...4 million, which was 475 times the blue-collar wage. This phenomenon revealed that companies are putting increasing emphasis on the CEO’s pay packages, holding a belief that better company performance could be achieved from a higher pay packages for executives. In other words, the correlation between executive pay and company’s performance has been underlined by many corporate boards in recent years. With the skyrocketed executive pay in society, there has been an avalanche of debates over the strong bonding between executive pay and company’s performance, especially among shareholders of the companies who doubted if it is worthwhile to invest a significant amount of money on the executive pay package. In fact, despite the fact that executives has been justifying their pay packages with such correlation, still, I agree to a small extent that executive pay does influence company performance. There is no denying that monetary rewards could be translated to motivation for executives to contribute more and to strive for a more lucrative profit for the company. However, there is no guarantee that a higher remuneration for executives would give rise to a more outstanding company performance given that executive pay is not the only key to success for a company. As a matter of fact, there are a wide range of external determinants affecting companies’ performance that cannot be controlled by executives, with opportunities and threats being the most significant one. It would be difficult...
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...extend does executive pay influence company performance Whether the executive pay influences the company performance or not? Or, can this high pay affect the decision of investors, motivate their employees and attract the brightest individuals to join? There is no universal answer towards this problem in the past few years. Some experts hold the opinion that the financial incentive is consistent with business performance, while some may argue that there is no relationship between them. This paper will discuss this 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...
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...increase shareholder wealth (“Restraints on Executive Pay”, 2009). Yet, the 2008 financial crisis was mostly characterized by declining levels of company performance largely due to the increase of risk afforded to CEO’s by the attractiveness of lucrative executive incentives to perform. This essay argues that executive pay and its influence on company performance is both controversial and complex and concludes that executive pay has minimal influence on company performance and, when it does have influence, it tends to be negative. It is widely believed that companies and their shareholders suffer from poor performance unless the importance of incentives for executives – most notably through monetary and stock compensation – is realized (Jensen and Murphy 1990). The notion that the level and performance sensitivity of pay affects the quality of managers an organization can attract in a competitive labor market for executives seems, on the surface, uncontroversial. However, whether compensation policy is truly “one of the most important factors in an organization’s success” (p.139), as Jensen and Murphy (1990) assert needs further examination A series of empirical studies from a variety of industry, national, and time settings present evidence contrary to the conventional belief in the effectiveness of performance‐related pay. In a paper exploring the effect of executive compensation policy on the profitability of companies in Japan in 1993‐ 1995, Kubo (1995) found...
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...argument discussing about the impact of executive pay influence over company performance. It is often taken for granted that a company is able to have a better performance when the C-Suite is paid more. Nevertheless, the issue can be unexpectedly complicated in some cases and go way beyond a “more or less” question. Several empirical evidences reveal that an unwise form of payment could easily backfire and lead the company to be derailed, even if the compensation is appear to be highly tempting. In this article, based on the current pay system, the correlation between executive compensation and company performance will be studied, suggesting that although the two subjects are positively correlated from a theoretical perspective, restraints and loopholes indeed exist in the current context of economy. 2 The Current Pay System In the beginning of 1990s, a high level of executive compensation has already been regarded as an effective measure to solve the principal-agent problem within a company, that is, to align the benefit of shareholders and executive managers. It’s believed that the rise in executive pay serves as strong incentives, and conceivably, it could be stronger with a larger sum of money (Jenson, M and Murphy, K). Derived from the previous viewpoints and experiences alike, the current executive compensation usually comprises base salary, performance-based bonus and long-term incentives. The system is supposed to furnish executives not only with a large amount of money...
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...been a subject of contentious controversy. Heated discussions erupt surrounding the impacts of executive pay to company performance. Some parties claim that executive pay can avoid the agency problem, which refers to the possibility of conflicts of interest between the shareholders and managers of a firm (Amarjit Gill, Nahum Biger and Smita Bhutani, 2008), in order to align the interest of executive officers and company. However, some people reckon that such compensation cannot boost company’s performance since the increase in revenue of executive officers does not mean an increase in their working incentive. Executive pay is the combination of salaries, bonuses and shares. Under most circumstances, there should be a positive correlation between executive compensation and company performance. As a medium of transaction, money has a profound relation with quality of life and the vast majority yearn for earning a living wage. Hence, money is always deemed a motivation for enhancing workers’ performance. There is no doubt that most executive officers attempt to maximize their revenues when the policy of executive pay is implemented. However, whether they would put strenuous effort into the business, this remains a dubious, uncertain question. Some may still slack off at work due to some personal factors such as laziness and lack of devotion to the company. First of all, executive pay will lead to a rise in risky investments. As the amount of salary is the sum of fixed basic salary...
