The highest-performing companies build pools of talent from which they can draw as needed (Michaels et al., 2001). Thus, there will inevitably be talented people who are at times underutilized. Their higher-order needs are not being met and thus they must be generously compensated. Otherwise, when the time comes to move someone from the organization to a fulfilling, higher-order executive position, the talent will not be there.
CEO pay proponents also point out that the bulk of the "excessive" executive compensation comes in the form of stock or options. These instruments were brought into executive compensation packages specifically to align the interests of management with those of the shareholders. It was the shareholders and the boards of directors who initiated this, as a means to protect shareholder wealth. There have been some instances where executives have abused this system, but those executives find themselves prosecuted. The argument here is that a properly-constructed executive compensation plan will yield the desired results. If a firm does not design their plan well, it will fail. Thus, it is not the size of the compensation package that determines its level of effectiveness but its structure. Many firms have sound structures and the high level of executive pay is matched by high performance. In most situations, there is little publicity or outcry about the issue. Largely, it is only when performance is poor that the issue of executive compensation is raised. If performance is poor and bonuses are given out, this has bad optics but evidence has shown that reducing executive compensation sends a red flag to investors, causing rapid erosion of shareholder wealth as the stock price drops (Hume & Tokic, 2005). It is unreasonable, then, that the entire system of executive compensation be regulated or scrapped simply because some firms are not good at designing executive compensation plans.
At the core of the pro and con arguments is the fundamental belief regarding regulation in industry. The free market philosophy underlies the beliefs of those who believe that executive compensation is not too high. Those who believe it is want the system to build in limits, or a sense of common justice. Some of those who believe in the free market perspective feel that the market is irrational. The use of equity-based compensation was encouraged by favorable tax treatment. By the time the tax treatment was changed, the concept had become standard practice. It is only recently that shareholders have begun to exercise their rights in a meaningful way. Even now, there are only a handful of major institutional investors, such as CalPERS, that have strict policies regarding executive compensation (Business Wire, 2004).
While CalPERS and Warren Buffett oppose high executive compensation on financial grounds, it is social justice that forms the basis for most objections to executive compensation levels. The social justice view stems from the notion of patterned principles -- that there is a social order that is more just than others and that the role of government is to pull levers of power to bring reality closer to that just social order (Epstein, 2008). Nozick argues that such involvement in the pursuit of patterned principles is itself unjust, because the rules of the game are not the same for everybody and there are needless barriers erected. If the market wants CEOs to make millions, so be it. The rules are the same for everyone.
Current Crisis
The AIG bonus scandal has become the flashpoint for discussion about excessive executive compensation and the global economic crisis. AIG, of course, represents a special case in that the company is essentially owned by the American taxpayers. Thus, the bonuses paid to executives came directly from the taxes paid by American workers. It is interesting to note that among shareholders there is seldom this same outrage. The fundamental principle is the same, however. High levels of executive compensation, if not translated into improved performance, are a drain on shareholder wealth.
The current crisis exemplifies this well. The crisis has a number of different antecedents, from the government reaction to the savings & loan scandal to the Fed's interest rate policies after the dot-com bubble burst to the creation and subsequent lack of oversight of Fannie Mae and Freddie Mac (Knowledge @ Wharton, 2008). The wide range of factors that have contributed to the crisis makes it difficult to accurately gauge the impact of executive compensation. However, there was a role in the development of the crisis that was caused by executive compensation schemes.
Flush with cash as a result of the Fed's aggressive interest rate cutting following the bursting of the dot-com bubble, banks began to invest aggressively in consumer credit markets. The main manifestation of this was the dramatic increase in subprime lending. Bank executives were willing to take this risk because they believed it would result in increased profits. They were essentially making a gamble on the housing market. For a few years, the housing market paid off and banks recorded stellar profits. Executives cashed in hundreds of millions of dollars in bonuses, options and stock. To ensure that the profits were maximized, bank executives package up their...
Executive Salaries are inflated. 'Bottom Line': Executive salaries are disproportionately high, causing a crisis of both economics and morale within American enterprises. What is the justification behind a particular salary? Encyclopedia Britannica defines a salary as a wage derived from human labor. What is the 'human labor' of an executive Labor of executive involves managing company. Labor of executive involves presenting a favorable image to the public. Does the current labor of executives justify their current
In order to compare the executive compensation in both countries, the countries firms should be matched and compared according to industry, size and operation. The executive compensation can be measured or compared accurately according to the industry and firms sizes. From the data, it was found that the executive compensation in both countries were high whereas the firm performance was reducing. The data collection for the executive compensation in
Executive Compensation Programs and Incentives In 1996 the average salary plus bonus for CEOs was $2.3 million. After other benefits were added, this sum rose to $5,781,300. Beginning with Revlon executive Michael Bergerac who broke the $1 million mark in 1974, executive pay and bonus plans have soared to mind-boggling proportions. Although various governmental agencies have set limits on tax-deductible executive compensation, these efforts not only failed but served to raise
When he, representing the de facto shareholders the American taxpayers, found the executive compensation plans were out of line with the objectives of said shareholders, he acted. In the free market system, this is the only response. Shareholders have rights and duties as the owners of companies. The executive team acts as their agents. The shareholders have not only the right but the capability to fire boards of directors and
Other benefits include payouts or large severance packages should an executive leave a corporation, whether or not they fulfilled the terms of their initial contract (Griner, 1996). There has been some criticism of late of agencies and organizations that offer compensatory packages for CEOS that do not meet organizational objectives. Employees in many instances are not afforded the same benefits or exemptions that executives are. Most employees are likely to
The qualification of Mr. Thomas will be very valuable for our company both presently and in the future. The education background of the employee is a valuable asset for our company because he has assisted our company to take some investment risks, which have paid off in the long run. The past risky investments that we have undertaken have been largely profitable for our company based on the expert
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