ARE TOP EXECUTVES WORTH WHAT THEY ARE PAID?
Introduction
“Republic Bank Executives getting million$- Workers Getting Crumbs!!”- This is at a time when Bank Directors fees are increased by 85 percent to nearly 1 million dollars in one year alone (Trinidad Guardian, February 25,2011).
“While Republic Bank Biggies could look forward to a bigger parting gift than $10 Million and FATTER PENSION(BIGGER BANK/BIGGEST PROFITS=BIGGER GIFT/FATTEST PENSION) , a republic bank worker after 30 years service gets an average MONTHLY PENSION OF $2,400.00 and a pat on the back.”
It is headlines like the one stated above that continues to bombard the media in recent times. Executive remuneration is one of the most hotly debated topics in the Human Resource (HR) world. Bergmann and Scapello (2002) argue that during the reign of Julius Caesar, centurions received attractive incentives. However, they stressed that longevity of an idea does not mean a lack of controversy surrounding it.
In the aftermath of the financial crash and recession 2007-2009, the debate of the executive compensation again has surfaced to the forefront by the media and became the hot issue for academicians, researchers, regulators, policy makers and public.
The purpose of this paper is to clearly discuss the issue of executive compensation by presenting arguments for and against it. While there has been an undisputed escalation in Chief Executive Officers (CEOs) pay and in comparison to the earnings of “average” workers over recent decades, academic researchers have taken positions on both sides of the debate. This paper would, therefore, provide a brief review of the basic frameworks within which CEO pay is viewed, and presents the principal arguments characterizing this debate. My OPINION WOULD FOLLOW.
BRIEF BACKGROUND
As mentioned previously, Bergmann and Scarpello (2002) stated that executive compensation is not a recent issue. The compensation paid to CEOs of large publicly traded corporations rose dramatically during the 20th and 21st century stimulating much debate on the determinants of managerial pay.
While nations were in an economic tailspin, unemployment rising and the financial system teetering, executives’ compensation made headlines in the media. There was public outrage about the enormous paychecks and bonuses afforded to corporate leaders while shareholders suffered from dropping stock prices and employees saw a reduction in salary, no bonuses and a diminished workforce.
Yet, the rate of increase in the level of pay began to rise during the 1970’s and rose at a faster rate in the subsequent two decades, reaching an average growth rate of more than 10 percent per year from 1995 to 1999. More so, CEO’s pay increased 92 percent and corporate enjoyed 75 percent increase in profits while the average worker’s pay increased by 16 percent. Although executives’ remuneration declined modestly during the 2000-2001 recession, it resumed a strong growth rate in the last years.
Much of the literature has argued that one of the main reasons for the explosion in executive compensation is that stock options are present in many CEO pay packages.

LITERATURE REVIEW
INTRODUCTION
The fact that executive pay has come under increased scrutiny in the recent past cannot be ignored. Very often, the media display outrage about the tremendous heights that executive salaries, bonuses and other financial gratuities have reached. Amidst all this turmoil, Boards of Directors still have problems explaining how, how much, and justifying why executives are paid such enormous salaries. The literature on CEO compensation is vast and pertinent points will be discussed to gain a clear insight into the arguments for and against these high paid salaries. However, it is important to note that scholarly research output in this area remains at best contradictory.
Firstly, the literature review would briefly discuss the major theories that surface from the literature to gain a clearer insight into how pay is view by different authors. These theories are Agency Approach, Value-based approach and Symbolic approach.

AGENCY APPROACH
One of the most prevalent arguments for high executive salaries has been the argument based on principal-agent problem. The agency approach considers pay mainly as a consequence of agency problems, and focuses on the question as to how to pay executives. Jensen and Meckling (1976) define the “agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent.” Agency problems exist in any situation where one party entrusts responsibility of tasks to another party. (Otten,Jordan 2007).
However, managerial actions and investment opportunities are not, however, perfectly observable by shareholders and as a result, shareholders do not often know what actions the CEO can take or which of these actions will increase shareholder wealth. The agency theory applied to compensation policy will be designed to give the manager incentives to select and implement actions that increase shareholder wealth. Shareholders want CEOs to take particular actions—for example, deciding which issue to work on, which project to pursue, and which to drop—whenever the expected return on the action exceeds the expected costs. But the CEO compares only his private gain and cost from pursuing a particular activity.

VALUE BASED APPROACH
The value approach generally regards pay as the reflection of the market value of the services executives have to offer. This approach utilizes the laws of economics, that is, supply and demand as underlying factors for executive pay. Legitimizing executive pay is grounded in arguments of market forces and market mechanisms. Some of the main theories under the value approach are (1) human capital theory (2) efficiency wage theory.
The human capital theory argues that an executive’s productivity is influenced by his accumulated knowledge and skills, i.e. his human capital. The more knowledge and skills an executive has, the higher his human capital will be. Agarwal (1981) states that “an executive with a greater quantity of human capital would be better able to perform his job and thus be paid more.”
Castanias and Helfat (1991) argument is in line with Agarwal. They believe that a relationship exists between human capital and executive compensation. However, the central premise of the argument rests in the resource based view theory. The resource-based view states that firms’ unique resources (including capabilities) drive firm performance. Organization can gain a sustainable competitive advantage when their resources are valuable i.e buyers are willing to purchase the resources' outputs at prices significantly above their costs ; rare, so that buyers cannot easily turn toward competitors with similar resources; and difficult to imitate or purchase (Barney, 1991). As such, superior managerial skills appear to meet such criteria for delivering a sustainable competitive advantage and are difficult to imitate because they are generally learned through experience and are thus difficult to codify and teach (Castanias & Helfat, 1991).
Efficiency wage theory (Prendergast, 1999) argues that executives will put in extra effort if they are promised an above-market-level wage. Because pay is set at a rate above market level, executives are less likely to leave the firm or to shirk their work, and will feel their contributions to the firm are valuable. Executives subsequently have the incentive to put in extra effort, which reduces executive turnover and increases productivity (Balsam, 2002; Prendergast, 1999).
SYMBOLIC APPROACH
This approach to legitimizing executive pay comprises of theories that consider pay more as a social constructed symbol fitting the expectation, status, or role that executives play in a society or firm. The argument here is that executive status, dignity, and expectations are reflections of executive pay and play a more secondary role in executive motivation (Otten, Jordan 2007). These arguments are based on social constructed beliefs about executive roles and how pay ought to reflect this. Two of the major theories under the symbolic approach that will now be discussed are: 1) tournament theory and 2) social comparison theory.
Tournament theory explains that the pay of a CEO is a prize and executives work assiduously to increase the chances of winning. (Armstrong, 2010). According to Lazear and Rosen (1981), the first prize in the tournament is the highest pay received by the CEO, the highest-ranking position in an organization. Setting a high prize provides incentives for the contestants to climb higher on the corporate ladder (Rosen, 1986). Rosen(1986) further states that “Contestants who succeed in attaining high ranks in elimination career ladders rest on their laurels in attempting to climb higher, unless top-ranking prizes are given a disproportionate weight in the purse. A large first-place prize gives survivors something to shoot for, independent of past performances and accomplishments”