CEO Executive Compensation

Answer

CEO Executive Compensation

                                Executive Summary

The paper highlights the rise of executive compensation in recent years and the impact it has on businesses. The paper indicates that the rise in executive compensation has become detrimental to businesses, and highlights different options for its reduction. It also gives a recommendation on what can be done to mitigate it in future while acknowledging limitations of its theory. The paper also gives an in depth analysis of context and background of the concept of executive compensation.

  Table of Contents

Executive Summary ………………………………………………………………….3

Overview & Current Context……………………………………………………….. 4

 Identification & Evaluation of Options…………………………………………….. 4

 Thesis & Recommendations……………………………………………………….. 7

Assumptions & Biases……………………………………………………………… 8

 Concessions & Limitations…………………………....................................... ……9

 Conclusion…………………………………………………………………………. 11

References……… .. ……………………………………………………………….. 12

 Appendix A………………………………………………………………………... 12

                                              CEO-Executive Compensation

Overview and Current Context

       The amount of executive income has considerably increased during the last three decades. Today, the amount of executive income has more than doubled while deferred income has increased more than three times its original value. It is also safe to say that executive compensation has also diversified into many forms, which include deferred income. Today economic analysts have discovered that executive compensation has increased  to an extent of it threatening the sustainability element of businesses, which raises much concern. Today, the rise in executive compensation can be attributed to two schools of thought, one being the increase in competition for labor and generalist CEOs, effects of scale and talent and the availability of options outside the workplace for managers. The other school of thought attributes the increase in executive income to the restrictive elements of corporations and the effects it has on executive pay.  The huge increase in executive compensation has been blamed for huge imbalances in sales, employee relations and efficiency, all of which negatively affect profit. The ever evolving nature and form of executive compensation should therefore be understood and looked into so as to find a way to reduce it.

Identification and Evaluation of Options

              There are several options and forms of executive pay which include deferred payment, base salary, short- term incentives and long –term incentives. |The idea in this case is to understand the ethical requirements of these kind of payments and align them with the need for an increased executive pay or not.  Deferred income refers to the idea of an executive postponing part of his payment for future use. It is usually paid after retirement and has many benefits to the executive, making it an integral part of the executive pay package today. One of the most common advantages of the deferred income option is the reduction of tax value that is accrued through inflation. The deferred income is usually taxable with the tax bracket of the date of payment, and therefore any tax changes or fluctuations do not affect it. For this reason, the deferred income accrues some interest, making it a preferred option of r executives to earn more income when they withdraw their money (Frydman, 2009). The deferred payment option for example is a pay option that is deductible from the base salary, and usually accrues interest due to the fact that it is taxed based on the date of payment.

         The long- term incentive option on the other hand is a payment option for executives that are descriptive of a reward for the executive once they reach a certain target. The target is set to motivate the executive into improving in the long- term, but also to align them with the long-term goals of the organization. Due to the fluctuating nature of markets, the use of long –term incentives helps maintain the loyalty of executives and help the company achieve great milestones in business. It is usually free from influence of the base pay, and I usually presented over and above it.

        The stock option is another option for executive compensation, and usually entails the company giving the executive part of its stock as payment. The stock option is also given over and above the base salary and benefits, and is usually seen as a long- term incentive or benefit most of the time. The use of this option is quite clever for the sustainability efforts of the firm, especially since the executive will want to grow the company that owns his s tock. The problem however is that for CEOs with over a million dollars in payment, their net worth might affect the stock volatility of the company (DeLisle et al., 2019).

 Descriptions of Stakeholders

            The stakeholders in this case include the leadership of the company, the shareholders,customers and other junior employees. The effects of executive oay are felt by the stakeholders in varying degrees, depending on the type of executive may involved. If an executive is being paid in stocks for example,the company shareholders have a bigger stake since its part of their stock that will be given to the executive. The idea in this case is to understand the effect of the compensation to each stakeholder and how it can be managed if its negative.

• Values

        The values of the leadership include looking for an efficient leader who will be responsible for the corporate vision and mission. The shareholders should value taking risk and allow the executive to defer or accrue further benefits so long as he meets the set targets of investment. The customers should value risk just as the junior employees should do.

• Assumptions

         The stakeholders hold the assumptions that the executive will help the company achieve its short and long- term vision. They also have the assumption that the compensation will be a negligible or small part of the collective revenue accrued from the company.

