...Executive Compensation: Do you get what you pay for? Some would say that top executives are not overpaid. This side of the argument is based on the premise that top executives are paid well, but not overpaid. Many people see CEO pay packages but do not look further to see that a CEO's pay is not the whole story. What are the factors that might support a high executive compensation package? It is usually the most extreme cases of overpay that hit the press. Proponents of the argument that top executives are not overpaid state that most of the complaints about executive compensation center around extreme cases of overpay, and such cases blind us to the fact that the majority of executives are paid fairly. One example of this is the case of Lee Raymond, former head of Exxon Mobile. When he retired from the company in 2006, the price of gasoline at the pump was high, $3 per gallon, much to the consternation of consumers. Yet Exxon Mobile rewarded Raymond with a record retirement package--a "golden parachute," as it is known--to the tune of $400 million. The combination of exorbitant CEO pay and painfully high gas prices rubbed most observers the wrong way. A similar situation occurred in the case of Robert Nardelli of Home Depot. When Nardelli retired in 2007 with a pay package worth $210 million, the company he headed had just gone through several straight years of relatively poor performance. People wanted to know why the chief executive received such an exceptional payout...
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...Journal of Business Ethics (2009) 85:147–156 DOI 10.1007/s10551-008-9934-6 Ó Springer 2008 What’s Wrong with Executive Compensation? Jared D. Harris ABSTRACT. I broadly explore the question by examining several common criticisms of CEO pay through both philosophical and empirical lenses. While some criticisms appear to be unfounded, the analysis shows not only that current compensation practices are problematic both from the standpoint of distributive justice and fairness, but also that incentive pay ultimately exacerbates the very agency problem it is purported to solve. KEY WORDS: executive compensation, distributive justice, pay disparity, incentive alignment Introduction Few academic theories have been adopted as widely as the application of agency theory (Jensen and Meckling, 1976) to the structure of executive pay in modern corporations. After prominent suggestions that the inherent conflict of interest that exists between stockholders and corporate managers – or ‘agency problem’ – could be mitigated through the structure of managerial incentives (e.g., Jensen and Murphy, 1990a), the prevalence and size of stock option grants to senior executives have expanded increasingly and substantially (Hall and Murphy, Jared D. Harris, Assistant Professor teaches both Ethics and Strategy courses in Darden’s MBA program, and a doctoral seminar on corporate governance and ethics. His research centers on the interplay between ethics and strategy, with a particular focus...
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...overpayment have been identified: CEOs with too much power, inattentive boards of directors, conflicts of interest by compensation consultants, the use of stock options--the list goes on. Some studies show the average CEO was paid $10 million to $15 million in 2005. This includes their salary, bonus, stock option gains, stock grants, and various executive benefits and perquisites. Are rank-and-file workers underpaid? Everyone, I suppose, feels a little underpaid. Some data sources indicate the average American worker was paid about $40,000 in 2005. Anyone working in the technology sector knows this average pay level would barely hire a below-average administrative assistant in any of the technology hot spots in the U.S. And the average CEO pay has been earned by more than a few average technology company workers who had stock options in the right company at the right time. So, are CEOs overpaid compared to average workers? If you read the media stories this year, and in recent years, you might think that they are. Some interest groups have determined that the ratio of CEO pay to average worker pay is an appropriate measure of this problem. Some Web sites allow you to calculate how underpaid you are compared with your CEO. According to these sources, chief executive pay is between 250 and 500 times that of the average worker. Who are these CEOs who are supposedly paid hundreds of times more than the average worker? In most analyses, they are CEOs managing the largest public companies...
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...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 or bonuses. This combination...
