...increase shareholder wealth (“Restraints on Executive Pay”, 2009). Yet, the 2008 financial crisis was mostly characterized by declining levels of company performance largely due to the increase of risk afforded to CEO’s by the attractiveness of lucrative executive incentives to perform. This essay argues that executive pay and its influence on company performance is both controversial and complex and concludes that executive pay has minimal influence on company performance and, when it does have influence, it tends to be negative. It is widely believed that companies and their shareholders suffer from poor performance unless the importance of incentives for executives – most notably through monetary and stock compensation – is realized (Jensen and Murphy 1990). The notion that the level and performance sensitivity of pay affects the quality of managers an organization can attract in a competitive labor market for executives seems, on the surface, uncontroversial. However, whether compensation policy is truly “one of the most important factors in an organization’s success” (p.139), as Jensen and Murphy (1990) assert needs further examination A series of empirical studies from a variety of industry, national, and time settings present evidence contrary to the conventional belief in the effectiveness of performance‐related pay. In a paper exploring the effect of executive compensation policy on the profitability of companies in Japan in 1993‐ 1995, Kubo (1995) found...
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...argument discussing about the impact of executive pay influence over company performance. It is often taken for granted that a company is able to have a better performance when the C-Suite is paid more. Nevertheless, the issue can be unexpectedly complicated in some cases and go way beyond a “more or less” question. Several empirical evidences reveal that an unwise form of payment could easily backfire and lead the company to be derailed, even if the compensation is appear to be highly tempting. In this article, based on the current pay system, the correlation between executive compensation and company performance will be studied, suggesting that although the two subjects are positively correlated from a theoretical perspective, restraints and loopholes indeed exist in the current context of economy. 2 The Current Pay System In the beginning of 1990s, a high level of executive compensation has already been regarded as an effective measure to solve the principal-agent problem within a company, that is, to align the benefit of shareholders and executive managers. It’s believed that the rise in executive pay serves as strong incentives, and conceivably, it could be stronger with a larger sum of money (Jenson, M and Murphy, K). Derived from the previous viewpoints and experiences alike, the current executive compensation usually comprises base salary, performance-based bonus and long-term incentives. The system is supposed to furnish executives not only with a large amount of money...
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...Executive pay is often perceived by large as an excess of company compensation. But does it generally provide better results? It is evident that executive pay plays a role in a company’s performance, however the extent of its influence depends on the company’s policy on executive pay. In the essay I will examine how executive pay is dependent on company performance and whether this will affect future company development. The most basic concept is that the amount that executives are paid has a definite effect on performance. If an executive is paid a enormous amount of compensation, he is likely to be overconfident of his business decisions and is likely to take higher risks. This is due to his past performance that led to such high compensation. With such high compensation under the public eye, executives would feel compelled to perform better to live up to his expectations. But firstly, we have to determine if executive pay is performance based. The idealistic policy is to reward executives when they have made positive business decisions and have brought in profit for both the company and shareholders, all the while giving executives incentives to perform better in the next quarter. Some policies are equity-based, meaning bonus’ will link to share prices. This policy will undoubtedly benefit shareholders, because executives will be willing to take bigger risks to drive up the share price. Another reason they would take high risks is because whether the outcome is positive...
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...To what extent does executive pay influence company performance Executive pay has a lot to do with company performance. Chief executives, as the leader of a company, can exert some impact on the company’s future. Normally, they get a large amount of payment as well as the severance pay. Except the base salaries, they often get a compensation which is several times of their remuneration. According to CNBC, the average S&P 500 company CEO made 373 times the salary of the average production and non-supervisory worker in 2014, up from 331 times in 2013, according to the AFL-CIO. I would argue that executive pay will effect company performance a lot economically and socially. That kind of high payment could become a motivation for both executives and employees. Just as mentioned by Kubo (2005), in order to get as much pay as executives, employees are more willing to work hard and this is beneficial to the performance of the whole firm. He also showed the evidence from Jensen and Murphy that a high pay-performance sensitivity is better for the company. This means, driven by this kind of system, executives need to pay more attention and put more effort on their daily management, since the payment and the performance are related. Moreover, affected by the sense of equity, executives will see to improve the firm profitability (Fong, 2010). Talented individuals will be attracted to companies which are willing to pay more. And this would make the company more competitive than others...
