...CASE STUDY: The Debate over CEO Compensation The most visible and highly paid person in most corporations is the chief executive officer (CEO). CEO compensation is particularly important to firms for three reasons. First, the compensation package is likely to be important in attracting and retaining good CEOs. Second, the form of the pay contract is likely to help determine whether the CEO focuses on value maximization or some other objective. Third, employees throughout the organization carefully follow their CEO’s pay. Important morale problems can occur when employees think that the CEO is overpaid. For instance, employees complain bitterly when they are asked to take pay cuts because the company is in trouble, yet at the same time the CEO gets a big raise. Controversy over CEO pay has increased substantially in recent years. One charge is that the level of CEO pay is too high. CEO pay is so huge that people don’t believe they deserve it. It is easy to pint to many ECOS who report compensation in the millions of dollars (reported compensation figures typically include salary and bonus payments, as well as gains from the exercise of stock options). Consider the following two examples. Investors were outraged when E Trade Group Inc. disclosed it had paid out a $77 million compensation package for CEO Christos M. Cotsakos in 2001- a year in which the financial-services company lost $242 million. When Cotsakos pledged later to return $21 million, the complaints...
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...related to ISSUES IN CORPORATE GOVERNANCE focusing on Directors Remuneration and CEO Compensation. The article that I selected is mainly focus on Directors Remuneration, Corporate Performance, Board Characteristics and factors that influence in determining the Directors Remuneration and CEO compensation. This assignment plays a vital role in developing our understanding and providing a clear picture on Corporate Governance in real world’s perspective. ARTICLE 1: Board Compensation Structure and Firm Performance Ivan E. Brick, Oded Palmon, and John K. Wald January 15, 2003 SUMMARY: The article is mainly focused on the factors that influence Director’s compensation structure. The factors that influences the determination of the Director’s compensation structure are firms, CEO and governance structure characteristics. In addition, the article also identifying the significant relationship between the Directors’s compensation and firm performance and the consistency of the structure on firm value maximization. The impact of the compensation structure towards firm performance is mainly in changes in Q, ROA performance, future ROA and pay performance sensitivity. PROBLEM STATEMENT: Firm Performance Director’s Compensation Structure The diagram above shows the significant relation between the Board of Director’s compensation structure and firm performance. The problem statement that discussed in this article...
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...DETERMINANTS OF CEO COMPENSATION: EVIDENCE FROM MALAYSIAN BANKING INDUSTRY CHONG KOK CHIEK (AC082799) MUHAMMAD AZWAN BIN MOHD ARIFFIN (AC082868) SITI SUHANNA BINTI ABDUL GHANI (AC083010) BACHELOR OF ACCOUNTING (HONS.) COLLEGE OF BUSINESS MANAGEMENT AND ACCOUNTING UNIVERSITI TENAGA NASIONAL 2012 DECLARATION We hereby declare that this project is our original work except for quotations and citations which have been duly acknowledged and that it has not been previously and/or concurrently submitted for any other degree at Universiti Tenaga Nasional and/or other institutions. CHONG KOK CHIEK AC 082799 MUHAMMAD AZWAN MOHD ARIFFIN AC 082868 SITI SUHANNA ABDUL GHANI AC 083010 Date of submission: 13th August 2012 i ACKNOWLEGDEMENT We would like to express our sincere gratitude to our project supervisor, Mr. Wan Mohammad Taufik bin Wan Abdullah, lecturer of Department of Accounting of Universiti Tenaga Nasional, for his valuable advices and continuous guidance throughout the research process. Mr. Taufik spent a lot of time enlightening us on various issues, giving us a comprehensive view in the academic aspect via our meetings within his busy working schedule. It is our pleasure to have him as our project supervisor. Without his unconditional support and care, our project could not be finished effectively. He let us try different approaches with confidence in the process, assisting us to solve a lot of problems especially at the time when we did...
