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Executive Pay And Company Performance on ceo compensation

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Published: 23rd March, 2015 Last Edited: 17th May, 2017

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High Pay, Low Performance Financial Crisis It is shown in several studies that high CEO pay is linked to low company performance. In the article, “Chief Executive Compensation: An Empirical Study of Fat Cat CEOs,” by Kuo and Wang they describe the connection between CEO compensation and the financial crisis in 2008. As stated in the article, “the incentives built into the compensation plans of many financial firms are one of the fundamental causes of the financial crisis and surprisingly receives little public attention”.

Executive pay and compensation packages are a hot topic in todays world of business and public analysis. Many top executives in the United States are seen as more highly compensated than is necessary, while other Americans are struggling to make ends meet.

Salary made up a higher proportion and bonuses and options a lower proportion of the compensation package for Canadian corporations. Overall, the relationship of pay to performance is weaker in Canada than in the United States. Despite the drastic differences in CEO compensation between the United States and other countries there are several reasons for these differences which stem from being cultural, some regulatory, and others due to taxation. In many countries it is taboo to earn the amount of money that American executives make.

Even so, the cost of executive compensation continues to increase despite efforts to curtail this type of company spending.

Despite the fact that the cost of compensation is steadily increasing, a company´s performance often depends on the performance of a good Chief Executive Officer (CEO).

The overcompensation of CEOs in America is nothing new, according to our research this trend dates back to the 1970s. “The review on CEO compensation by Frydman and Jenter (2010) shows that there was a dramatic increase in the compensation levels from the mid-1970s to the early 2000s in the U. S. Especially in the 1990s, the annual growth rates were more than 10% by the end of the decade” After researching the topic, we were surprised to find out just how much CEO pay has increased in a very little time-span, “Between 1992 and 2000, the average real pay of chief executive officers of S&P 500 firms more than quadrupled, climbing from $3. million to $14. 7 million” (Bebchuk and Fried, 2004, pg. 1).

Therefore, it is often necessary for a company to pay its CEO handsomely, usually well above the market rate, in order to retain him or her as one of the company's most prized assets.

This paper analyzes this notion and gives an in-depth look into the concept of pay for performance for senior executives such as CEOs.

Figure 1 illustrated median CEO pay at the 350 largest publicly-held companies in the US in the period of 1995 to 2005. From the figure, we can see an upward trend, especially the 35% rose in 2001. However, we can see from the figure that executives' pay does not always go up. In 2001, the dot com bubble went burst, the stock market declined significantly and had led to large fell in CEOs' pay.

It is important to note that a company's Board of Directors, shareholders and compensation committee are responsible for executive compensation package proposals presented to prospective CEOs, and they are charged with weighing possible risks against benefits for any particular package presented.
If the CEOs are being overpaid, and greater than their marginal product, this might due to the board losing control, which can then lead to further problems. Chairman Barney Frank of the House Financial Services Committee in the United State said in 2006, “I do not think the boards of directors' work as effective independent checks. They are not the fox guarding the hen house. They are hens guarding the rooster. And I think the time has come to say we need the shareholders to do this...” Former US President, George Bush, had asked American corporate boards to take up the responsibilities to control excessive executives' pay. He said in 2007, “America's corporate boardrooms must step up to their responsibilities. You need to pay attention to the executive compensation packages that you approve. You need to show the world that American businesses are a model of transparency and good corporate governance”.

CEO Compensation

There is a consensus in America regarding executive compensation and it is the philosophy that it is better to align executive compensation with performance. It is reasonable, considering that it just makes sense that paying an executive more for better performance is motivational to the executives (Ferracone 2010).

In a perfect competition, executives' pay should be equal to their marginal product. In equilibrium, these executives should be paid as much as the revenue they contributed to the firm. In a perfect competition, where all agents have perfect information, paying less or more to executives cannot occur. Firms overpaying executives will be undercut by competitors, while firms paying less, these executives will look for jobs elsewhere. In such a model, no one will be overpaid or underpaid. Executives receive high compensations only because of their high productivity and contributions to firms, not a sign of overpaying. Former US Treasury Secretary John Snow said, “in an aggregate sense...(CEO pay)....reflects the marginal productivity of CEOs...Until we can find a better way to compensate CEOs, I'm going to trust the marketplace.” (Greg Ip, 2006).

As analyzed by Gomez-Mejia, Tosi & Hinkin (1987), compensation for CEOs is as follows:

Compensation has three distinct components: salary, bonuses, and long-term income. The last includes a wide array of deferred compensation benefits like pensions, profit sharing, stock options, IRAs, and bonus deferrals (60).