• Interests

       As regards the stakeholders’ interests they include profits, loyalty from the executive leader, achievement of long and short term goals of the company, and increased innovation and efficiency in production.

Thesis & Recommendations

           Executive compensation needs to be regulated and reduced so as to ensure corporate success and sustainability.  Executives, just like any other enployee, judge the fairness of their pay using two factors: how much input they have placed in the business versus the actual output they receive. The idea of output in this case is a wide and varied concept which also includes the collective revenue or profit that the company makes (Gorry, et al., 2017). In case the workers note that they are not paid fairly, they can decide to disrupt the production cycle or report such incidents, which can be detrimental to the company's sustainable goals. The use of the fairness scale is therefore a very sensitive matter for an employer, as it is the company that suffers in the long run. In corporate set ups,one way of reducing executive compensation is to ensure CEO ownership of the company. If a a CEO is part or full owner of the company they will allocate less funds for their own salary if it would affect production.

         Call to Action

          I would recommend that executive also look at how much they have worked in order to determine the fairness of their pay. In some employment set ups, an executive can be off for considerably long periods of time, and opt to forego part or all of their payment for this period (Suarez, 2011). The same case is used in paying workers for manual or short term jobs most of the time, as it is the effectiveness of their input that reflects their salary at the end of the day. A construction worker or dishwasher for example is paid at times based on the number of hours they have spent at the place of work while a real estate agent can be paid a commission based on how many houses they have sold. An advantage of this outlook to payment is that it has less confrontational elements. The reward system should also be balanced among the workers giving a sense of encouragement even to the poorly performing workers. There could be rewards for most improved and reward set ups for entire departments as opposed to individual workers which may lead to divisions and conflict in the long run as well.

Assumption & Biases

             An assumption for executive  renumeration is that it is a critical component of management. It depicts a well structured and fair management system, and this effectively reflects on the output as well. In most countries, the law requires companies to submit periodic reports of their books of account which detail their revenue and expenditure (Pozen, 2014). The percentage of money spent on paying workers is an effective tool to determine if a company has good leadership and this can boost its brand outlook as well. Looking at the long run efforts for sustainability, it is safe to say that effective and fair payment of executives is key.

          Another assumption is that increase in executive pay will automatically increase productivity, efficiency and profit. It assumes that the payment is hinged on a pay-for-performance plan. A pay for performance plan in business refers to a scenario where workers are paid according to their productivity and procedure at work. They are paid according to how much they bring back to the company in terms of sales, efficiency, engagement or even management at times. It is a revolutionary tool of business management and employee retention since it is based on the talent hierarchy model which advocates that the most productive workers get the most remuneration.  The job is therefore given prominence over all the other factors and this has been the reason for the success of many businesses in this day and age. In other set ups, an exemplary worker can be rewarded through other means that are not necessarily monetary, and this may include an award of excellence, a holiday, a token of appreciation or even just a highlight of recognition by the company leadership (Schneider, 2013). Regardless of the reason or form of reward, the idea of using the reward model for performance has been known to have positive results if implemented correctly.

         The pay for performance model has therefore become quite  in recent times since it enables the employer to have short term goals for performance by employees, and they may most likely achieve this in order to achieve the reward. The process however may mean intense pressure for the workers, and some may opt to avoid it next time if they can. It is for this reason that the pay for performance model may be defective in achieving long term sustainable solutions for companies (Flabbi et al., 2015). In order to rectify this, the pay for reward model must be balanced in accordance with certain limits and boundaries that do not pressure workers in the end.

Concession & Limitations

         The limitation of my idea is that in some cases,the mere talent and skill of the executive accounts for an increase in pay. The limitation in this case is the fact that looking at how much they have worked not necessarily mean a reflection in pay. There has been an increase in hiring of employees with a specific set of talents and skills which in turn positively affects the company itself. The CEO of Apple Incorporated Mr. Steve Jobs for example, was a highly talented businessman whose expertise took his company to the personal computer market leadership position. His peculiar skillset of management and innovation is one of the most integral parts of the growth of his company, and has propelled it to the trillion dollar mark in asset base.