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...To what extent does executive pay influence company performance? There has been widespread controversy in recent years about the amount of compensation CEO’s receive. CEO’s financial compensation packages were largely structured to incentivize risk taking in order to increase shareholder wealth (“Restraints on Executive Pay”, 2009). Yet, the 2008 financial crisis was mostly characterized by declining levels of company performance largely due to the increase of risk afforded to CEO’s by the attractiveness of lucrative executive incentives to perform. This essay argues that executive pay and its influence on company performance is both controversial and complex and concludes that executive pay has minimal influence on company performance and, when it does have influence, it tends to be negative. It is widely believed that companies and their shareholders suffer from poor performance unless the importance of incentives for executives – most notably through monetary and stock compensation – is realized (Jensen and Murphy 1990). The notion that the level and performance sensitivity of pay affects the quality of managers an organization can attract in a competitive labor market for executives seems, on the surface, uncontroversial. However, whether compensation policy is truly “one of the most important factors in an organization’s success” (p.139), as Jensen and Murphy (1990) assert needs further examination A series of empirical studies from a variety of industry, national...
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...Executive pay is often perceived by large as an excess of company compensation. But does it generally provide better results? It is evident that executive pay plays a role in a company’s performance, however the extent of its influence depends on the company’s policy on executive pay. In the essay I will examine how executive pay is dependent on company performance and whether this will affect future company development. The most basic concept is that the amount that executives are paid has a definite effect on performance. If an executive is paid a enormous amount of compensation, he is likely to be overconfident of his business decisions and is likely to take higher risks. This is due to his past performance that led to such high compensation. With such high compensation under the public eye, executives would feel compelled to perform better to live up to his expectations. But firstly, we have to determine if executive pay is performance based. The idealistic policy is to reward executives when they have made positive business decisions and have brought in profit for both the company and shareholders, all the while giving executives incentives to perform better in the next quarter. Some policies are equity-based, meaning bonus’ will link to share prices. This policy will undoubtedly benefit shareholders, because executives will be willing to take bigger risks to drive up the share price. Another reason they would take high risks is because whether the outcome is positive...
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...about the CEO’s pay package should Don identify to potentially share with the employees? 2. How can Don explain the pay disparity to the employees to ease their concerns about the fairness of the CEO’s pay? 3. Discuss the six forms of deferred (stock) compensation. 4. Briefly discuss the current core compensation and employee benefits of executive compensation. SOLUTION 1. Executive pay is comprised of several different components and Don should outline those specifically. Depending on the theory used to set the CEO’s pay, Don may want to collect different information. For example, under agency theory, he may want to emphasize the CEO’s ownership in the company. Under social comparison, he may want to obtain information on the market rates of CEO pay in Oakwood’s industry. Further, Don should identify the components of the CEO’s salary that are specifically tied to performance. While the company is having financial difficulty, Don should identify performance data that indicates any success that CEO has had in leading the company. The case may be that while the company is struggling financially, without the leadership of the CEO, they could be doing much worse. 2. Students may have a variety of responses to this question. Essentially, they should identify the type of information that they would want to know if they were employees of Oakwood. For example, Don should emphasize the tie between the CEO’s pay and company performance. If the CEO’s pay will be reduced...
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...Executive Compensation: The Ethical and Impact Challenge Executive Compensation: The Ethical and Impact Challenge Executive compensation is defined as the reward given to corporate executive employees for their job performance. Corporate executive employees are the higher echelon company employees and may include the chief financial officers, chief executive officer, upper level managers and the company president. Executive compensation mostly consists of base salary, bonuses, long-term incentives benefits, and prerequisites whose main purpose is to motivate the executives to steer the company to profitability and make decisions with the best interest of the organization. Executive compensation has been on an upward rise especially within the last few decades reaching to unprecedented levels. Worse still, executive employees’ salaries and benefits have increased at a significantly higher rate as compared to other employee’s compensation consequently raising controversy not only of the ethical issues but on issues of equity and efficacy of the high compensation in motivating the executive’s performance. The paper thus posits that the increased executive salaries are not only unethical but are not a reflection of executive performance nor are they correlated to executives performance and as such other options of motivating...