Occurrences of corporate scandals are largely because of executives being compensated by stock option. These scandals include accounting fraud and earnings manipulation. Executives can maximise personal interests by manipulating. An example of such a scandal is Xerox Corporation. In 2002, the Securities and Exchange Commission in the US accused the company of a massive manipulation of earnings over a number of years. “The SEC said that accounting scheme helped keep Xerox's stock price artificially high in the late 1990s, so that executives could cash in $5 million in performance-based compensation and more than $30 million from stock sales. Xerox's stock rose to more than $60 in mid-1999, the heart of the period in which the SEC says executives manufactured profits, before tumbling to less than $4 a share in later 2000” (Bandler and Hechinger, 2002). These manipulations of profit can mislead investors but share holders might still be benefiting from rising share price, though this is not the initial goal of the firm.

The above quote outlines the totality of the basic CEOs compensation package, not including any added benefits or perks the company deems is necessary to attract and retain their chosen CEO executive.

The success of a company is a team effort and not just all done by the CEO. Without the lower level employees a company will not be able to be successful. CEOs do have greater responsibility, but corporations are too large and unwieldy to be governed by just one individual. By spreading the CEO’s compensation package it could allow for employee raises and benefits which could help motivate employees and make them happier. Executives can be paid well without being paid excessively.

However, the bottom line is whether or not the executive is capable of handling the responsibilities of being the top executive for the firm.

According to Lewellen, Loderer, Martin & Blum (1994), senior executives are responsible for their corporations' sound investment and financing decisions and also to ensure that their firms' shareholder and investor interests are well taken care of; however, there is concern by many shareholders and investors that their corporate executive may not do was is expected.

In the United State, financial institutions and investment bank still pay executives very high bonuses as these companies make a lot of profit with tax payers money in the stock market. In October 2009, the US government announced ways to limit executives' pay. The Treasury Department decided to order the seven companies that have not repaid bailout money to cut their executives' pay by half. This will result in the top executives pay limited in most cases to $500,000. The Federal Reserve takes another method. They proposed to monitor the paying packages at thousands of banks, including those who never receive aid from government. These actions taken by the government have two main objectives. Firstly, the government tries to push the executives' pay down to construct a fairer society with less inequalities and inefficient allocation of resources. The second reason to set-up these policies, is to limit risk-taking by banks. If banks, or bankers, are trying to risk in the stock market to earn high bonuses, they might lose out again. Discouraging reckless gambles can slow down or eliminate the development of a stock market bubble.

This brings up the issue of whether there is a correlation between the size of senior executive compensation packages offered and the firm's financial performance standing.

A positive correlation between the two can result in a reduction of overall costs for a large corporation (Lewellen, Loderer, Martin & Blum 1994).

Some countries have their own laws and regulations that make stock options less valuable and limit the overall compensation of CEOs. Lastly, restraints and taxes can affect compensation. An example is that few Japanese and German corporations were able to issue stock options. Japan is limited to owning only 10 percent of their stock, which is a large amount but much less than companies in the United States (Balsam, 2002, pg 280). Overall, the United States drastically pays CEOs higher compensation than the rest of the world, on average.

This is significant, given the fact that many smaller firms are competing in the marketplace with larger firms that can afford better executive compensation packages.

Similarly, Gomez-Mejia, Tosi & Hinkin (1987) suggests that economic theory concerning executive compensation is based on the human capital theory, and it relates to a company's size as being associated with how difficult a top executive's job is.

It is further noted that organizational size and the CEO's compensation package should be closely related and based on the complexity of the job more so than how well the job is done.

CEOs in the United States earn over $1,350,000 compared to Japanese, $485,000, German $530,000, French, $570,000, and UK, $665,000 (Balsam, 2002, pg 277). Rules for governing executive compensation vary from across the globe. In companies such as Germany and Finland it is illegal to to use stock option to compensate executives until 1998, unlike the United States, which stock options are a major part of their compensation package (Balsam, 2002, pg 277). It was noted that in 1997, Disney’s Michael Eisner single handedly out earned the aggregate paychecks of the top 500 CEO’s in the UK.

However, many experts and industry professionals disagree and feel that the CEO's performance should definitely be taken into account. The obvious assumption is that a high compensation incentive would yield a high performance level and success for top executives.
They go on to say, “Top executives of large banks or investment banks have encouraged the excessive risk-taking by top managers, leading to the financial crisis. ” Kuo and Wang also explain how the incentives of executives are link to the short-term performance of securities that are traded. This sort of behavior is not in the stakeholders’ best interest. The CEOs in this case are clearly not interested in what is best for the company, but merely looking out for themselves. Instead of focusing on long-term competitive advantages and achievements, the CEOs are looking to make a quick buck for themselves.

