Pros and Cons of Executive Compensation to Top Management

Answer

Pros and Cons of Executive Compensation to Top Management

             Top managers are often regarded as the most important persons in the organizations. Their daily activities entail diverse management and challenging projects to foster the growth of the organizations and attain business goals in the dynamic business settings. As such, most organizations tend to offer lucrative salaries and welfare packages to executives due to their significant contributions and remarkable value. Although qualified and dedicated executives deserve high compensation, some people argue that awarding such compensations may bring hefty burden and pose potential threats to organizations. Therefore, this paper describes the pros and cons of executive compensation to top management.

             As described in the Maslow’s hierarchy of needs, self-actualization and esteem are considered the highest needs of a person that are mostly obtained by professional, trained, and educated persons (Sadri & Bowen, 2011). The top managers holding the top positions in the organizations are professionals who require satisfaction and recognition from the organizations. Similarly, executive compensation can motivate top management by improving the potential capacity. As argued by Sadri and Bowen (2011), while there are myriad of perquisites, a major motivating factor for employees to work hard and perform exceptionally well is money.

            Lin, Kuo and Wang (2013) further grouped compensation into four parts, namely, short term incentives, basic pay, long tern incentives, benefits and perquisites, and claimed that cash that is considered the core component of basic pay plays a critical role in motivating the top management. Thus, executive compensation to top management might attract qualified personnel from outside the organization due to the high pay above the average. Moreover, executive pay may make companies to attract best talents in the market thus increasing their performance and competitive advantages. Executive compensation can also improve the relationship between top management and shareholders. Welsh, Ganegoda, Arvey, Wiley and Budd (2012) contended that maximizing the value of shareholders is often viewed as a critical goal of top managers since are often ready to maximize their personal revenues. To a larger extend, the top management will consider the profits of shareholders in case they are contended with the compensation offered to them.

            Top management tends to stress on effective management among themselves and in things around them. In fact, they desire to emerge victorious in the shareholder performance game (Welsh et al., 2012). More importantly, executive compensation is an effective way of prevent agency conflicts between managers and shareholders. As stated by Hansell, Luther, Plaschke and Schatt (2009), high compensation linked with the performance is critical in aligning the interest of top management with that of shareholders and these two groups would desire to work together to pursue similar goal.

Nonetheless, executive compensation is not often beneficial to employees. Notwithstanding incentives, the concept of distributive justice may be experienced in most organizations. Agarwal (2010) reported that the public perceive executive compensation to top management as extremely high and the disparity between these executives and other corporate staff is widening. On the same note, Lin, Kuo and Wang (2013) claimed that employees view their employment world as considerably unjust or just by comparing with their fellow workers and such workers may be discouraged with biased compensation distribution. These employees may think that their contribution to the organizations are not rewarding and thus may be discouraged from working harder.

Another limitation of executive compensation to top management is that the organizations may experience the obstinate challenge that there is inadequate room for further incentives. The professionals, particularly, top managers require need satisfaction from their daily chores instead of money. At times, they can be motivated by giving them difficult projects and the exclusive rights to supervise their projects (Lin et al., 2013). Awarding executive compensation to top management may also cause potential challenges to the organizations. In business, executive compensation is considered an expense and thus when it is out of control, there will be a significant decline in the corporate revenues of such companies. Moreover, executive compensation is considered a huge financial burden to organizations, particularly during financial meltdown.  Executive compensation to top management can taint the reputations of companies. Hansell et.al. (2009) claimed that when top managers are awarded executive pay but end up performing poorly, it will lead to unpleasant impression of the success of companies and lower the integrity of top managers among the public.

In conclusion, executive compensation to top management has numerous benefits and limitations. For top management, executive compensation causes recognition and incentives for their achievements and performance. Nonetheless, the problem of distributive justice coupled with the limitation for additional incentives cannot be overlooked. For the organizations, executive compensation may attract talents workers and prevent agency conflicts. Nonetheless, executive compensation, especially to top management can cause negative impression and financial crisis. As such, regardless of benefits of awarding executive compensation to top managers, both the organizations and top management require a more competitive and reasonable compensation that ensures that the business continues to improve instead of a relatively high one.