Introduction
During the recent, very serious economic recession, the financial media focused a lot of attention on the compensation paid to top business executives (Ford & Zhao, 2009, p. 13). Executive compensation plays a fundamental role in attracting and retaining quality managers and provides motivation for executives to perform their duties in shareholders’ best interests (Anderson & Bizjak, 2003, p. 1324). Compensation paid to top executives of publicly traded corporations is a politically sensitive area, with critics claiming that amounts paid to executives are too high, and corporations arguing they need to pay to attract (Balsam, 2014, p. 3). Research has shown that when a corporation is performing poorly, shareholder proposals on executive compensation are likely to be made, and more recently shareholder proposals have sought to tie executive pay to performance (Balsam, 2014, p. 4). With this in mind, this essay is constructed to evaluate the role of a chief executive officer (CEO) and argue whether or not they are being overpaid, when looking in terms of company performance.
Role of a Chief Executive Officer
In order to truly understand whether a CEO is overpaid or not we need to first analyze the role in which a CEO has on the performance of a company. With an increasingly uncertain and turbulent environment, coupled with growing organisational complexity, suggests a greater centrality of the role of the CEO (Zuckerman, 1989, p. 25). According to
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.
In Energetics meets Generex negotiation, I was acting as a Chief Operating Officer (COO) for Energetics Corporation and my opponent and my classmate Chace Eskam was acting as a COO of Generex Corporation. In this deal, as a COO I was supposed to sell the Wind energy division of the Energetics to Generex. Energetics Corporation was in desperate need of cash due to bankruptcy. Another hurdle was that I could not sell three different locations of Wind plants individually. My company needed cash within three months with no additional terms added to this deal. My another best alternative was to sell all the assets of Wind Energy division to generate some cash if deal with Generex fails in this negotiation. Our negotiation went on for 15-20 minutes during class time and deal was set in $247 millions. My opponent Chace was very tough in this negotiation to deal. He was very prepared with facts and numbers before he came to the table. My opponent asked me lot questions such as the depreciation of the property, equipment’s life, taxes etc. After having lot of discussion we ultimately came to the conclusion that Generex will pay Energetics $247 million right away in cash to purchase Wind Energy division from Energetics.
The most important leadership hat of the president is the Chief Executive Hat or power. In respect to this hat, the president of the United States has the power to enforce laws of the United States, create policies, appoint federal judges, and fires or hire officials or representatives within the executive branch. This hat is important because it enables the president to make decisions that help maintain the economic stability as well as the political stability of the country. For instance, by enforcing laws and appointing federal judges, the president is able to make decisions that help maintain stability within the United States. In turn, this enables economic indicators such as businesses to flourish efficiently.
The CEO’s compensation should be set on how well the firm performs and should be awarded based on the performance of the stocks in the long run. It is easier to measure performance by the growth rate in the profits that have been reported since intrinsic value cannot be fully
See, Bob Reich isn't the just a single to notice disparity. Indeed, even most corporate chiefs are worried that soaring CEO compensations are askew with corporate benefit, and also normal worker wage. As working mom Nancy Rasmussen says, it just doesn't seem right. "I took a pay cut of $12 an hour. My benefits have gone down," Rasmussen says. Her voice cracking with emotion, she asks, "If you have millions of dollars, why do you need that little bit that I have?" We see it all around us: A CEO gets a huge bonus the same year he lays off hundreds of
The economic downfall of 2008 illustrates the impact of unbridled corporate pay structures on our economy. Securities fraud, committed as a result of incentive packages offered to executives to create quick profits, had a detrimental effect on the overall economy. As observed during the Bank and Loan bust of 1989, CEOs take greater risks when offered stock options in their compensation packages. The 2008 Financial crisis, sparked by subprime mortgage market and hedge funds, was driven by banking executives making short term risks that served detrimental to stockholders in the long run. Furthermore, many compensation packages offered Golden Parachute clauses with no claw backs to both performing and underperforming executives.
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
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.
Ethically speaking, let’s analyze the disparity regarding overall compensation of that a Chief Executive Officer (CEO) and that of whom are front line employee. Compensation, which is the total of all rewards provided to employees in return for their services takes on a
Headlines have seized on dramatic accounts of outrageous amounts earned by executives (Kay). The CEO-to-worker compensation ratio was 20-to-1 in 1965 and 29.9-to-1 in 1978, grew to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 295-to-1 in 2013, far higher than it was in the 1960s, 1970s, 1980s, or 1990s. Chipotle boss Steve Ells earns 28.9 million, 1,522 times the median salary of 19,000. CVS Health boss Larry Merlo’s 32.4 million pay is nearly 1,192 times than that of a median worker’s 27,139; many more CEOs are in this same case, where they are making a disturbing amount over their workers. This image of executives shows just how much they are paid, and when it is put beside their median workers, it becomes a problem. This tragedy can befall both shareholders and employees when CEOs line their own pockets at the organization's expense (Kay). On the bright side, Google’s CEO Larry Page, has only been paid a dollar a year along with Zuckerberg since both company went public. Larry Page got exactly 1 dollar in 2014; his median worker got 153,150 (Reuters), which is a common move for tech CEOs who have already made their money and or take home a hefty amount of stock. Another case would be CEO Dan Price and his decision to dramatically increase wages at his company Gravity Payments, making himself go from being a millionaire, to making a salary
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.
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
Given the effect a CEO can have on a company's success, we can understand why their compensation packages