The Pros And Cons Of Executive Compensationation

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.

Compensation systems can take on many forms, all of which have positives and negatives related to it. However, certain components are noted to be determinants of solid compensation plans. One agreement of a solid compensation system is the use of incentives. “Clearly a successful companies set objectives that will provide incentives to increase profitability” (Needles & Powers, 2011). Incentive bonuses should be measures that the company finds important to long-term growth. According to Needles & Powers (2011) the most successful companies long term focused on profitability measures. For large for-profit firms, compensation programs should offer stock options. The interweaving between the market value of a company’s stock and company’s performance both motivate and increase compensation to employees As the market value of the stock goes up, the difference between the option price and the market price grows, which increases the amount of compensation” (Needles & Powers, 2011). Conclusively, a compensation plan should serve all stakeholders, be simple, group employees properly, reflect company culture and values, and be flexible (Davis & Hardy, 1999; The Basics of a Compensation Program).

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

2.Shareholders want high long-term profits. Managers want job security and wonderful perks and amenities. Since risk and return tend to be positively related, managers may wish to avoid risks that shareholders want the managers to undertake. To encourage managers to take on risks, compensation committees can place a greater weight of their compensation on long-term incentives such as stock, options to buy stock, and bonus based on surpassing the performance of comparable firms over several years. When all

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.

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.

In order to examine the effects of excessive CEO pay on the company’s stakeholders, one must define the two terms. Russell S. Whelton, a former graduate student at Saginaw Valley State University, defines excessive pay as, “compensation that is 20% or greater than the national average CEO salary” (Whelton 15). Therefore, excessive pay would constitute compensation over $13.8 million per year (Chamberlain). A stakeholder is anyone who is directly affected by the performance of an organization and thereby, holds a stake in that company (Schermerhorn 73). Some examples of stakeholders are directors, shareholders, executive officers, and all employees. It is important to understand why executive officers are compensated at the high levels they are today to determine the benefits and disadvantages of the argument. The purpose of compensation at any higher level is to “attempt to ensure that management actions result in successful performance for the firm” (Ashley and Yang 369). Possible excessive compensation can be a result

According to Dodd Frank Act, 2010, companies have to disclose this inequality and reasons of high compensation given to their executives. The board members continue to find avenues to continue this high compensation. However, being so concerned about the CEO compensation and not being concerned about their employees could cause employees to quit. The employees don’t look to be making what the CEOs make, but at some point they will feel they are being taken advantage of. This could cause the company to lose dedicated and reliable employees because of their selfish acts. Society will began to have a different out look on certain companies, it might come to a point where society might feel if they buy this they are continuing to make these CEOs salaries. This could result in market drops and lack of sales. Continuing this escalation in CEO compensation could result in a lot of consequences to satisfy these tremendous CEO

1. Differing perspectives affect our views of compensation. It does not mean the same thing to everyone. A person’s view can differ depending on whether you look at compensation from the perspective of a member of society, a stockholder, a manager, or an employee. Everyone is different. For example, an employee may have a different idea of what compensation is when compared to a stockholder. An employee may see compensation as a return in exchange between their employer and themselves, as an entitlement for being an employee of the company, or as a reward for a job well done. A stockholder on the other hand would have a different point of view. Stockholders are interested in how employees are paid and some believe that using stock to pay employees creates a sense of ownership that will improve performance which will in turn increase stockholder wealth. Additionally, compensation becomes a great interest to stockholders when it comes to compensating the CEO.

The compensation was traditionally a method to align the goals of executives and stakeholders. Although in theory it would encourage desirable conduct, in real life we saw examples when executives took advantage of their governing position and participate in fraudulent activity to gain money at the expense of the shareholders. I will suggest the potential steps that could be made to prevent similar situation from happening and rebuild public between executive, shareholders, and stakeholders.

Given the effect a CEO can have on a company's success, we can understand why their compensation packages

In practice, the use of stock options in the corporate sector has increased to account for nearly two-thirds of total pay for CEOs in median firms, a figure that trumps 1984 estimates, where stock options accounted for only 1% of total pay (Denis et al., 2006). So the question we must ask is when we use stock option based incentives for executives, does the evidence warrant the need for greater controls or regulation? Denis et al. (2006) briefly explores the idea of the need for greater outside monitoring, and discusses how the “dark side” of stock incentive compensation may require robust corporate governance structures to counter-veil the negative effects. Erickson et al. (2006) points out that regulators and policy-makers are quick to link corporate fraud and stock options. They (Erickson et al. 2006) state that the intent of their research was in part to resolve the question as to whether there exists evidence that stock-based compensation is tied to accounting fraud. Since no evidence is found, the policy implications for greater controls are limited. Burns et al. (2006) study has implications for the level of options and equity in CEO remuneration contracts. Efendi et al. (2007) does not provide any policy recommendations, but do call for further research

The stories of evidently mind boggling CEO pay never stop; every year conveys another bundle of plausibility to parade as tests of private undertaking miss the mark on control, yet the matter of CEO pay is not exactly the same as some institutionalizing sentiment what society considers sensible. Despite the likelihood that judicious money related pros may agree that CEO pay appears to be unequal, they can wander back and examine for reasons why current compensation levels may be magnificently shrewd in a business division sense. What turns out finally is something of a hung jury: An expansive number of segments make it difficult to check whether CEO compensation is systemically uneven and inefficient, and for whom or to what result. Most

Since bonuses are usually paid in cash and are linked to organizational performance, they reflect rewards that CEOs receive for their contribution to a firm’s economic performance and integration of stakeholder interests. Previous studies on CEOs annual bonuses have examined certain components of CEOs’ actual annual payout bonuses. The type and amount of CEO compensation is arguably important to a firm’s management and governance (Sanders & Carpenter, 1998; Zajac & Westphal, 1994). Whereas many empirical accounting literatures have established the usefulness of accounting metrics in compensating executives, , quite few studies have focused on how specific non-accounting

The term compensation refers to all forms of financial returns and tangible benefits that employees receive in exchange for their time, talents, efforts, performance, and results (Bernardin, 2013). Executive compensation is defined as the financial payments and non-monetary benefits provided to high level management in exchange for their work on behalf of an organization. The types of employees that are typically paid with executive compensation packages include corporate presidents, chief executive officers, chief financial officers, vice presidents, managing directors, and other senior executives (Business Dictionary.com, 2016). Executive compensation is an aspect of business that every major corporation, company, and organization has to manage. Although every major organization or company utilizes some form of executive compensation, it may differ greatly from one company to the next. Proper management of executive compensation is vital to the success and progress of companies, corporations and organizations because of the impact that disbursement of such high pay and benefits have on the financial status of any business and its shareholders.