           Another limitation with my concept of decrease in executive compensation is that it may be affected by changes in technology. Today the advancements in technology have also presented limitations in the way the executive is paid as well. As the internet and the modern world connect, hackers infiltrate sensitive networks and infrastructure more and more, creating an even greater need for the executive to oversee its protection from such activities. Increasing such activities have increased benefit elements of executive compensation. Executives in recent times have had to oversee seminars,digital transformation and creation of digital products that are sometimes totally different from the actual products they make,adding more duties and benefits to their pay.  Brandes and Deb (2013) point out that it has significant implications as IIoT poses risks for businesses using digital investment and payment systems. That has been shown by the recent intrusion on the Saudi power network that has left 225 000 homes powerless, and studies show that people can search online traffic signaling services easily.

            Companies advocate a cross-component security strategy to focus on and control over endpoints, networking, web, emails, data, and physical and digital data center servers that are related with compensation. If an employees loses his salary, it demeaning is demeaning to the company image. Companies address the more than 500,000 new, specific threats every day and must secure, identify, and react quickly (Frydman, 2009). It is also advised that businesses and other institutions review current safety and practices, determine the risks and establish a security strategy or policy that addresses vulnerabilities. Still, no means of preventing all attacks are assured. The definition of regular procedures and a plan of action when an attack is identified could also be appropriate. Controlling, recording, verifying, and checking compliance procedures such as backups, hardware, software upgrades, and other security patches must occur. Organizations may also include mobile device management strategy in the procedure of exceutive compensation, which greatly helps its accountability cause. It is also the responsibility of the ensuring security therefore for digital systems therefore, such as changing passwords and safeguarding data confidentiality.  An organization can also learn how to use applications for malware and virus approved by it. It is vital to inform staff about malware and viruses and can help to prevent more violations. When executives recognize the likelihood of risk, they will obey the organization's security program more likely, reducing failure to hack and have regular maintenance.

      Conclusion

            Executives should recognize the value of balance with productivity. It should be reflective of an increase of the sustainability element of a business as shown. It is safe to say that executive compensation is a tip of the ice berg when it comes to corporate failure today. The ideology behind this is that the percentage of executives is relatively small as compared to the rest of the workforce, and therefore paying huge salaries and benefits to this group presents a scenario of unequitable distribution of resources. The global economic landscape has greatly suffered as a result, especially in the wake of a pandemic and a recession. The only logically sound thing to do would be to reduce the number of executives, salary and benefit amount or both. The move towards this will assist the corporate sector get its footing back in the industry as most of them are struggling with such imbalances of resources. The reduction of executive compensation will also serve to improve employee relations especially in corporate set ups where the CEO is more or less unapproachable or unavailable. The huge pay gap between junior employees and executives has greatly served to increase disunity and conflict among employees, which is detrimental to the company's image or sustainability efforts. In order to reduce such tensions, the CEO can have his or her salary reduced,and this will create an image of equity and fairness. Fairness in payment is therefore highlighted as one of the best methods to reduce corporate imbalance that affects production and sales.

Annotated Bibliography

Brandes, P., & Deb, P. (2013). Executive Compensation and Corporate Governance: What Do We “Know” and Where Are We Going.

            In “Executive Compensation and Corporate Governance: What Do We “Know” and Where Are We Going”, the authors discuss various frameworks that integrates corporate governance research related to executive compensation.  The information presented throughout the chapter is helpful in magnifying how much of the discipline of law within the domain of corporate governance and compensation is not empirical, and therefore cannot be included as conclusive data.  The authors further discuss how varying factors that surround compensation into internal, institutional, and market forms of governance, as well as how these factors affect executive pay outcomes including pay levels, structure, and performance metrics.

Chan, M. (2009). How to Rein in Executive Compensation?. The Open Ethics Journal, 3(1).

            In “How to Rein in Executive Compensation”, the author Marjorie Chan examines the necessary measures that corporations voluntarily participate in to prevent government involvement in executive compensation.  Chan uses        a multitude of compensation design issues and corporate governance to discuss various restructuring and modification efforts that will assist in preventing excessive executive pay.  Her examination of compensation design is of particular interest as it discusses biased benchmarking and its contribution to the increase of executive pay over time.  This information will be useful in discussing how firms determine executive pay based on CEO characteristics, size, and firm performance throughout my research paper.

DeLisle, R. J., Gorry, A., Kallen, C., & Mathur, A. The Million Dollar Rule, Executive Compensation, and Managerial Risk-Taking.