More CEO Pay vs. CEO Exits

As illustrated by Ferracone (2010), a company's Board of Directors may see the company in a position of risk by losing a strong-performing, qualified CEO, so they may opt to reward the CEO accordingly rather than risk losing the CEO to a competitor.

An example is one CEO and chairman of the board made $8. 9 million in 2003, which was the same year his company lost $463 million and he slashed the workforce by 20 percent, or 6,000 workers. Doing things like this can poison a corporation and completely divide a company. Instead of CEO’s comparing compensation packages to to other employees of their companies, CEO’s are comparing their compensation packages to the other CEO’s, which is not a standard for just compensation, since the issue of inequality often arises within a particular corporation.

They see it in their best interest to retain an already well-performing CEO who is experienced with the ins and outs of their firm and not have to deal with the possibility of ending up with a less desirable executive.
However, experts think that neither plan is expected to kill Wall Street's culture of lavish pay (Martin Crutsinger and Stevenson Jacobs, 2009). People argue that Federal Reserve's proposal does not set a specific limit; hence, the usefulness of the policy is still uncertain. The Treasury's plans only cover a limited number of executives. Also, this is not a long term policy, as if these companies pay-off their bailout fund, they are no longer being restricted and they can pay executives as much as they want.

Morgenson (2012) reports, many corporations argue that if they do not pay high CEO compensation packages, then they will not have the most highly qualified CEO. Therefore, many corporations find it in their best interest to justify the high-valued executive rewards and compensation packages by saying that their focus is really on hiring the most competent executive instead of simply trying to scrimp on pay and end up losing a promising executive for the company.

If the executives receive compensations that are greater than their value of marginal product, i.e. greater than their contribution to the firm, shareholder return may be stolen. A study compared the total pay given to the top five executives relative to corporate earnings at Standard & Poor 1500 firms between 1993-1995 and 2001-2003 has shown that the ratio of executives pay to aggregate corporate earnings doubled between the periods (Lucian Bebchuk and Yaniv Grinstein, 2005). However, another study states that the elasticity of CEO pay with respect to the rate of return to shareholders is very small. A 10% increase in rate of return to shareholders only lead to a 1% increase to CEOs' pay (Michael Jensen, Kevin Murphy, 1990). We might argue that the correlation between shareholders' return and CEOs' pay are too small to motivate CEOs to work for the firms' best interests. Also, by increasing this correlation will improve the firms' profitability by encouraging the CEOs.

Additionally, it is a fact that plenty of management teams in companies across America feel like they have to keep up with whatever the competition is doing, in this regard, based on what the market can stand.

In this practice certain virtues such as integrity, moral courage, and justice are essential to the practice of business. Also, in virtue ethics justice implies that executive pay should be more modest across the board, regardless of company profitability. (Kolb, 2006, pg. 101-115) CEO compensation is not “fair” top 25 CEOs had an average annual pay of $32. 7 million, which is more than 900 times the annual salary of the typical US worker. In an era which many companies are cutting costs by laying off employees, such compensation seems to be unjust.

It's a classic case of keeping up with the Jones'. However, a company's compensation committee may choose to offer a compromise by presenting the CEO with a reasonable pay incentive that is contingent on company performance.
It is easy to see how wide the gap actually is when seeing the statistics. Several reasons contribute to the difference in CEO compensation. However, with the success of international companies and paying CEOs less compensation, we in the United States can infer that CEO compensation in the United States is too high. Recommendations After taking a closer look into the argument and debate of CEO compensation we believe there are several ways to lessen the gap between CEOs and employees. One idea we had was to link bonuses to the company stock prices.

This way, the company is protected from the possibility of the company's financial collapse and also having to lose the CEO by forced resignation, along with paying out a hefty CEO severance package. With this in mind, questions often arise about whether or not pay-for-performance incentives for CEOs actually work and are a good idea.
Recently CEO compensation packages have high rocketed making many people question the validity of their compensation. Many questions have been risen to find out if CEO compensation if excessive. Through this paper we will discuss why we feel CEOs in America are grossly overpaid. We will start off by talking about the ethics on the matter and then the pay-performance connection within organizations. We will also touch on the real wages of employees and how America compares to international companies. We will finish our argument with some recommendations that we feel will help make organizations as a whole better.

In terms of pay-for-performance, it is a fact that high value incentives may not necessarily equate to good CEO performance, and good CEO performance may not necessarily mean better company performance.