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... | |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 should be regulated to prevent executives paying themselves too much. This topic has been rising presently as due to recession and critical competition , the performance of multinational and large organization become Important to the stakeholders and also the heavy remuneration packages of top executives become objectionable. In view of the importance of this debate, following pages present the arguments on the validity and relevance of heavy remuneration of executives and their counter arguments. According to my analysis, the executive pay should be highly regulated by board of governors and other competent authorities to prevent the transfer of large sums to few executives’ accounts and to interconnect the pay and performance of these executives. 2. Case of Bank of America CEO Compensation The financial crisis...
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...Q1 Explain the importance of compensation management and detail how organization handle its complexities? Ans1 Compensation and reward system plays vital role in a business organization.since, among four Ms, i.e. men, material, machine and money, men has been most important factor, it is impossible to imagine a business process without men. Every factor contributes to the process without men. Every factor contributes to the process of production/business. It expects return from the business process such as rent is the return expected by the landlord, capitalist expects interest and organizer i.e. entrepreneur expects profits. Similarly the labourexpects wages from the process. Labor plays vital role in bringing about the process of production /business in motion. The other factors being human, has expectations, emotions, ambitions and egos. Labor therefore expects to have fair share in the business/production process. Therefore a fair compensation system is a must for every business organization. The fair compensation system will help in the following: 1) An ideal compensation system will have positive impact on the efficiency and results produced by employees. It will encourage the employees to perform better and achieve the standards fixed. 2) It will enhance the process of job evaluation. It will also help in setting up an ideal job evaluation and the set standards would be more realistic and achievable. 3) Such a system should be well defined and uniform...
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...To what extent does executive pay influence company performance? Whether there is a relationship between the level of executive pay and company performance is a topic of great interest. The forms of executive pay can be both 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...
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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) ------------------------------------------------- ...
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...Section number: (1) Subject: Research on “Is Executive Compensation Fair?” Is Executive Compensation Fair? Executive pay (also executive compensation), is financial compensation received by an officer of a firm. It is typically a mixture of salary, bonuses, shares of and/or call options on the company stock, benefits, and perquisites, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance. Over the past three decades, executive pay has risen dramatically relative to that of an average worker's wage in the United States, and to a lesser extent in some other countries. Observers differ as to whether this rise is a natural and beneficial result of competition for scarce business talent that can add greatly to stockholder value in large companies, or a socially harmful phenomenon brought about by social and political changes that have given executives greater control over their own pay. Executive pay is an important part of corporate governance, and is often determined by a company's board of directors. Types of compensation There are six basic tools of compensation or remuneration. * salary * short term incentives (STIs), sometimes known as bonuses * long-term incentive plans (LTIP) * employee benefits * paid expenses (perquisites) * insurance In a modern corporation, the CEO and other top executives are often paid salary plus short-term incentives...
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...An Assessment of Executive Compensation in Switzerland With Reference to Referendum in March 2013 on Executive Pay Adamu Yushau Usumanu adamuusumanu@gmail.com This Paper is Submitted in Partial Fulfillment of the requirement for Corporate Finance and Governance course SMC University School of Management Dr. Albert Widman January 29 , 2014 Abstract The citizens of Switzerland in March 2013, decided in a referendum that shareholders must determine Board Member, Chairmen and Executive pay. They also decided to restrict proxy voting and ban severance pay, bonuses, for the purchase and sale of companies. In addition, loans pensions, and remuneration in he form of stocks or profit sharing must be regulated by the bylaws of the company, and finally, individual board members, and chairmen be elected by shareholder every year and banned corporate proxy and the representation of shareholders by depository bank. Key Words: Corporate Governance, Executive Compensation, Referendum, Board Introduction The executive compensation (executive pay) is composed of the financial compensation and other non-financial awards received by an executive of a firm. It is a mixture of salary, bonuses, shares of and/or call option on the company stock, benefits, and perquisites, ideally configured to take into account government regulation, tax law, the desires of...
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