INTRODUCTION
The relationship between executive compensation and firm performance is a topic of major concern amongst academics, professionals, and regulators. In an effort to identify a relationship between executive pay and firm performance, scholars have conducted research since 1925 and have established that compensation packages are the primary means of incentivizing managers to achieve certain financial targets or goals. These goals include certain performance measures that can be broken down into three main categories: accounting based, measures, market based measures, and non-financial based measures. Additionally, compensation packages have become an increasingly researched topic due to the surge in levels of compensation in
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Additional features include benefit plans, tailored life insurance and retirement plans. Additionally, a unique characteristic of an executive’s compensation package is the executive 's ability to negotiate features of their compensation packages. This paper will primarily focus on the long-term incentives offered by firms today.
To effectively understand compensation packages, it is critical to understand agency theory. Agency theory represents the differences in goals between management (agent) and the firm’s shareholders (principal). According to Murphy (1998), compensation plans are a solution to the goal incongruence between management and its shareholders and will be explained later in this paper.
The purpose of this paper is to understand the relationship between certain firm characteristics and the use of financial or non-financial performance measures in determining executive compensation. Prior research will be discussed to establish the role, nature, and impact of compensation packages. Furthermore, this paper will explore the relationship between a firm’s profitability, growth, and size when determining the use of financial versus non-financial measures when setting executive compensation, if any relationship exists.
II. LITERATURE REVIEW
Although there is a substantial amount of research available regarding executive compensation, the nature of this research is inconclusive. This can be
With the constant change in today’s business world, to have a competitive advantage makes it difficult for employers to attract and retain the most talented employees. Identifying the company’s compensation strategy ensures the organization offers the right pay and manages the pay increases to retain top talents. When we hear the word compensation we think about compensating an employee for their work performed, but there
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.
Read the discussion case "Executive Compensation" on pages 190-192 then answer/discuss questions 1-7 that follow.
Compensation in these organizations has many faces. Employee compensation may look quite a bit different that that of the executives, and certainly different from that of the stockholders/shareholders of the organization. The following is a proposal of how a compensation philosophy might look for a Fortune 500 Company:
This investigation studies both theoretical and empirical evidence on the trend of rapidly increasing executive compensation in America. Over the course of three decades, executive compensation for the top five highest paid managers of publicly-traded firms has increased so much that the parallel growth in the size of the standard American business, the parallel increase in complexity of the standard American business following the Age of Information or computing and its ensuing technologies and the globalization of the American economy, and the parallel heightened corporate governance of the standard
Another way to look at CEO compensation is to see if it agrees with virtue ethics. There is Aristotelian virtue oriented approach to ethics and was applied to business by Robert Solomon. In this, Solomon argues that business is primarily a practice, in which a community of individuals engages in a cooperative endeavor to deliver goods and services for the good of society. In this practice certain virtues such as integrity, moral courage, and justice are essential to the practice of business. Also, in virtue ethics justice implies that executive pay should be more modest across the board, regardless of company profitability. (Kolb, 2006, pg.101-115)
Executive compensation packages have been used both successfully and unsuccessfully to solve the principal-agent problem facing corporations these days. In this study, we focus on a specific element of an executive compensation package, stock options. The use of stock options as a form of senior executive compensation has been studied extensively to be a testament to the success of it’s ability to realign executive with shareholder interests. However, as the study reveals, prior to the Sarbanes-Oxley Act of 2002, there were many problems with the usage of stock options within corporations that had a weak corporate governance structure. Problems included executive’s incentives to focus on short run profit, take on risky business strategies, and manipulations (legal and illegal) to fulfill executive self-interests. While it is difficult to measure the true effect of stock option’s influence on executive performance and behaviors, we see that the problems with stock option usage far outweigh the benefits of stock options prior to the implementation of the Sarbanes-Oxley Act.
s the overpayment of CEOs and the effects these high base salaries have on businesses. Understanding that well compensated CEOs are generally quite productive and well deserving; there are those that seem to drop the ball and the business suffers. CEOs are hired in with contractual compensation packages, which do not give stipulations to cover incidents such as decreases in stock value, company downsizing, or bankruptcy. Many argue that CEOs are not compensated enough for the pressures they endure, that they are generally they first to receive pay
Concerns about the compensation of executive officers and other top executives of American public companies have reached fever pitch since the financial crisis and economic meltdown recently. Some observers blame the recent recession in part on the unsound compensation arrangements for the top management of major financial institutions. For almost 20 years, a growing reprise of voices—including some shareholders, the business media, policymakers, and academics—have been criticizing the way top managers are paid. The criticisms focus particularly on CEOs not only because they are the highest paid, but also because their compensation sets the pattern for executives beneath them. Flawed compensation arrangements have not been limited to a
The objective of a suitably structured executive compensation package is to engage, retain, and motivate CEOs and senior management. When it comes to attracting the best senior talent, having the right compensation strategy can make the difference between success and failure. Knowing what strategies work, and those that don’t, is a vital part of any senior recruitment strategy. The objective of this survey is to provide insights into the remuneration and benefits structure and compare the existing compensation package for various private and public organisations operating in the technology and engineering space. This involves examining both salary and benefits components such as bonuses of overall remuneration for the six job positions that are the primary drivers of different compensation levels.