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...| CEO Compensation | | | | Jade Duan | 5/12/2012 | | INTRODUCTION Over the past a few decades, executive pay has risen dramatically in the United States. As of 1960, the average CEO at a large corporation made approximately $190,000 (equivalent to approximately $1.3 million today). The 1990s saw one of the greatest wealth transfers in history, as CEO pay skyrocketed. S&P companies CEO pay went from 1993 average of $3.7 to $17.4 million in 2000 [1]. In 2010 the highest paid CEO was Viacom's Philippe P. Dauman at $84.5 million in 9 months [2]. Motorola CEO, Sanjay Jha, pay package rose to $47 million in 2011, almost four times of his 2010 pay about $13 million [3]. As CEO compensation continues to soar while workers’ pay stalls, today, the average CEO makes 411 times more than the average worker (Figure 1). The explosion in executive pay has become controversial and criticized. The idea that stock options and other alleged pay-for-performance are driven by economics has also been questioned. Figure 1. Ratio of average CEO Pay to average production worker compensation in America 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. "Today the idea that huge paychecks are part of a beneficial...
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...Top 10 CEO Highest Paid in Compensation as of 2011 1. Apple CEO Tim Cook was the highest-paid chief executive at a public U.S. company in 2011 with total compensation of $378 million. After becoming CEO in August 2011, Apple had record profits in the first quarter of $13.06 billion. Equilar, an executive compensation data firm, compiled a list of CEO pay of companies with revenue over $5 billion that filed annual proxy statements by March 30, 2012. (Kevork Djansezian/Getty Images) 2. Oracle CEO Lawrence Ellison had the second highest CEO pay in 2011 with $77.6 million in total compensation, according to Equilar. Ellison's pay increased 11 percent from the previous year. Forbes' 2012 third richest person in the U.S. and the world's sixth richest with a net worth of $36 billion, he has been CEO of the software company since he founded it in 1977. (Kimihiro Hoshino/AFP/Getty Images) 3. Ron Johnson, who became CEO of retailer J.C. Penney in November 2011, is Equilar's third highest paid chief executive with $53.3 million in total compensation. Credited with pioneering Apple's retail store and its Genius Bar tech support as that company's senior vice president of retail operations, he is tasked with transforming J.C. Penney Company, which reported a loss in the fourth quarter. (Astrid Stawiarz/Getty Images) 4. Viacom President and CEO Philippe Dauman had the fourth highest CEO compensation with $43.1 million, a drop of 49 percent from last year. Dauman has been...
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...CASE STUDY: The Debate over CEO Compensation The most visible and highly paid person in most corporations is the chief executive officer (CEO). CEO compensation is particularly important to firms for three reasons. First, the compensation package is likely to be important in attracting and retaining good CEOs. Second, the form of the pay contract is likely to help determine whether the CEO focuses on value maximization or some other objective. Third, employees throughout the organization carefully follow their CEO’s pay. Important morale problems can occur when employees think that the CEO is overpaid. For instance, employees complain bitterly when they are asked to take pay cuts because the company is in trouble, yet at the same time the CEO gets a big raise. Controversy over CEO pay has increased substantially in recent years. One charge is that the level of CEO pay is too high. CEO pay is so huge that people don’t believe they deserve it. It is easy to pint to many ECOS who report compensation in the millions of dollars (reported compensation figures typically include salary and bonus payments, as well as gains from the exercise of stock options). Consider the following two examples. Investors were outraged when E Trade Group Inc. disclosed it had paid out a $77 million compensation package for CEO Christos M. Cotsakos in 2001- a year in which the financial-services company lost $242 million. When Cotsakos pledged later to return $21 million, the complaints...
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...Shareholders Watchdog, Inc. 777 Wall Street New York, NY 10005 December 7, 2011 RE: Is CEO Compensation Fair? Dear employee, Accompanying this letter is our completed report that discusses the issue of the fairness of current CEO compensation. Although there are two sides of this argument, recent legislation and regulations for reform tend to support those who believe it is unfair. We have evaluated the current standards of CEO compensation and examined why both sides think they should prevail. There are some advantages that strongly support CEO’s huge salaries, including the following: * Provides incentives and motivates the CEO to obtain or surpass corporate objectives * Retains key-value leaders for the long-term, resulting in consistent corporate success * Creates a strong CEO confidence for him/her to reinvest in the corporation (bonds) Our overall research indicates that CEO compensation does not reflect actual performance in most cases. Many CEO’s are grossly over compensated (including stock options, bonuses, hedge funds, and other benefits). The “Golden Parachute” guarantee adds insult to injury. Based on our research, conducted from the UNLV Library periodicals database and online sources, we recommend the following: * Require corporations to adhere to sections 951, 953, 955 and 956 of the Dodd-Frank Bill * Maintain a collective (“Esprit de corps”) work force environment for all employees * Consult third party professional...
