The Nortel case is an interesting one because its meteoric rise is as quick as its downfall. There are several important factors that have contributed to the sudden breakdown of the company and most of these are situated within the ethical perspective. First is the evident high compensation that Nortel’s executives received. Its CEO, John Roth, collected pay higher than his contemporaries from other companies and was also incredibly way above the industry average (Fogarty, Magnan, & Makarian, 2011). Executive compensation must be one of the significant issues to be given attention by a company to ensure its ethical performance, wherein there must be a salary cap no more than 19 times of the average employee salary (Collins, 2011). It should …show more content…
In short, the agency theory asserts the total cooperation between the managers (agents) and the shareholders/stockholders (principals) to ensure that their visions, goals, and interests in the organization are the same and well-aligned (Seven Pillars Institute, no date). However, reading the Nortel case, it is evident that this supposed alignment did not happen. One of the mechanisms to facilitate this kind of alignment is to respect the shareholders and the stakeholders. Both the agents and the principals must acknowledge that they both have the duty in the creation of wealth that is not only for the organization, but also for the value that their customers and the greater community, as well, receive. Both the agent and the principal must consider the principle of honesty, fairness for the organization’s customers, employees, suppliers, competitors, and the general community the organization is situated in (Collins, …show more content…
They instead chose benchmarks which they believed could increase the stock of the company without ever realizing that standard benchmarks had to be followed. Because of the freedom that the managers at Nortel had in terms of stock options, they were able to “increase” their earnings due to subsequent higher profit margin (Fogarty, Magnan, & Makarian, 2011). Inevitably, this led to the greed and pride of the people behind Nortel heading to the future downfall of the company. The immense power that the managers at Nortel held showed very little ethics and conscience on their part. Street value of the stocks of the company was prioritized more than the real and standard ones (Fogarty, Magnan, & Makarian,
The agency problems or conflicts are continuously happening between the principal and the agent. It particularly arises when an interest conflict occurs between the principal and the agent. In terms of finance, there are two core agency relationships; managers and stockholders and managers and creditors. To balance the interests and satisfactions between managers and stockholders which helps firm to improve performance, there are a variety of different measures have been generated and implemented by Telstra in order to optimize the bond and monitoring costs.
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.
In Peter Eavis’ article “Executive Pay: The Invasion of Supersalaries” the conflict of CEOs and top executives outrageous pay grade is discussed. Even though the “compensation machine” of Corporate America is running smoothly, there are multiple negative and dark undertones. In fact, many people believe that these shocking salaries are the roots of inequality within America. Currently, some CEOs are being compensated millions and millions of dollars as their normal annual salary. Even though the current executive compensation system focuses on performance and can “theoretically constrain pay,” there is nothing stopping the companies from giving their CEOs more. According to the Equilar 100 C.E.O Pay Study, “the median compensation of a
The term 'executive pay' has acquired bad connotations over the past decade or so and the recent Occupy Wall Street movement brought this issue back into public consciousness on a worldwide scale (Minder, 2013). In Switzerland, the parliament recently passed legislation that would limit executive compensation excesses under threat of fines and imprisonment and the European Parliament agreed to limit banker bonuses to twice their base salaries. Adding fuel to this fire was last month's announcement that the golden parachute for departing Novartis Chairman Daniel Vasella would include a $78 million dollar severance payment.
Like several companies, Nortel stipendiary their executives with stock choices (Collins, 2011). This compensation solely inspired the tendency to be but honest regarding the company’s finances. author closely-held stock choices that solely inspired his actions to fulfill or beat the benchmark set by analysts. If Nortel’s earnings showed to be higher than the benchmark, Nortel’s stock costs would rise creating the stock closely-held by management to be even a lot of valuable. By tweaking the books to indicate the road earnings price as critical the allowable accumulation price he created the stakeholders assume that the corporate was creating extra money than it had been. “Nortel ne'er incomprehensible a benchmark over the sixteen quarters (Collins, 2011).” it had been too tempting to bump the numbers up so the stocks gave the impression to be value over they were. “Nortel’s accounting practices junction rectifier to AN investigation by AN freelance review committee, that found that insubordination with accumulation and accounting fraud were undertaken to fulfill internally obligatory earnings targets (Collins, 2011).”
Excessive top executive pay is viewed by the public as a direct linkage to economic inequality or disparity. Many opinions state that over the top pay stemmed from compensation trends and indicates corporate Board of Directors as business people earning similar salaries as top executives. Pozen and Kothari (2017) reported “More than 95% of the time, shareholders overwhelmingly approve the pay recommendations.” (Decoding CEO pay, para 2). Excessive pay distorts the views of the public and injures the trust of American workers. According to Pozen and Kothari (2017), companies, legislation, compensation committees, and stakeholders need to clearly articulate the basis of their decisions for setting excessive compensation.
I don’t agree with Dunlap’s view that shareholders are the only constituencies about which corporate directors and executives should be concerned. In light of agents’ obligations to principals, managers are supposed act in the best interest of the company’s shareholders, the major capital providers, when making decisions; however, as shareholders and stakeholders interests are to a large extent compatible, especially from a long-term perspective, managers should also take into consideration the interests of multiple constituencies when operating a company. For example, both shareholders and customers may benefit from a company’s successful research and
In the article, “Wages of Failure: The Ethics of Executive Compensation” General Global is faced with a complex decision after new CEO, Janice White, requests to be paid based on performance. Her predecessor, former CEO Bill Hogson, seemingly underperformed for the company for nearly a year and stepped down with a huge exit package totaling $100 million (two years salary with bonuses). This caused an outcry by the press for less greed among America’s corporate executives. Janice White, formerly CFO of General Global, feels that by changing the companies pay policy to pay the CEO based on performance would increase stakeholder faith in the corporation. By being paid based on merit rather than by a market based industry standard would
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
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
Executives and those responsible for misdeeds should have been subject to significant clawbacks of compensation. If the reason they misbehaved and took inappropriate risks was to raise compensation, losing that compensation would be an appropriate punishment.
Agency theory relative to corporate governance assumes a two-tier form of firm control: managers and owners. Agency theory holds that there will be some friction and mistrust
Agency costs are inevitable within an organization whenever shareholders are not completely in charge; the cost can usually be best spent on providing proper material incentives and moral incentives for agents to properly execute their duties, thereby aligning the interests of shareholders (owners) and agents.
Agency Theory is tied up with analyzing and resolving any current issues that exist between their management team and owners. In Agency theory, way of think may
The conflict between shareholders and managers will incur certain costs. Jensen and Meckling (1976) refer the associated costs to this agency problem as the agency costs and present three components of agency costs, including “the monitoring expenditures by the principal”, “the bonding expenditures by the agent” and “the residual loss”, which all incline to increase as the manager’s ownership declines. The monitoring expenditures are the costs of the principals to monitor or control the managers in order to limit the abnormal actions of the agent to make sure that the agent act for the principal’s interests. The bonding costs is paid to guarantee that the agent would not take any action which can be harmful to the principal or the principal will be compensated if such actions happen. The residual loss refers to the discrepancy between the principal’s welfare and the agent’s decisions despite the use of monitoring and bonding. Such costs are inevitable results of agency problem. Similar to the agency conflict within the firm between managers and shareholders, if information asymmetry exists between the firm and outside investors, agency conflict may also