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...BACK ON TOP . . . OF CEO PAY Valerie Lieber MGT 2500 Human Resource Management February 11, 2015 INTRODUCTION Executive compensation has been at the forefront of discussion for a long period of time. Analyzed by academics, highlighted by the media, questioned by Congress, and scrutinized by the general public, the topic warrants much debate. In the 1990’s, total executive compensation increased substantially as companies began offering stock option programs; CEO’s of S&P 500 saw an average increase of 150%. While many top U.S. executives continued to receive enormous compensation options throughout the economic downturns of 2001 and 2008, none was more apparent than those in the automotive industry. While the big three, comprising of General Motors, Ford and Chrysler, were facing insurmountable debt and possibly bankruptcy, top executives were receiving some of the highest reparations ever experienced by directors of the companies. The case study presented in Managing Human Resources, Sixteenth Edition by Snell and Bohlander brings to mind the fact that during 2011, Ford CEO, Alan Mulally, received $53.5 million in stock awards. Many discussions can be derived from this statement. However, a basic understanding of modern corporate compensation structures must first be realized. Along with understanding these compensation structures, knowledge of the views on economic rent and optimal contracting must also be developed. Corporate Compensation Structures Corporate...
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...because it still against the objectivity and the originality of that standards even complying all the basic requirements. In this writing provide some discussion of literature review of the CEO changes and earnings management. Generally, according to big bath hypothesis, the CEO is trying to hide current higher earnings in order to secure their position in future drop earnings performance. In other hand, the contemporary CEO claim that he always does not have sufficient time especially on his first year tenure to show his capability, hence take opportunistically behavior by manipulate the account in achieving their target. Also, in few cases, CEO’s compensation also being some motivation factors. CEO big bath hypothesis Generally, the likelihood involuntary CEO turnover are positively related to a firm's earnings management. The relation surrounding CEO turnover also occurs either the current performance good or bad. Big Bath in accounting is a technique take by CEO in taken against income by reduce assets, which purposely to lower expenses in the future. Usually, they write-off or reduce the asset from the current year accounting period and results a lower net income for that current year. This purposely to create “big expenses” so that future years can show improvement income. The CEOs objective to engage in big bath behavior...
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...The best form of compensation for corporate executive for optimizing long –run performance. Over the past two decades, there has been a stream of research which has focused on the characteristics of corporate executive and firm performance. This paper examines five academic and practitioner-theory focused research articles by (Baker et al, 2006; Babchuk et al, 2003; Hartzell et al, 2003; Murphy et al, 2003; and Kathleen et al, 1989) on the subject of corporate performance and compensation. The purpose of this essay is to advocate the best form of compensation for corporate executive for optimizing long –run performance based on the listed above studies. The components of CEO compensation are classified into four categories: salary, bonus, long-term incentive rewards (e.g., stock options), and benefits. In examining these components, equity based compensation and agency theory were employed and investigated as key factors of analysis. Many academic scholars advocate that the issues of CEO compensation have been a subject of debate and research, due to the agency problem. Thus, for the past three decades, issue of executive compensation was approached from the perspective of the principal-agent relationship. Agency problem, in the context of the five papers mentioned above ‘is the possibility of conflicts of interest between the shareholders and managers of a firm’. According to agency theory, each firm consists of principals (shareholders) and agents (managers)...
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...Journal of Economic Perspectives—Volume 17, Number 3—Summer 2003—Pages 71–92 Executive Compensation as an Agency Problem Lucian Arye Bebchuk and Jesse M. Fried E xecutive compensation has long attracted a great deal of attention from financial economists. Indeed, the increase in academic papers on the subject of CEO compensation during the 1990s seems to have outpaced even the remarkable increase in CEO pay itself during this period (Murphy, 1999). Much research has focused on how executive compensation schemes can help alleviate the agency problem in publicly traded companies. To understand adequately the landscape of executive compensation, however, one must recognize that the design of compensation arrangements is also partly a product of this same agency problem. Alternative Approaches to Executive Compensation Our focus in this paper is on publicly traded companies without a controlling shareholder. When ownership and management are separated in this way, managers might have substantial power. This recognition goes back, of course, to Berle and Means (1932, p. 139) who observed that top corporate executives, “while in office, have almost complete discretion in management.” Since Jensen and Meckling (1976), the problem of managerial power and discretion has been analyzed in modern finance as an “agency problem.” Managers may use their discretion to benefit themselves personally in a variety y Lucian Arye Bebchuk is the William J. Friedman Professor...
