Trends in Executive Compensation The notion of executive compensation is a contentious issue, particularly during times of economic slowdown. According to Business Dictionary, executive compensation is “the financial payments and non monetary benefits provided to high level management in exchange for their work on behalf of an organization.” Examples of high level management include presidents of the corporation, chief executive officers (CEOs), chief financial officers (CFOs), vice presidents, managing directors and other senior executives (Business Dictionary). It is understood that these individuals are of special interest, because their decisions influence the strategic direction of the company. Over the last 20 years, academic …show more content…
The board has reappointed Chakma to a second five-year term extending to June 30, 2019" (CBC News, 2015). This deal led Chakma to receive double his 2013 salary, a move which left individuals upset as this decision comes at a time when reportedly, the core mission of the university is being compromised by a broken budget model. Given these concerns, students received an email from Chakma himself voluntarily offering to refund half his 2014 salary. Examples of high compensation during times of economic uncertainty and tenuous work are difficult to justify.
1. Research Purpose
The purpose of this paper is to gain more insight on the trends associated with the high and rising pay levels of CEOs. I chose to research the topic of executive compensation because I am interested in the pay practices (and trends in pay practices) for chief executive officers (CEOs). There are many forces that contribute to the growth of total compensation to top managers. The wage gap between executives and the average worker in many organizations is unfathomable. An infographic exists online depicting the ratio of executive to average worker compensation for many organizations (Payscale, 2015). This infographic highlights the harsh reality of executive compensation. For example, CVS Caremark CEO-to-average worker pay ratio is 422:1 (Payscale, 2015). Thus, executive pay has been under scrutiny by many; some who believe the concept is unfair and
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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 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.
Stock options are another main concern and are based upon the performance of a company. A lot of companies are in a low return and low compensation which then caused bad business and it’s about 400 times that amount. I believe the government is trying to tighten down on excessive executive compensation with implementing salary caps. Executives are unrealistic with common life and way of living therefore; they do not take any consideration with the underdogs of the company or the world. The economy does have hope but it’s a long way from being stabilized once again.
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.
Chief Executive Officer pay in the United States has risen dramatically. In the past three decades the salary of a CEO has risen significantly beyond what can be explained by variables such as firm, size, performance, and industry classification (Bebchuk & Grinstein, 2005). According to research, the CEO pay at the nation’s top 500 largest companies averages about $10.9 million a year. The CEOs are also receiving an additional $364,000 in perks. It was estimated that the average CEO makes 319 times more than the average worker in 2008 compared to a multiple of 42 in 1980((Anderson, Cavanagh, Kliner, & Stanton, 2005). CEO
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.
The practice over overpaying company CEOs in contrast to the general employee population is not considered a valid reward distribution system. As reported in the “The State of Working America”, the ratio between CEO salaries and average company wages was approximately 19.2 to 1 in 1965. In 2011, this ratio was nearly 220.2 to 1 (Mishel, Bivens, Gould, and Shierholz, 2012). Per Mishel, Bivens, Gould, and Shierholz (2012), this ratio has experienced a 177.15-point decrease from the year 2000, when the
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
During the economic crisis, the cost of giving compensation to executives is the relief capital could be spent elsewhere within the organization and not be handed down into their executive’s
As a result of the current economic crises, many companies are experiencing massive financial losses. These companies are reducing salaries and cutting peoples’ jobs while executives are maintaining high compensations. Using tax payer’s money, the US Government is assisting these financially struggling companies through the Troubled Asset Relief Program (TARP). TARP was created to assist these companies to ultimately allow them to survive and prevent massive job loss. Tax payers are concerned about executives receiving a high and unjust compensation in comparison to other non-executives whom are suffering from layoffs and compensation cuts. Executive compensation is controlled by the
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
Executive compensation issue has always been on concern, especially after the shakeout of global economy in 2009, pushing concentration about this topic to the cusp. What exactly may be the criteria determining executive income? Peer group methodology, identifying companies that are reasonably similar to the subject company in terms of industry profile, size, and market capitalization (Institutional Shareholder Service Inc., 2014), is widely applied as a benchmark when companies make decisions about managers’ payoffs. According to ”S&P 1500 Peer Group Report 2014, most companies choose 11 to 20 firms per peer group. Targeted companies from same industry are mainly preferred.