New Incentive Plan Motivation, Options and the Economic Profit-System Overview of the Previous System & Motivation We believe the new incentive system was needed and reasonable because the accounting-based incentive system, where EPS was a measure of performance, raised valid concerns. The first being an agency problem. This existed within the old system as manager’s interests were not aligned with those of stockholders. EPS had improved steadily at a rate of 9% annually; however, the share price had increased only slightly in comparison. Therefore, the company’s stockholders had hardly benefited. The second issue was the use of subjectivity in granting bonus awards. These awards were given out even when their entity had not performed well. Managers began “politicking”, meaning they would try and convince their evaluators they performed better than the results had shown.
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.
The second compensation package was not well designed nor did it help define what the corporate strategy would be. For a second time the compensation package focused on maximizing shareholder’s wealth and didn’t take into consideration the stakeholder’s position at all. Dunlap’s package was deeply weighted in company options ($3.75M). In fact it was weighted heavier than before. The stock grants were
CEOs, Workers, and the Costs of Excess Student's Name Course Title May 3, 2013 CEOs, Workers, and the Costs of Excess 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).
06 May 2013 Number of words: 3,943 INTRODUCTION This assignment aims to present in a clear and concise manner our viewpoint towards remuneration disclosure, considering steps to improve this matter of contention is taken voluntarily by the boards as recently stated by The Australian Financial Review.
However, there have been many cases where the CEO and executive officers receive outrageous compensation even when the companies suffer. Overall, there is a wide disconnect between the incentive of the executives and the financial performance of their company, which needs to be fixed. By passing regulations and rules such as the Dodd-Frank Act, there is hope of shedding light on the connection between the company’s performance and the executives pay. Although it will provide a clear insight, it will not be able to set a strict regulated compensation or define what an executive should earn. Instead regulations will allow for more transparency for the shareholders regarding corporate governance issues such as executive pay. Along with that, it will force companies to take accountability for their actions. If they do poorly, then the executives should be paid less, and vice versa. Overall, there should be a direct alignment between executive pay and the company’s
1) I agree with the advisory votes provision of the Dodd-Frank Act, because it serves as a valuable means of gauging the pulse of the collective shareholders’ interests. Since executive compensation is an important tool intended to align the interests of both the corporation and the shareholders, a system of assessing the shareholders’ interests is necessary – without it, the shareholders’ interests are in many ways left to speculation. Given the varied geographical locations of the shareholders and the regulations governing their ability to interact with one another, the advisory votes mandate affords the shareholders a collective voice and provides the board of directors with valuable feedback.
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.
Literature includes CEO cash compensation as the proxy for the CEO’s level of risk aversion (Rogers, 2002; Nam et al., 2003; Coles et al., 2006). CEOs with higher cash compensation are more likely to become more risk avers. CEO’s with high cash compensation will seek to avoid risk. I measure cash compensation as the natural logarithm of the salary and the natural logarithm bonus. Following existing literature (e.g., Guay, 1999; Rajgopal and Shevlin, 2002) the sensitivity of CEO wealth to stock price is also included as an additional control variables for CEO risk aversion in the risk-taking incentive model.
The statement explains the company’s compensation philosophy and what the compensation program centers around. According the company’s philosophy, the compensation for named executive officers is made up of three components; salary, stock options, and performance-based bonuses. The fourth proposal to vote on is proposed by a stockholder. Southwest Regional Council of Carpenters Pension fund who is the beneficial owners of less than 100 shares, proposes for a director election majority vote standard. The company lists reasons as to why that is not a good fit for the board and recommends shareholders to vote against the proposal. The proxy statement lists three other stockholder proposals to vote on, if they are presented at the upcoming annual meeting. The board recommends that the shareholders vote against all the three proposals and gives explanations for what is best for the
Wk1 DQs What is meant by an "agency cost" or "agency problem"? Do these interfere with shareholder wealth maximization? Why? What mechanisms minimize these costs/problems? Are executive compensation contracts effective in mitigating these costs/problems? Our textbook defines an agency problem as a “conflict between the goals of a firm’s owners and its
It’s no secret that the new administration has very different governance practices and priorities. Congress and CEO Pay Ratio regulations are being examined and the SEC has opened discussion on itthe topics for discussion. Change is here and boards will likely encounter unforeseen challenges. This begs the questions: How
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.
A recent study by Xue Wang (Emory University) tackles how SOX has affected the compensation and turnover rates of CFOs. They play a critical role in developing firms’ financial reporting and making voluntary disclosure decisions. Moreover, CFOs are ultimately responsible for the quality of internal control systems. The study provides some important insights about the impact of SOX on the executive labor market. It shows that requiring more disclosure of information about a firm’s internal controls provides some positive benefits with respect to corporate governance, in this case making it easier for boards to monitor the activities of CFOs. In comparing and contrasting firms with strong internal controls received an increase in salary, bonus, and total compensation in the post-SOX time periods. In contrast, CFOs of corporations reporting a problem with their internal controls incurred a significant reduction in their compensation packages. With respect to CFO turnover, Wang did find that CFO turnover rates generally increased form the pre- to post-SOX period.
| | |Executive pay should be regulated to prevent executives paying themselves too much. | | | Table of Contents 1. Introduction 3 2. Case of Bank of America CEO Compensation 3 3. Arguments on Steep Executive Compensation 4 4. Conclusion 6 References 6 1. Introduction In this period of severe economic recession in Europe and America, executive pay Now days the executives are paid rewards on the basis of the risks they faces in the high competitive markets not on the basis of their achievements.