Star Athletes It has been said that CEOs are comparable to star athletes; therefore, they deserve the substantial increase in their pay. However, the majority of the CEOs that are contributing to this big picture problem are not working for their “team”. If CEOs were taking these risky investments to better the company, that is one thing, however, the link directly pointing to incentives tells a different story.

As outlined by Barro & Barro (1990), the amount of CEO pay-for-performance increases as the CEOs relative experience increases. Additionally, as it relates to CEO turnover, CEO skill matching is directly related to compensation and the size of the corporation.

Capping seems to be a socially desirable policy in an economic crisis situation. However, it violates the principle of free economy which will be based purely on supply and demand. In addition, the capping policy will be seriously challenged in a good economy. Human resources specialists will also challenge this policy as it will limit a firm's ability to compete for the best talents in the labour market (Cheung, 2009). In a recent article in the Middle-East, Richard Lamptey of Mercer, an executive search firm, also warned the employers that the competition for high performance CEOs will drive up the executive pay (Richard Lamptey, 2009).

It is also noted that CEO experience has an affect on pay-for-performance sensitivity. As it relates to CEOs jumping ship of a firm to join the competition, relative transferable knowledge, skills and talents is an issue.
If we are in a perfectly competitive world, we can truly trust the marketplace that resources are allocated perfectly. There is no need to discuss whether executives are overpaid as market will self-correct. We can argue that the upwards trend of executives paid was led by the increasing competition in markets. Nowadays, managing a company requires more skills as CEOs face more competition. In this model, CEOs are worth getting huge amount of compensations.

Morgenson (2012) points out that most CEO skills are not easily transferrable from one firm to the next and that CEOs do not move often because of this fact. This means that perhaps all the hype about more money and incentives every year for CEOs is not necessary to keep them, because they will more than likely not move anyway.

A CEO is not some isolated individual seeking his or her own ends independently of other members of the corporate community; he or she is part of a whole. Therefore CEOs should not be paid like they are an individual who does everything on their own. A CEO’s role is defined by the corporation and the corporation has an overall purpose to benefit society. CEOs taking less in their compensation packages and spreading them throughout employees can actually help society. Our economy is down and needs to be improved. In order to improve it we need people to start spending money.

Many CEOs are comfortable and would rather not risk jumping ship to find greener pastures and end up in a worse situation than the one they think they are in at their present company. This is a valid assumption and it is crucial to the concept of aligning CEO pay with company performance.
Defenders of CEO compensation are also forgetting that along with the large compensation packages there is a great deal of retirement funds, 401ks, and stock retained within the company. The large payment of athletes could be contributed to the fact that they are not getting post-retirement benefits, like those of large corporation CEOs (Bebchuk, Fried, 2004 pg. 20-21). Employee’s Living Wages One of the biggest concerns with the increase of CEO compensation is the steadily decreasing real wages of employees. Compensation of CEOs far outweighs that of employee pay. In 1991, the average large-company CEO received approximately 140 times the pay of an average worker; in 2003, the ration was about 500:1” (Bebchuk and Fried, 2004, pg. 1). CEO Compensation and Virtue Ethics Another way to look at CEO compensation is to see if it agrees with virtue ethics. There is Aristotelian virtue oriented approach to ethics and was applied to business by Robert Solomon. In this, Solomon argues that business is primarily a practice, in which a community of individuals engages in a cooperative endeavor to deliver goods and services for the good of society.

However, some highly compensated executives are raking in the dough even when their companies are not performing well, and this is seen as highly unacceptable.

Executive Compensation Overpayment

Some CEOs are overpaid, in spite of undesirable company performance trends. Highly compensated top executives often accept large compensation bonuses and incentives, even when they see their company is not doing so well.

In many companies, remuneration of high level executives, such as Chief Executive officers (CEOs) and Chief Financial Officers (CFOs), are based on the performance of their companies as well as the market pay for similar positions. In a good economy, companies are fighting for high performance CEOs and CFOs, the pay levels and performance bonus are extremely high. There has been a lot of debate over this pay and benefits policy, especially after the recent financial crisis. This paper will examine the how the financial crisis has affected executive pay and examine the pros and cons of imposing limits on executive pay. Debates over the limits on executive pay and proposed capping methods in the United States, the United Kingdom and other parts of the world were reviewed.