Executive compensation keeps a highly controversial for recent years, with more credit crisis appears in companies, the action of shareholders’ vote on directors payment get more acception. The new reform act 2013 in the UK gives firm’ owners more power and influence to shape managers’ pay. In fact, this act is not only popular in the uk, also sprung up in other European countries, Australia and USA. In this essay, I will focus on discussing the relation between UK shareholder voting and executive pay. As for shareholders have a binding vote on executive compensation, I think the negative effects overweigh the positive ones. In the following paragraphs, I am gong to describe the benefits and harms.
Although subtle, differences do exist between publicly traded company and privately held companies. Public companies use the compensation plans as a tool to deliver the “right” amount of compensation such that it does not lead to unwanted scrutiny, whereas private companies wish to drive value creation. This difference reflects a distinction in the incentives and constraint of their governance structure. Indeed, the board of directors of public companies is composed primarily of independent directors, whose purpose is to care about shareholder value. In private companies, the board consists essentially of individuals with significant ownership. Hence, they have a personal stake in the performance of their company. Indeed, all decisions taken by private companies are most likely evaluated in terms of its expected impact on the company’s progress toward value creation; that includes, how they access information, track and review performance, and evaluate and reward performance. Furthermore, directors in private companies do not spend time worrying about what outsiders may think about their executive compensation package. Hence, they are free to design and implement performance measures and compensation plans based on what makes sense to them. However, private companies lack trading share, therefore it cannot be offered as a reward to the employees.
There are several types of equity compensations with variety of impacts on the agents. The stock compensations and stock options compensations are the most prominent ones. The stock compensations are awards provided to the agents in stocks of the firms, in this way the shareholders reward agents by awarding them a part of the equity of the firm. Balsam and Miharjo (2007) have the belief that stock compensation provides direct link between executive compensation and shareholders wealth and therefore the interests of a firm’s CEO’s with those of its shareholders. Therefore, this type of executive compensation is very effective in aligning the principal and agent’s interest. However, stock compensation has negative side effects, such as an increase in risk aversion of CEO’s. By providing more stocks to a CEO, the risk attitude of CEO in a firm becomes different than that of the shareholders: whereas CEO’s will be loyal with most of their capital to their corporations trying to avoid risk while shareholders aim is to maximize their gains, and prefer more risk taking operations. Therefore, it is very important to provide the right executive compensation to motivate agent (CEO’s or executives) to act in the best interest of the principal (shareholders, debtholders) to mitigate the agency problem created by the provision of the stock
As a significant impact on the organizational strategy, employee behaviors, and firm performance, executive compensation program is designed and determined through many policies and approaches, and many leading theories are explained and related empirical studies are conducted. The theories that will be introduced include marginal productivity theory, governance theories of managerialism and agency theory, structural theory, human capital theory, and the symbolism theories of tournament winnings and political strategist appointments.
Compensation is a critical aspect of every organization and appropriate consideration and strategic planning must be conducted in regards to compensation in order to ensure success of the organization’s mission statement. I believe that most managers fail to recognize the importance of compensation in the strategic planning process and write it off as something that they have little input or value added. They fail to consider that they have the responsibility to analyze compensation in the strategic planning process in order to select the appropriate compensation plan that will allow them to meet the organization’s mission with the least amount of resources possible. Any organization, whether it is corporate or government, has a responsibility to return value to its shareholders for their investment. In the private or corporate sector, the shareholders are the people that own stock in the company and in the government sector the shareholders are the taxpaying citizens who have entrusted the organization with acting responsibility with the resources that they have provided. Accordint to Milkovich, Newman, and Gerhart (2014), total compensation is a very dynamic aspect in the strategic planning process of any organization (p.43) and all too often I believe that executives, managers, and employees see it as a static aspect and fail to see how it can give their organization an advantage or edge over their competition. I am currently a middle manager in the United States