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...The Debate over CEO Compensation Analyzing Managerial Decisions: The Debate over CEO Compensation 1. Do you think the fact that most American CEOs are paid so much more than rank-and-file employees suggests CEOs are overpaid? Explain. I do not believe that just because American CEOs are paid much more than rank-and-file employees suggest that they are overpaid. Many CEOs whose salaries and compensation packages are discussed in the news are the CEOs from the largest American corporations and likely do not represent the average American CEO. Also, many times when CEO payouts are discussed in the news it is not a one year payout but instead a multi-year payout. Plus, many companies need to pay high salaries and incentives to attract successful CEOs from other companies. This alone drives the overall salary and compensation packages for CEOs but does not necessary point to them being overpaid. 2. Japanese CEOs generally receive much lower levels of compensation than CEOs in the United States. Does this imply that U.S. CEOs are overpaid? I do not believe that just because Japanese CEOs receive much lower salaries than United States CEOs implies that they are overpaid. I worked for Honda and one item that I learned in the past years is that there are large differences between the American and Japanese cultures. The Japanese very much frown upon employees that leave their companies. Japanese employees barely ever transfer companies unlike American...
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...1) Essay Question # 2: Issues of CEO pay that managers need to understand. CEO Pay Overview It seems as though no matter how bad the economy gets or how poorly a company performs, the Chief Executive Officer (CEO) (and other top executives) always come out in the best possible position, especially with compensation. Besides lavish compensation packages and best possible amenities, the CEO’s generally enjoy large severance packages or “golden parachutes”. Severance packages are basically contractual deals between the CEO and the corporation that in case the CEO is terminated for some reason or leaves the company, he/she is entitled to a specific sum of money on departure. Golden parachute is a term used to describe rich severance pay packages which in addition offer cash bonuses, stock options and benefits – essentially a complete and wealthy severance pay package. (Carroll & Buchholtz, 2009) The purpose of these packages was logical for industries prone to mergers, acquisitions or failure – it would protect the CEO in case the company experiences any of the above. Nevertheless it increased the moral hazard problem and the principal-agent problem within organizations. Basically the rationale has a fallacy where it protects the CEO and his/her pay if the company should fail, merge or be acquired but it doesn’t protect the company if the CEO performs badly and decides to bail out when the company is taking a dive. In this situation the CEO is capable of earning his/her regular...
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...In the article, “Wages of Failure: The Ethics of Executive Compensation” General Global is faced with a complex decision after new CEO, Janice White, requests to be paid based on performance. Her predecessor, former CEO Bill Hogson, seemingly underperformed for the company for nearly a year and stepped down with a huge exit package totaling $100 million (two years salary with bonuses). This caused an outcry by the press for less greed among America’s corporate executives. Janice White, formerly CFO of General Global, feels that by changing the companies pay policy to pay the CEO based on performance would increase stakeholder faith in the corporation. By being paid based on merit rather than by a market based industry standard would hopefully prove to the stakeholders including customers, employees, stockholders, and the public that she too was willing to take a loss if the company did not perform to expectations while under her control. While this seemed an admirable gesture, it raised many new questions for the board about exactly how to execute this change and what overall effect the change may have for the company itself. The board directors wondered if salaries of other executives should also be affected, if there should be a cap on yearly compensation, if they would loose an advantage due to loss of competitive CEO salary, or if the decision may ultimately cause instability. The ethical question here is should CEO’s be compensated based on a market industry standard...