A case in point is outlined in an article in the Huffington Post reports that, in 2011, the CEO of Dean Foods, Gregg Engles, was given a 52 percent increase in salary and incentives from the previous year and made $8.5 million, even though the company had a $1.6 billion loss for the year (Kavoussi 2012). This seems out of context but it is evident that this CEO's company places a high value on his presence without the organization.
However, we are not living in a perfectly competitive world. In an imperfect competitive market, we face imperfect information, where we don't know the marginal product of CEOs. Former Porsche Chief Executive Wendielin Wiedeking has been Europe's highest paid CEO, with a salary of more than $100m (David Stevenson, 2009). We do not know whether Wiedeking marginal product equals his pay as we do not have perfect information. Moreover, many people blame him for acquiring huge amount of debts and driving share price down after failing to takeover Volkswagen. Is he truly worth $100m? Since we are unable to observe any individual value of marginal product, we cannot tell whether these high earners are being overpaid or not.

Another example of a CEO cashing in when his company's profits took a downturn is the case of the CEO of Omega Healthcare in Hunt Valley. His executive pay package value doubled to $7.8 million, in spite of it being criticized by a shareholder advisory firm and also in light of the fact that the company's fallen stock price and decreased profits were on the books (Hopkins 2012). These are glaring examples of CEO overpayments and many people in the general public consider it an outrage.

It appears that the capping policy will result in interference in the market and could lead to inefficient allocation of resources. To resolve the problems associated with executive pay such as over paying the companies executives leading to unfair return to shareholders; short term or unethical actions by executives to drive up share price and inequalities in distribution of wealth in society, one should consider using appropriate action to rectify the situation. Corporate governance practice and audit by independent Board Members are important measures to ensure proper Executive Pay policies. Progressive tax system on executive pay will help to redistribute wealth. These could be more effective measures than to cap executives' pay in such a model.

As it relates to CEO overpayments, Popper (2012) reports that the median pay of the 200 most highly compensated CEOs in the United States was $14.5 million in 2011. This statistic comes from a study done by Equilar, a Redwood City, California compensation data firm.

In a perfectly competitive market, there is no need to intervene as the market will self-correct and reach equilibrium where executives or any individual employee are being paid according to their marginal product. However, we are living in an imperfect competitive market where we have imperfect information. Control is needed when these executives are being paid more than their contributions to the firm. It is consider more appropriate to ask for good corporate governance practice to manage this situation than to use Federal law to regulate private activities.

Additionally, those same CEOs' median pay raise equaled 5 percent. This is a standout social issue and it feeds the anger of ordinary Americans who often struggle with unemployment, pay cuts and decreasing wealth.

Executives may also be compensated by other methods such as the grant of stock option and equity shares. Stock option and equity shares are long term incentives for the executives. These options allow the owner to exercise based on the strike price. Executives only make profits if the share price is greater the strike price of the option. To maintain a high stock price, i.e. keep the option profitable, the executives have to align their interests with other shareholders, hence, to achieve good performance over a long period. Though stock option compensation might bring long term incentives, there are criticisms that the executives might decide to sell off firm's long-term wealth in order to drive up the stock price and exercise the option.

It is seen as a case of the haves catering to greed while the have-nots are barely getting by. Ferracone (2010) states some people blame the recent financial collapse in America on overly high executive compensation.
The recent financial crisis has drawn many tax payers and politicians' attention to the big pay package of many senior executives in companies that have requested government help and federal subsidy.

CEO Pay Alignment to Performance

In light of the overpayment issue, company investors' points of view are often in favor of aligning CEO pay with company performance, as well as having a trustworthy compensation committee that has the best interests of the investors and shareholders of the company in mind (Ferracone 2010). For instance, a Wall Street Journal report shows that 2011 CEO pay packages were more aligned with company performance.

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On average, CEOs received 0.6 percent increases for every extra 1 percent of returns to shareholders. This, at least, is a measurable component to the executive compensation package issue.

Shareholders often need justification of the significance of an executive compensation package before approving it. To meet approval, it is often not so much an issue about the amount of pay that is being considered for the CEO but more of whether or not the CEO is giving the corporation its money's worth.

If executives are being paid more than the marginal product, then yes, capping of executives' pay is needed. However, how can we observe an individual marginal product? How to cap and at what level are tough questions. It is also difficult to ensure executive performance when the pay incentives are taken away. It is also difficult to administer an equitable pay cap to executives of forms in different industries.

It is a question of does the CEO meet goals and standards put in place to help the company advance. Bhatt (2012) states that companies justify executive pay to shareholders by implementing compromises such as eliminating perks, tying bonuses to corporate goals and putting policies in place that allows the company to take back bonuses and stock options from executives if the company gets into financial trouble.
According to a recent study, the ratio of CEO pay in the United State, including bonuses and stock options, to that of an average employee has gone up from about 25-40 in 1970s to as high as 344 in recent years. The ratio in Europe remained around 20-40 and 10-15 in Japan (Venkat Venkatasubramanian, 2009).

