What’s Wrong with Executive Compensation?

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.

Executive Compensation. I’m in agreement with Thomas Piketty that the one cause of rising inequality in the United States “the rise of supersalaries” for top executives (Piketty & Goldhammer, 2014, p. 298). The average American estimates CEO to worker pay ratio at about 30-to-1, which is more than 4 times what they believe to be ideal. The career review site Glassdoor reported from 2014 data that the average pay ratio of CEO to median worker was 204-to-1 and that at the top of the list, four CEOs earn more than 1,000 times the salary of their median worker with the very top pay ratio of 1,951-to-1. In some cases a CEO makes in one-hour what it takes the average employee six-months to earn. In comparison, the Washington Post reported for the

CEOs usually get paid a lot more than any of their employees and it is believed that the ratio between the CEOs salary and the average employee salary has continued to increase throughout the years (Mackey, 2014). The increase in the CEOs salary is mainly attributed to two factors: First, the required skills and the high responsibilities that are associated with this position. Second, the number of qualified people who could fill such a position is really limited (Executive Compensation, n.d.). This does explain the

Executive pay – excessive pay for top executives is one problem that will not go away. It is a response to public concern about pay rises that are unrelated to effort, plus a number of high-profile cases of failed executives getting pay-offs of up to US $100 million and others having stock options backdated to give them a share of earlier capital gains. This at least tells shareholders exactly what their top executives are earning.

Take severance packages for example. When the average employee in no longer benefitting the company, chances are they will be let go. Besides a final paycheck for hours worked and the possibility of unemployment collection, they do not receive anything else from the company. When a CEO is no longer performing up to standards, they are forced to resign but walk away with much more than a final paycheck. Chuck Prince of Citigroup was shown the door after the company lost $64 billion in market value, yet he left with $68 million and a cash bonus of $12.5 million (Nickels, McHugh & McHugh, 2010). Not only are CEOs paid a substantial amount more for their work, they are paid a substantial amount more to leave the company all together. In 2009, President Obama and Congress put limits on executive compensation of firms receiving money under the federal government bailout programs. The payout to CEOs leaving their companies was limited to $500,000 but it wasn’t for all companies across the board. This new limit only applied to companies who had borrowed money from the government during periods of economic downfall and hadn’t yet paid it back. Despite the decrease in monetary payout, CEOs were still allowed a decent portion of restricted stock which amounted for a fairly large payout when the stock could be sold a few years down the line.

Federal governance in executive pay is essential to a stable and healthy economy. I offer that the issue of Federal governance in executive pay is bigger than equity in compensation. “Taxpayers and politicians and others disapprove of these levels of compensation precisely because the leaders of these firms, in the words of Treasury Department officials, nearly caused the financial system worldwide to collapse.”

Executive Compensation is typically structured to incentivize executives to achieve company performance consistent with increases in shareholder value. As a result, a majority of executive pay is contingent on performance. If the company or the executive fails to perform, the pay may never be received. Corporate Governance is the system of principles and processes by which a corporation is managed that defines the relationships among the board, shareholders, management and other stakeholders in a manner designed to promote long-term growth in share price. Specific to executive compensation, the Center believes that a board-centric approach to corporate governance is best and that consistent with that approach, best practices should ensure that compensation decisions are aligned with the best interests of shareholders and other

They believe that the unfairness in pay that is so prevalent in America will slowly but surely violate the public’s feeling of what is fair. William J. McDonough is not some liberal politician or university professor exposing his views to an adulating audience or a classroom of college students. He is the former vice chairman and special advisor to the chairman at Merrill Lynch & Co. Inc., and the former President of the Federal Reserve Bank of New York. “America’s business leaders, McDonough believes, have a moral responsibility to end compensation excess. If society appeals to this moral responsibility, he also believes, business leaders will see the light and take steps to limit the gaps that divide us.” (greedandgood.org 1) This type of moral standing can be used as a calling card that rallies people to gather in strength and cause political change, similar to the “too much Federal Government” call of the “Tea

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

We tend to activate parts of the brain associated with negative emotion when considering unfair offers. Cross-cultural studies suggest that fairness is an important consideration in every society that has been tested, though its strength may vary across cultures. Even monkeys tend to respond to unfairness by refusing to work for rewards. Pay differentials play a key role in dictating organization-level outcomes. Companies with more pay equity tend to produce better products than ones with pay inequity. Major league baseball teams with more pay equity tend to perform better than those with pay inequity. The gap between CEO pay and the pay of the average executive is negatively correlated with performance. Pay differentials have important consequences because we use others’ outcomes as reference points to help us determine the acceptability of our own

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

In 2003 the average pay for CEOs at 200 of the largest U.S. companies was $11.3 million--but there are a good number whose compensation packages approach the $100 million mark. Faced with these figures, Americans from all walks of life--who revile CEOs as greedy fat cats--are overcome with bewilderment and indignation. Astonished to learn that what an average worker earns in a year, some CEOs earn in less than a week--people ask themselves: "How can the work of a

Twenty years ago, Chief Executive Officers of companies only made approximately 35 times more than the average hourly worker; but in 2015, that pay gap has increased exponentially to over 300% more, depending on the company (Pizzigati, 2015). The United States has claimed her fame as the most “unequal rich” country on the planet, and with that comes a lot of disrespect from not only other countries, but the United States’ citizens, as well. Just how rich are the super rich compared to an average Joe on the field? Just as a recent example, Donald Trump just bought his way into the presidential campaign, stating that he has not taken one dollar of donation money. The accumulation of such wealth by such a small portion of the American society is carving the way for political campaigns, which henceforth carves the way for more distance from a pay gap

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