            In “The Million Dollar Rule, Executive Compensation, and Managerial Risk-Taking,” the authors provide evidence on the relationship between the structure of executive compensation and managerial risk taking with respect to tax changes in law.  This research is helpful in assessing how tax policies influence the structure of executive compensation within organizations.  Results show that the more risk a firm takes, the more sensitive executive compensation will become.  This information is of particular interest to my research because understanding the relationship between the managerial compensation structure and risk-taking behavior is a direct correlation with how an organization is run from within.

Flabbi, L., Macis, M., Moro, A., Schivardi, F., Lindley, J., McIntosh, S., ... & Donaldson, J. The impact of taxes on the use of deferred executive compensation.

            In “The impact of taxes on the use of deferred executive compensation”, the authors discuss the various way in which executive compensation has grown over the years.  More specifically, the article examines how, in recent years, the amount of government taxes imposed on the use of deferred executive compensation should be monitored and increased significantly.  The analysis of recent government regulations will be useful in discussing how the impact of taxes on the structure of executive compensation will place a significant impression on higher tax rates generating an increase in deferral activity.

Frydman, C. (2009). Learning from the past: Trends in executive compensation over the 20th century. CESifo Economic Studies, 55(3-4), 458-481.

            In “Learning from the past: Trends in executive compensation over the 20th century,” author Carola Frydman discusses the reasons which attempt to decipher the hasty increase in CEO compensation over the last thirty (30) years.  Frydman examines a few theories which include a competitive labor market alongside the argument that executive compensation is often excessive when compared against an economically efficient compensation contract.  Her examination of the managerial power theory will be useful in further discussing and examining how executive pay does not correlate to performance within my research paper. 

Gorry, A., Hassett, K. A., Hubbard, R. G., & Mathur, A. (2017). The response of deferred executive compensation to changes in tax rates. Journal of Public Economics, 151, 28-40.

            In “The response of deferred executive compensation to changes in tax rates”, the authors examine the empirical evidence that suggests a significant impact of taxes on the composition of executive compensation.  They further discuss how these changes impact the choice of compensation and analyze how wage deferral is a vital component in the assessment of such rate changes.  This information will be useful within my research paper to further present data that details how executives' choice of compensation between current and deferred income depends on changes in tax policy.

Pozen, R. C. (2014). Curbing short-termism in corporate America: Focus on executive compensation. Governance Studies at Brookings, 35(1), 1-19.

            In “Curbing Short-Termism in Corporate America: Focus on Executive Compensation,” author Robert Pozen evaluates a multitude of policy approaches to reduce short-termism.  These approaches include altering the compensation arrangements of asset managers and corporate executives, constraining the rapid trading of stocks by public investors; and limiting the influence of institutional shareholders on corporate governance.  Breaking down this information will be beneficial to the data provided in my research paper when I begin to incorporate alternative methods to executive compensation while maintaining fair ground for executives and organizations alike.  Knowing how to prevent organizational loss through short-termism will strengthen executive compensation packages offered by organizations. 

Schneider, P. J. (2013). The Managerial Power Theory of Executive Compensation. Journal of Financial Service Professionals, 67(3).

            In “The Managerial Power Theory of Executive Compensation,” author Paul J. Schneider details the arguments in favor of and opposed to the managerial power theory of executive compensation.  He outlines that those in favor of this theory suggests that the current system creates a distortion within executive compensation due to the creation of incentives alongside psychological and social influences.  Paul further discusses the recommendations proposed that will generate shareholder value.  This information is of particular interest because executives in any organization hold an important position in designing an organizations policy including their own investments and capital related decisions.  It would be beneficial to address how organizations can take necessary actions to reduce the managerial power and design of executive compensation in a way that a harmful business decision may directly impact the benefits of top management.

Suarez, S. L. (2011). The Politics of Executive Compensation: Government Regulation in the Wake of 'Focusing Events'. Available at SSRN 1745019.

            In “The Politics of Executive Compensation: Government Regulation in the Wake of 'Focusing Events,'” author Sandra Suarez compares government efforts to regulate executive compensation during the Roosevelt and Obama Administrations, after the outbreak of the Great Depression and of the global financial crisis.  This information will be great to utilize within my research paper because on both occasions there was a severe economic downturn.  It was during this time that the perception of policymakers and the media was that the general public wanted to curb excesses in executive pay.  Analysis of these financial crises meet the criteria of a focusing event, which succeeded in making executive compensation a prominent political issue.  Sandra goes on to compare government efforts to regulate executive compensation which have resulted in a variety of policies responses.