being the CEO of a