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...Case Report on Executive Compensation In the modern society, chief executive officer has become the most important part to many companies especially to the publicly listed corporations. They generally make a significant contribution to the profitability of their firm. However, in some case the managers’ interests conflict with their companies’, and thus their decisions may probably do not maximize their companies’ value. Therefore, it is a problem that how shareholders ensure that top executives want to maximize their wealth. This paper explores the principle for compensation, makes an attempt to design a new compensation package to the chief executive officer of Nike, Inc., and finally compare the different between the existing pay package and the new one. I. Introduction Nike, which originally named as Blue Ribbon Sports, is the largest manufacturer of the athletic footwear and apparel in the world, and one of the Fortune 500 companies. Figure1 shows that Nike is the leader of the global athletic footwear market, with around 31% market share in 2007. Creating by Bill Bowerman and Philip Knight in 1962, its early products are footwear, but now it has a wide range of product line. Today Nike is engaged in design, development and marketing of footwear, apparel and equipment, including shoes, sock, gloves, bags, and sports balls and so on. Many of its products are design for specific athletic such as football, basketball, running and even walking. According to figure2,...
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...little ownership of the company (less than 1% in most cases). a) Assume that we have a CEO that does not have 100% ownership of the company but has an ownership stake of 33% with no other shareholders having a significant ownership stake in the corporation so that the CEO has effective control over decision making in the organization. What are some of the advantages of the CEO having such a large ownership stake in terms of controlling agency costs? (3 pts) As this particular CEO essentially wears two hats, manager and large shareholder, there is an incentive to maximize the value of the firm. Every decision this CEO makes as a manager will impact the value of the company and thus his own personal wealth. As this CEO has a significantly greater vested interest in the performance of the company, he or she is likely to keep agency costs at a level that allows for a greater margin of profit. Also, as stated in the book, Corporate Governance, Third Edition, by Kim, Nofsinger, and Mohr, “a person whose wealth is significantly tied to a firm and is also directly responsible for running the firm…minimizes conflict of interest problems between owners and managers”. In effect, the duality of these roles cause owner and manager to be one in the same. b) What are some of the disadvantages of the CEO having such a large ownership stake in terms of agency costs? (3 pts) A disadvantage to a CEO being the majority shareholder is that his managerial decision making...
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...used to emphasise the various views of economists regarding executive compensation. Non-Regulation of Executive Compensation Executive Compensation can be described as the monetary bonus, or the non-monetary benefits which an executive receives for their work in an organisation. Executive Compensation can be a highly motivating incentive to work more efficiently, thus benefiting the organisation and keeping the executive content with his contribution and performance. However, this compensation can have adverse effects where the executive does not have the organisations best interest in mind, but his own in an attempt in maximise his compensation. Executive compensation may consist of the following components, a base salary, incentive pay in the form of a bonus, stock awards, option awards. It may include a Supplemental Executive Retirement Plan (SERP) and extras such as cars and even club memberships. An executive could also qualify for deferred compensation earnings. Clearly the...
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...Case Study 2 – At Oakwood CEO Pay in News a recent campaign by organized labour unions brought the issue of executive compensation into the public eye. Media coverage of executive compensation concerns has been extensive over the last few weeks with articles in national publications and a featured story on a television special, in addition to stories on local news stations. This extensive coverage has highlighted public concerns of the high level of pay that top executive receive. The union promotes an executive compensation awareness campaign every year as a strategy to build awareness of perceived inequities between the pay of CEOs and the frontline employees. Such awareness often prompts employees to consider forming a union, resulting in the growth of national unions. The publicity has caused some turmoil at Oakwood lawns. For the first time, the company’s CEO Pay is featured as an example of perceived excesses in the executive suite. Several field managers have been in touch with Don Henry, the director of human resources, to report that employees are outraged at the rate of pay of the company CEO and other top executives. In addition to their desire to remain union free, Don also knows that such outrage could lead to low morale and other problems at Oakwood. The union targeted Oakwood because it is a big company that has faced some financial challenges. The landscaping company has more than 15000 employees’ in offices throughout the Midwest and most of their employees...
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