Executive Compensation and the Dramatic Increase in Corporate Accounting Scandals

969 Words Sep 24th, 2009 4 Pages
Executive Compensation and the Dramatic Increase in Corporate Accounting Scandals

According to one estimate, the total median CEO pay at the nation’s 350 largest publicly-owned firms grew from $2.7 million annually in 1995 to $6.8 million in 2005. The overall increase in CEO pay has outstripped inflation and the growth in non-managerial pay over the same period. Equally important is the trend in the composition of CEO performance-based pay which includes stock and stock option grants. Median pay grew from $1.3 million in 1995 to $4.4 million in 2005 (Labonte, & Shorter, 2008). At Enron executives had incentives to achieve high-revenue growth because their salary increase and cash bonus amount were linked to
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• WorldCom 's Bernie Ebbers became very wealthy from the rising price of his holdings in WorldCom common stock and got a $1.5 million-per-year pension for bankrupting the company. All of these perks were funded with dollars that could have gone to shareholders. The average shareholder who can 't rely on a company funded-pension or government-funded Social Security is funding the lavish lifestyle of the CEO who will get a pay raise (via stock price increases) for downsizing that worker 's job (Beatie, 2008). There are many other ways that a CEO can hurt a company, but they all boil down to a CEO putting his or her own interests before the company 's. Enron, Tyco, and WorldCom are extreme examples. They are the few bad apples that get all the headlines. For these CEOs, it is apparent how easy it is to forget that their job is to serve the company and its shareholders, not pad their own wallets. The Enron case is a testimonial as to the relativity and importance implementing the top-down approach for an internal control. By utilizing the top-down approach, Enron’s unusual accounting methods and the detection of major weakness in the company’s financial reporting would have not been overlooked but detected early on in the audit process.
Notwithstanding, most companies are run by ethical people. They may bend the rules, but few take the process to the extremes of Enron or WorldCom.

References

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