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...To what extent does executive pay influence company performance? Whether there is a relationship between the level of executive pay and company performance is a topic of great interest. The forms of executive pay can be both equity-based compensation which is based on the price of company’s stocks, like stocks and options, and non-equity-based compensation, such as cash compensation- including salary and bonus (Bebchuk & Fried, 2006 ). A company’s performance can be measured by its economic return, in other words, the accounting performance on financial statement (Gulen & Rau, 2009). This essay supports that executive pay may have no significant influence on company performance, because there are some ways that managers can decouple their payments from performance, and this essay will investigate these possible underlying reasons. There are studies examine the relationship between the pay policy and performance, and the results do not support the hypothesis that there is significant link between payment and performance. Kubo (2005) examined this link by investigate a group of Japanese companies and the result showed that companies with high pay-performance sensitivity did not get better performance. Gulen and Rau’s (2009) study on incentive pay also suggested that managerial compensation components such as restricted stock, options and long-term incentive payouts, that are meant to align managerial interests with shareholder value, do not necessarily translate into...
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...To what extent does executive pay influence company performance? There has been widespread controversy in recent years about the amount of compensation CEO’s receive. CEO’s financial compensation packages were largely structured to incentivize risk taking in order to increase shareholder wealth (“Restraints on Executive Pay”, 2009). Yet, the 2008 financial crisis was mostly characterized by declining levels of company performance largely due to the increase of risk afforded to CEO’s by the attractiveness of lucrative executive incentives to perform. This essay argues that executive pay and its influence on company performance is both controversial and complex and concludes that executive pay has minimal influence on company performance and, when it does have influence, it tends to be negative. It is widely believed that companies and their shareholders suffer from poor performance unless the importance of incentives for executives – most notably through monetary and stock compensation – is realized (Jensen and Murphy 1990). The notion that the level and performance sensitivity of pay affects the quality of managers an organization can attract in a competitive labor market for executives seems, on the surface, uncontroversial. However, whether compensation policy is truly “one of the most important factors in an organization’s success” (p.139), as Jensen and Murphy (1990) assert needs further examination A series of empirical studies from a variety of industry, national...
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...“What are the factors at play in determining the pay and conditions of London train drivers, top company executives and investment bankers, and how large differences in pay have impact on employee morale and employee relations.” The study is divided into two parts based on the following issues: (1) What are the factors at play which determine the pay and conditions of London underground train drivers Top company executives Investment Bankers (2) To what extent may large differences in pay within an organisation impact upon employee morale and employee relations? If so what can be done to address the issue? 1.Introduction: From our basic knowledge, we know that for a job, there are different factors that help in determining the salaries and bonuses of an employee, job criteria and other work related issues. Similarly, to determine the pay and conditions of the London underground train driver, top company executive and investment bankers, there would be pay determining components/factors. However, since the above mentioned three jobs are different and unique, there pay determining factors too would be different. For the purpose of the study, Dunlop model has been considered. Now we will be having a close look at each of these pay determining factors one by one: 1/13 | P a g e Inputs Transformation Outputs Actors (Employers, Employees, State) Contexts (Technological, Market, Power) Ideology Bargaining Conciliation Arbitration Legislation...