This is seen as a fair compromise. With this type of justification tied to compensation package proposals, shareholders can feel better about the executives worth and commitment, and therefore they can feel better about approving the executive's compensation package.
The salaries of CEO’s today are very high compared to what it was back in the day. In economic booms, the salaries of CEO’s have skyrocketed and when the economy goes down the salaries of the CEO’s attracts the public’s attention. CEO pay is a controversial issue in the Unite States especially after the Financial Crisis of 2008. CEO’s are definitely getting paid too much for various reasons stated by former CEO Edgar Woodard Jr. There are four myths about CEO pay according to Woolard. The first myth is CEO pay is driven by competition. The second myth is about compensation committees are independent. The third myth is about how much wealth CEO’s are creating. The fourth and final myth is about severance for failing.

Say on Pay Authority

In contrast to decades past, investors are heavily involved in the decisions of what to pay top executives in their companies. They have a say about pay for top executives, unlike in the past.

CEOs in the United States not only being paid significantly more than their average domestic employees, they also receive significantly more than CEOs around the World. A study conducted by Martin Conyon, John Core and Wayne Guay in 2006 found that CEOs in the US were being paid 1.3 times of UK CEOs. Research on Japanese executives paid found that, they only received about a third of pay of the US counterparts while holding firms size constant (Minoru Nakazato, Mark Ramseyer and Eric Bennett, 2006).

The vehicle in which investors' voices can be heard is called the "Say on Pay" law. The "Say on Pay" law mandates that public companies allow its shareholders and investors to cast votes, based on advisory decisions, regarding executive compensation (Bhatt 2012). This has shed light on pay practices and allows a check and balance approach to alert for any red flags that may arise. The "Say on Pay" law is also a way for investors to vote against compensation packages it deems is too much and not in the best interest of the company, its shareholders and investors. For example, Bhatt (2012) reports that a Portland-based bank had an executive-pay proposal rejected by its committee and it cut the CEO's base salary by about 7 percent last year to a "paltry" $815,000. This example shows a move in the best interest of the shareholders, while still allowing for a hefty pay package for the CEO.
However, in order to spend more money people need to make more money. If CEOs distributed some of their compensation packages to their fellow employees they could have more money to spend and help increase the level of our economy. International Compensation When comparing CEO compensation in the United States to other major countries the statistics are quite glaring. A study done by consulting firm Towers Perrin estimated pay as of April 1, 1999, in industrial companies with approximately $500 million in sales.

It also shows that there can be a win-win situation with controlling executive compensation package amounts.

Shareholders, legislators, regulators and the media all put pressure on company Boards to appropriately balance the vested interests of investors and corporate management (Mercer 2009).

CEOs in the United States earn 45 percent higher cash compensation and 190 percent higher total compensation. Also median base salary is 30 percent higher in the United States while United States median bonuses are more than triple of that in the UK as well (Balsam, 2002, pg. 288). When comparing corporations in Canada with the United States there is a marked difference between the two countries in both the level and structure of CEO compensation. During the 1993-1995 period Canadian CEOs earn lower pay, with the median CEO earning $560,000 in US dollars compared to $2. 5 million for corporations in the S&P 500.

This is not only true for companies in the United States, but other countries as well. For example, Mercer (2009) reports that Europe has imposed legislation giving shareholders a say on executive compensation matters.
Executives in firms refer to senior and managerial employee within a firm. They are usually paid differently from the general employees. They normally get a base salary and on-top receive a performance linked bonus. For example, the pay of a CEO in a retailing firm might be based on a basic salary plus sales performance related bonuses. These bonuses are seen as short term incentives, since the executives only have to perform well in a particular period to get the bonus.

Also, firms in Span, Sweden, Australia, Norway and the Netherlands have voted to increase disclosure of executive pay programs. These types of corporate governance reforms have become popular, though the United States and Canada are the last to implement them.
In the United Kingdom, “The boardroom bonus culture is still booming” says the Guardian's Simon Bowers (David Stevenson). We still see executives being paid numerously after the recession. Lord Myners said the culture needed to be reformed as without government aids, bank would otherwise have collapsed a year ago (Jill Treanor, 2009). He warned that if banks do not self-discipline, government will take appropriate actions.

It is important that new disclosure regulations about executive pay programs are presented to shareholders of companies (Mercer 2009).

In addition to an increase in corporate disclosures about executive pay matters, there has also been an increase in compensation committee responsibilities in many firms.