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...Compensation Final: Three Essays Mr. Music MGT 320 April 27, 2011 1) Essay Question # 2: Issues of CEO pay that managers need to understand. CEO Pay Overview It seems as though no matter how bad the economy gets or how poorly a company performs, the Chief Executive Officer (CEO) (and other top executives) always come out in the best possible position, especially with compensation. Besides lavish compensation packages and best possible amenities, the CEO’s generally enjoy large severance packages or “golden parachutes”. Severance packages are basically contractual deals between the CEO and the corporation that in case the CEO is terminated for some reason or leaves the company, he/she is entitled to a specific sum of money on departure. Golden parachute is a term used to describe rich severance pay packages which in addition offer cash bonuses, stock options and benefits – essentially a complete and wealthy severance pay package. (Carroll & Buchholtz, 2009) The purpose of these packages was logical for industries prone to mergers, acquisitions or failure – it would protect the CEO in case the company experiences any of the above. Nevertheless it increased the moral hazard problem and the principal-agent problem within organizations. Basically the rationale has a fallacy where it protects the CEO and his/her pay if the company should fail, merge or be acquired but it doesn’t protect the company if the CEO performs badly and decides to bail out when the company is taking...
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...equity-based compensation which is based on the price of company’s stocks, like stocks and options, and non-equity-based compensation, such as cash compensation- including salary and bonus (Bebchuk & Fried, 2006 ). A company’s performance can be measured by its economic return, in other words, the accounting performance on financial statement (Gulen & Rau, 2009). This essay supports that executive pay may have no significant influence on company performance, because there are some ways that managers can decouple their payments from performance, and this essay will investigate these possible underlying reasons. There are studies examine the relationship between the pay policy and performance, and the results do not support the hypothesis that there is significant link between payment and performance. Kubo (2005) examined this link by investigate a group of Japanese companies and the result showed that companies with high pay-performance sensitivity did not get better performance. Gulen and Rau’s (2009) study on incentive pay also suggested that managerial compensation components such as restricted stock, options and long-term incentive payouts, that are meant to align managerial interests with shareholder value, do not necessarily translate into higher future performance. The reasons for this weak link may be quite complex and here are some possible explanations. By reaching contractual agreements, managers can completely decouple their payments from performance. A CEO may...
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...“What are the factors at play in determining the pay and conditions of London train drivers, top company executives and investment bankers, and how large differences in pay have impact on employee morale and employee relations.” The study is divided into two parts based on the following issues: (1) What are the factors at play which determine the pay and conditions of London underground train drivers Top company executives Investment Bankers (2) To what extent may large differences in pay within an organisation impact upon employee morale and employee relations? If so what can be done to address the issue? 1.Introduction: From our basic knowledge, we know that for a job, there are different factors that help in determining the salaries and bonuses of an employee, job criteria and other work related issues. Similarly, to determine the pay and conditions of the London underground train driver, top company executive and investment bankers, there would be pay determining components/factors. However, since the above mentioned three jobs are different and unique, there pay determining factors too would be different. For the purpose of the study, Dunlop model has been considered. Now we will be having a close look at each of these pay determining factors one by one: 1/13 | P a g e Inputs Transformation Outputs Actors (Employers, Employees, State) Contexts (Technological, Market, Power) Ideology Bargaining Conciliation Arbitration Legislation...
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...Payouts for CEOs” Monterey Institute of International Studies ADVANCED RHETORIC AND GENRE EAPP 8456 Xiaofei Lai October 13, 2013 In “Fat Merger Payouts for CEOs,” Emily Thornton (2005) criticized the top CEOs for taking advantage of Golden Parachutes agreement to seize huge profit from merger. The author quoted a string of the latest news to illustrate an increasing number of famous CEOs benefiting from merger-payout provisions. In addition, Thornton indicated that this trend has negatively influenced the whole financial market. This article was timely because golden parachutes became a hot issue among CEOs when it was published; and it alarmed CEOs and corporations to think twice before taking such actions. However, Thornton failed to thoroughly declare the positive effects caused by such agreements, or fairly compare the benefits those CEOs created for their companies against their compensation. This article was published after many famous executives gained a huge amount of compensation when their companies changed hands. The most representative example was James M. Kilts, Gillette’s CEO, who obtained about $188 million when Gillette was acquired by consumer-products giant Procter & Gamble Co. Compared with Kilts’ annual salary of $23million, this compensation went far beyond the norms. Similarly, Willian W. McGuire acquired $162 million by selling UnitedHealth, while Robert L. Nardelli was promised compensation valued at $114 million. According to a study conducted...