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...Journal of Economic Perspectives—Volume 17, Number 3—Summer 2003—Pages 71–92 Executive Compensation as an Agency Problem Lucian Arye Bebchuk and Jesse M. Fried E xecutive compensation has long attracted a great deal of attention from financial economists. Indeed, the increase in academic papers on the subject of CEO compensation during the 1990s seems to have outpaced even the remarkable increase in CEO pay itself during this period (Murphy, 1999). Much research has focused on how executive compensation schemes can help alleviate the agency problem in publicly traded companies. To understand adequately the landscape of executive compensation, however, one must recognize that the design of compensation arrangements is also partly a product of this same agency problem. Alternative Approaches to Executive Compensation Our focus in this paper is on publicly traded companies without a controlling shareholder. When ownership and management are separated in this way, managers might have substantial power. This recognition goes back, of course, to Berle and Means (1932, p. 139) who observed that top corporate executives, “while in office, have almost complete discretion in management.” Since Jensen and Meckling (1976), the problem of managerial power and discretion has been analyzed in modern finance as an “agency problem.” Managers may use their discretion to benefit themselves personally in a variety y Lucian Arye Bebchuk is the William J. Friedman Professor...
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...characteristics of executive compensation and its determinants; l understand the principles and practices of compensation administration; and l identify the major components of wage structure in India. Structure 17.1 Introduction 17.2 Compensation Issues 17.3 Compensation Function 17.4 Compensation Policies and Objectives 17.5 Compensation Administration 17.6 Compensation Determinants 17.7 Compensation Survey 17.8 Compensation Structure 17.9 Job Evaluation System 17.10 Pay Equity 17.11 Executive Compensation 17.12 Compensation Trends 17.13 Wage Structure in India 17.14 Case Study 17.15 Summary 17.16 Self-Assessment Questions 17.17 Further Readings 17.1 22 INTRODUCTION One of the most difficult functions of human resource management is that of determining the rates of monetary compensation. It is not only complex, but significant both to the organisation and employees. Employee compensation decisions are crucial for the success of an organisation. From a cost perspective alone, effective management of employee compensation is critical because of the total operating costs. Another reason for studying compensation from the organisation’s perspective is to assess its impact on a wide range of employee attitudes and behaviours and, ultimately the effectiveness of the organisation and its units. Compensation may directly influence key outcomes like job...
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...Chapter 1- The Pay Model Compensation: Does it matter? Compensation is one of the most powerful tools organizations have to influence their employees. General Motors (GM), like Chrysler, has, for decades, paid its workers well—too well perhaps for what it received in return. Having labor costs higher than the competition, without corresponding advantages in efficiency, quality, and customer service, does not seem to have served GM or its stakeholders well. On the other hand, Nucor Steel pays its workers very well relative to what other companies inside and outside of the steel industry pay. But Nucor also has much higher productivity than is typical in the steel industry. Wall Street financial services firms and banks used incentive plans that rewarded people for developing “innovative” new financial investment vehicles and for taking risks to earn themselves and their firms a lot of money. Troubled Asset Relief Program (TARP), which included restrictions on executive pay designed to discourage executives from taking “unnecessary and exces-sive risks.” In an opinion piece in The Wall Street Journal, entitled “How Business Schools Have Failed Business,” the former director of corporate finance policy at the United States Treasury wrote that “misaligned incentive programs are at the core of what brought our financial system to its knees.” 7 He says that we “should ask how many of the business schools attended by America’s CEOs and directors educate their students about the...
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...Taylor & Francis G K Compensation, esteem valence and job performance: an empirical assessment of Alderfer's ERG theory CA. Arnolds and Christo Boshoff Abstract Improving the job perfomiance of employees has been the focus of many motivation theories, especially the need theories. These theories have however been questioned because of a lack of research on the causal relationship between need satisfaction and job perfonnance. Research on the link between the need satisfaction-job performance relationship and individual personality differences among people has also been neglected. This study addresses these research gaps as far as the intervening influence of personality variables on the need satisfaction-job performance relationship is concemed. The present study investigates the influence of need satisfaction (as suggested by the Alderfer theory) on self-esteem (the personality trait) and the influence of self-esteem on perfonnance intention (the surrogate measure for job performance) of top managers and frontline employees. The empirical results show that esteem as a personality variable exerts a significant influence on the job performance of both top managers and frontline employees. These and other findings provide important guidelines for managers on how to address the motivational needs of top managers and frontline employees in order to improve their job performance. Keywords Job performance; esteem valence; existence needs; relatedness needs; growth...