As stated earlier, executives are being paid significantly higher than median workers. The increasing gap between top tier workers and front line workers will result in bigger inequalities problem, which can then lead to other social problems. Workers might think that their contribution to the firms is not rewarding, or they might not have benefited from the growth of the economy or the firm. In many past stories, we see firms growing, executives being paid at high rate, but at the same time laying-off labour.

This is significant because it shows that more time is going into the decision-making process to approve CEO compensation packages and that the interest of the company's shareholders and investors is taken into consideration on a larger scale.
If capping is implemented in one country, but not another, the highly skilled CEOs might just work in the country without the cap in order to earn more. As a result, the country as a whole may lose the competitive advantage because of brain drain.

Regulations have been strict, so it is in a company's best interest to ensure compliance to regulatory standards to avoid any possible corporate scandals (Mercer 2009). However, this presents a challenge for Board and compensation committee members to ensure an appropriate balance between executive pay with a necessity of attracting and retaining the best executive talent in the market.
According to Woolard, CEO pay is not driven by competition. The pay of today’s CEO is driven by outside consultant surveys and board member buying into a concept. The concept that the board members are buying into is that the CEO of your company has to be paid in the top half. Woolard suggests that in order to solve this problem is for the board members to suggest the human resources and compensation people to look at the internal pay equity and make the decision of what to do regarding the situation of the internal pay equity.

Additionally, when it comes to the compensation of top executives, many in the industry believe that CEO pay scales should have restrictions.

CEO Pay Should Be Restricted

CEO pay is often a subject of controversy as it relates to unnecessary compensation of corporate executives at the expense of taxpayers. DeCarlo (2012) reports on a study done in 2011 that revealed top executives of the United States' top 500 companies received $5.2 billion in pay raises, which represents 16% collectively. Comparatively, the average American worker only got an average of a 3% raise in pay.

The above concerns have logically led to the conclusion that executives' pay need to be controlled and cannot be excessive. However, there remains the questions that should we impose a maximum cap on the executive pay.

This is an in-balance that is seen as unfair to the general public. It's the old adage, 'the rich keep getting richer' and it shows a need for more corporate governance in this regard.

In contrast, some CEOs are simply not as greedy or fortunate as others.

Debates on putting a limit to the executive pay have disclosed many areas of controversies and concerns.

An article by CNET News reports that the CEO of Amazon, Jeff Bezos, has passed on his pay raise and bonus for the last five years. To make up for this, though, he did exercise some very lucrative stock options (Kawamoto 2003). This is something that is seen by shareholders as a good move and is preferable. It helps the corporation but still takes care of the executive.

Additionally, in the case of Amazon, a proposal is on the table for more executive compensation plans to include linking stock option cash out to an industry performance index.

Other compensations to executives might include retirement plans, housing and car allowances, health insurances, children benefits, club benefits, etc.

This means that the company executives would only get paid the large dollar amounts if the company's stock performed favorably (Kawamoto 2003). This is a compromising concept to executive pay restrictions.

Similarly, Hopkins (2012) states a recent study showed that six Baltimore CEOs received large pay cuts instead of large pay raises, due to low performing company issues.

The financial crisis in 2008-2009 was a quick and unpredicted one. Many financial institutions and banks, especially investment banks went bankrupt or into difficulties. Governments all over the world had different rescue plans. In the United States, one of the biggest investment banks, Lehman Brother, went bankrupt; American International Group suffered liquidity crisis. In the United Kingdom, Northern Rock was nationalised; Royal Bank of Scotland and Lloyds TSB together received ₤40 billion direct aid from government to prevent collapsing. Many financial institutions received government grant in order to survive.

For example the CEO of Corporate Office Properties had his compensation cut in half the year before he retired. This was because the company had a loss in 2011 of approximately $134 million due to plummeting stock prices.
From the Table, we can see that the highest paid CEOs receive more than 10 million US dollars. The amount these CEOs received is massive and many employees could not make this amount of money in their life-time.

The other five CEO pay reductions were also mostly related to bad company performance but there were other factors involved as well.

Another example of a CEO pay reduction instead of increase is the case of Armour's CEO whose compensation package was cut last year by 14 percent to only $1.1 million, but this was in light of the fact that the company's stock prices went up and they realized substantial profits. The company justified this by citing that the CEO did not reach all of his goals for the year (Hopkins 2012). This is an example of CEO pay restrictions in place.

According to Pearce, Stevenson & Perry (1985), some industry experts agree that CEO pay should have restrictions. This is based on the concept that high compensation merit pay may be an inappropriate way to enhance CEO performance and statistical analyses showed this to be likely. Additionally, it is noted that CEO performance motivation should be contingent on performance but many times it is not.