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...Are Bankers Undercompensated? The general public, more often than not, has the impression that bankers are the evil seed in the macro corporate environment. So, we need to ask ourselves, why? This notion is primarily based on the fact that “our economy is only as good as our banks,” therefore, CEOs are responsible for the country’s economic performance. Secondly, one of a bank’s many roles is to take care of people’s accounts, thus, in time of crises it is easy for individuals to make them liable for their uncomfortable financial position. Additionally, it is needles to say that these top executives are public figures, making it easy for people to put a name and face as the target of their dissatisfaction. Finally, in order for us to evaluate their compensation we need to draw a parallel between their performance as CEOs and their salary (including bonus), as well as compare them to CEOs in other industries. To assess performance, take into consideration that a country’s GDP is broken-down into four components: personal consumption expenditure, which is further broken down into goods and services; business investment; government spending; and net exports of goods and services. With the greatest US GDP contributor being personal consumption expenditure, services alone accounted for 46% of what the nation produced in 2011; and, the banking industry falls into that category. Moreover, if you take a look at exhibit1, which shows a further detailed breakdown of the US’s GDP...
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...CEO Compensation: A Display of Obscenity For years, the great debate over whether or not CEOs are overpaid has raged on. Some studies show that the average CEO in the US was paid $10 million to $15 million 2005[1]. Proponents argue that this level of compensation (compensation is the total amount of remuneration received by an employee, including salary, stock options, etc.) is necessary to obtain and retain the world’s greatest leaders, whole opponents argue the exorbitant amounts aren’t justified. However, in a world where economies are hurting, it’s hard to justify why CEO compensation is rising, and fast. While CEOs are hard-working, intelligent leaders who’ve worked up to their position, the rising levels of CEO compensation are unreasonable and almost unethical given the current state of the world economy. To put it simply, CEOs are accountable for the performance of their company, but in the end they are still managers. It is important that as a society, CEO compensation is better controlled and more reasonably determined. The high CEO compensation that exists today outlines the disparity of income between CEOs and their workers. CEOs pulling in millions while their workers struggle to get by is increasingly becoming an issue. A CEO working for a Fortune 50 company makes 213 times the average worker[2]. For instance, the CEO of Walmart pulls in $16,270,000 while the median worker makes just $22,700[3]. One of the worst CEO-to-worker pay ratios is found at UnitedHealth...
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...problem and give some evidence below. There is a prediction raised by Principle-agent theory that directors are more motivated while the performance-pay sensitivity increases (Kubo, 2005). However, after testing this prediction, the results do not support the hypothesis. Conversely, the study suggests that it is hard to improve performance in firms with high financial incentive measures. Moreover, it also points out that executives cannot be motivated by directors’ pay. Overall the results indicate that there is no consistence between financial incentive and business performance. The connections between incentive pay and future stock performance can also reflect this problem, where incentive pay refers to restricted stock, options and other forms of long-term compensation. Cooper, Gulan and Rau (2009) examined whether the long-term performance of a company could be better if incentive pay is in such forms. The study shows that performance of the companies in the highest compensation decile worsens significantly over time. Overall, it is concluded that incentive compensation and stock performance documented in the research is inconsistent. Moreover, the results suggest that compensation components could not create higher future returns for shareholders. But on the other side, some experts argue that high executive pay could help improve...
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...MASTER IN BUSINESS ADMINISTRATION ------------------------------------------------- (GENERAL MANAGEMENT) ------------------------------------------------- ------------------------------------------------- MGT6033: COMPENSATION & BENEFITS MANAGEMENT ------------------------------------------------- ------------------------------------------------- COURSEWORK / ASSIGNMENT I ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ------------------------------------------------- Prepared By: Lim Chee Seong (IC: 661007-08-6109) ------------------------------------------------- (Student ID: PACE 024747) ------------------------------------------------- ------------------------------------------------- Lecturer: Dr. Perema Kumari S Ponnampalam ------------------------------------------------- ------------------------------------------------- a) Compensation management as one of the important link to the human resource management, has greatly...
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