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...level of their capabilities, lack motivation, and may be dissatisfied. This chapter describes what leadership is and examines major leadership models and theories that have been developed by various researchers. It also describes how managers engaging in transformational leadership can have a dramatic impact upon their organization and discusses the impact of gender on leadership. Learning Objectives 1. Describe what leadership is, when leaders are effective and ineffective, and the sources of power that enable managers to be effective leaders. 1. Identify the traits that show the strongest relationship to leadership, the behaviors leaders engage in, and the limitations of the trait and behavior models of leadership. 2. Explain how contingency models of leadership enhance our understanding of effective leadership and management in organization. 3. Describe what transformational leadership is, and explain how managers can engage in it. 4. Characterize the relationship between gender and leadership. MANAGEMENT SNAPSHOT: EFFECTIVE LEADERSHIP STYLES FOR TOUGH TIMES: LESSONS FROM HOWARD SCHULTZ, RICHARD SCHULZE, DAVID FARR, AND LOU GERSTNER Each of these persons is a current or former chairman or CEO. Their companies compete within different industries. What they have in common is that as leaders, they developed effective strategies that helped their respective companies to deal successfully with the challenges that it faced. Each focused on building their company’s...
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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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...Canadian Social Science Vol. 6, No. 5, 2010, pp. 102-123 ISSN 1712-8056 [Print] ISSN 1923-6697[Online] www.cscanada.net www.cscanada.org The Effect of Reward System on Job Satisfaction in an Organizational Chart of Four Hierarchical Levels: A Qualitative Study L'EFFET DU SYSTÈME DE RÉCOMPENSE SUR LA SATISFACTION AU TRAVAIL DANS UN ORGANIGRAMME DES QUATRE NIVEAUX HIÉRARCHIQUES: UNE ÉTUDE QUALITATIVE Ekaterini Galanou1 Georgios Georgakopoulos2 Ioannis Sotiropoulos3 Vasilopoulos Dimitris4 Abstract: Rewards systems are one of the most significant issues of the human resource management. Throughout the literature, it is obvious that theorists and academics, as well as practitioners and managers emphasize the important factor of rewards. Additionally, job satisfaction is another crucial term within the same body of literature. Job satisfaction is likely to provide employees of all levels with feelings of fulfillment, achievement and even pleasure for their job. Thus, such feelings can make people more productive, creative and therefore more profitable for the organization. Furthermore, feelings of job satisfaction can strengthen the commitment and loyalty of employees with the organization, which is very necessary in present times where all firms are looking for competitive advantage and especially through their people. The objective of this study is to examine the correlation of the rewards systems and job satisfaction, based on a qualitative research. An attempt is also...
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...CONFERENCE PAPERS 165 What is the Impact of Corporate Governance on Organisational Performance?* Loizos Heracleous** Research on the importance of generally accepted ``best practices'' in corporate governance has generally failed to find convincing connections between these practices and organisational performance. We discuss research outcomes on the relationship between two such ``best practices'' (CEO/Chair duality and insider/outsider composition) and organisational performance, and find this relationship to be insignificant. We propose four possibilities for this tenuous relationship, that are not mutually exclusive: firstly, the possibility that ``best practices'' in governance are indeed irrelevant to organisational performance; secondly, that the operationalisation of theoretical concepts has low face validity; thirdly, that studies are too narrow, aiming to relate board attributes directly to organisational performance and ignoring other systemic factors; and lastly, the possibility that different types of organisations require different practices in corporate governance. Lastly, we address the methodological and substantive implications of each of these possibilities. Keywords: Corporate governance, best practices, performance, research methodology T he legal formation of limited liability companies in the UK in the eighteenth century has separated ownership from control of corporations (Fama and Jensen, 1983), where salaried managers ideally...
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