It is interesting to note that, according to Pearce, Stevenson & Perry (1985), a comprehensive study on performance-contingent pay programs for executives revealed that implementing these types of programs did not show significant effects on general CEO organizational performance. One reason for this is suggested that managers have limited direct control over the performance of an organization and focus should be more on environmental influences that the managers are responsible for manipulating.

Solomon argues that workers may not be loyal to someone they perceive as being unfair. At some level, trust and loyalty are needed for a company to prosper. Without these, this company will be left with a group of resentful, unhappy employees. Even if the CEO’s employees are “satisfied” with their minimum wage salary this satisfaction does not make the CEO’s actions any less just since he or she could afford to pay their employees more. At this point the CEO is taking advantage of his or her workers and being selfish. Companies give bonuses to CEOs even as employees and managers are being laid off.

It is important to note that even when CEOs are high-performing, they may not necessarily receive the highest pay for their performance. For example, the Society for Human Resource Management reports on a study done by a professional services firm that revealed that top CEOs of companies with the highest performance did not receive the highest pay raises.

Data on the top 10 highest paid CEOs in United State is shown in Table 1.

With this in mind, a question of whether or not it is even possible to successfully restrict CEO compensation and still benefit from the work of a quality CEO is appropriate. However, inefficiency in a product of interference should be taken into consideration as well as possible regulation of CEO compensation package ceilings.

CEO Compensation Packages Regulation

Many argue that it is unfair to have such an inequality in business as it relates to the astronomical salaries and compensation packages of CEOs in this country. However, others argue for its justification based on the fact that the CEO has the responsibility of final decisions that are made for a company and they have responsibility towards the company´s reputation and performance.

In light of this and the public attention from highly publicized, high profile corporation scandals such as the Enron situation, pay and performance of executives in the United States have come under some scrutiny (Jarque 2008).

We see a lot of problems associated with huge executives' pay, which include inequalities, accounting scandals and earning manipulation.

It is no wonder that the general public is skeptical and suspicious of how much money many executives make on a yearly basis. This is especially true because a lot of the money paid to these executives comes from taxpayer dollars, and the everyday American is aware of this and is not happy with it. An article from ABC News reports on a 2011 study that found tax loopholes, concerning executive compensation packages, which costs taxpayers more than $14 billion a year. This is due to CEOs receiving more in their compensation packages than was paid in taxes by their companies. Many see this as an unfair concept. It means that large corporations are taking advantage of these loopholes to lower their tax bills and the taxpayers end up subsidizing large CEO paydays. This is possible because, as it stands now, companies can take off executive pay as a deductible business expense on their taxes, so the trick is the companies pay the executives with stock options, which are exempt from taxation (Kim 2012). So, taxpayers get stuck with the bill and CEOs reap the rewards.

Regarding regulation of CEO compensation, however, there needs to be some. Jarque (2008) reports over the last 20 years, the average pay of CEOs working in the top 500 firms in the United States increased some six-fold. This compensation was mainly performance-based and was paid in stock options.

It is also reported that regulatory standards, imposed over the last 15 years, that affect executive compensation include changes in corporate capital gains taxes, limits on deducting CEO pay expenses unless they are performance-based, increased company disclosure requirements, and standards on option grants expenses (Jarque 2008).

Additionally, studies done following regulatory changes show a shift of compensation trends from salaries and bonuses to stocks and options (performance-based compensation). Jarque (2008) states, "This suggests that regulation efforts to improve corporate governance and transparency have been moving in the right direction, although it is difficult to evaluate the relative importance of regulation versus the market induced changes in governance practices" (267).


Executive compensation is a significant aspect of corporate governance and is often governed by a company's Board of Directors, investors, shareholders and compensation committee members. Executive pay typically consists of salary, stock options, benefits, bonuses and other perks deemed appropriate, based on different company preferences. As noted above, executive compensation has disproportionately increased relative to the average American worker and this is often seen as a negative in the public eye, so it is a growing social issue.

To help change the view of executive compensation as a root to evil, measures have been put in place to gear executive compensation packages more toward pay-for-performance. This equates to more executives receiving their bonuses, rewards and incentives only when their company's are doing well financially.

In today's competitive business world, many companies are looking for new and better ways to attract and retain the highest qualified CEOs to help lead their businesses to financial success through growth and expansion. Therefore, many companies are prepared to offer and follow through with paying handsome compensation packages to existing and prospective CEOs. Many firms are prepared to justify paying CEOs compensation packages above the market rates in an attempt to retain the services of what they feel is their most prized asset - the CEO.

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