executive compensation

Type
Essay
Pages
14
Word Count
4170
School
California State University Monterey Bay
Course
Finance
EXECUTIVE COMPENSATION
Executive Compensation
Overview & Current Context
Ron Brown
California State University, Monterey Bay
BUS 601-Business Communications Fundamentals
Professor Karen Wisdom, M.A.
August 10, 2018
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Executive Summary
Executive compensation is a problem that has recently become a
mainstream topic in the business and political communities. Articles written by experts on sites
such as EPI.org and aspeninstitute.org have sparked nationwide interest in the issue of executive
compensation levels and the widening gap between executive compensation and that of the
average wage earner. Several factors are examined that may or may not contribute to the
problem. First, the typical executive compensation package consists of 10 percent base salary
and 90 percent of various stocks and incentives. However, it is the structure of these incentives
that causes the problem. Short-term incentives and unrestricted stocks can leave a company
vulnerable to unethical or risky practices by executives. An example of this type of behavior is
“rents.” The practice of selling large amounts of stocks when it is advantageous Experts believe
that the rise in executive compensation is much faster than it should. Economic indicators show a
steep rise in CEO pay even during times of moderate gains in the stock market.
This report examines the impact on organizations, communities, and economies affected
by excessive executive compensation. Shareholders, managers, line workers and consumers
suffer when there is an imbalance in a company.
This report lays out a plan to slow the rate of increase of executive compensation using a
combination of ethical practices on all organization levels, legislation designed to reward
companies that work to reduce wage disparity and increased shareholder voting power.
There are issues with this plan. Oversite must be empowered to reprimand offenders and
reward the diligent. However, oversight must be distant. Companies must be allowed to
implement these practices on their own. Embedded within the framework of this plan are the
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“Six rules CEOs can use to take their companies in the right direction,” as explained by Conway
& Samuelson; The Dodd-Frank Act; and Portland, Oregon’s excessive compensation Tax. Each
of these solutions requires full the cooperation by all entities involved. Opponents of the
components of the plan argue that they will not work.
Furthermore, they insist that they solutions may have adverse effects on the corporate
world. The recommendation of this report is to refine each one and combine it with the other
components. Earlier implementation of some of the components shows positive results.
Consideration of this plan is warranted.
Executive compensation is a problem that has recently become a mainstream topic in the
business and political communities.
EXECUTIVE COMPENSATION 4
Table of Contents
EXECUTIVE SUMMARY.................................................................................................................................2
EXECUTIVE COMPENSATION OVERVIEW & CURRENT CONTEXT.............................................4
IDENTIFICATION & EVALUATION OF OPTIONS..................................................................................6
THESIS AND RECOMMENDATIONS...........................................................................................................9
CONCESSIONS.................................................................................................................................................11
CONCLUSION...................................................................................................................................................12
REFERENCES...................................................................................................................................................12
ANNOTATED BIBLIOGRAPHY...................................................................................................................12
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Executive Compensation
Overview & Current Context
The disparity between executive compensation and that of the typical worker is a primary
cause of many of American's corporate problems. During the last four decades, Executive
salaries have increased at a staggering rate. Mishal and Davis (2015) reported that "from 1978 to
2014, inflation-adjusted CEO compensation increased by 997 percent, a rise substantially great
than the painfully slow 10.9 percent growth of the typical worker's annual compensation over the
same period." This statistic and others like it have been the center of widespread contention and
debate within the political and economic communities. Studies conducted by major consulting
firms and think tanks intend to ascertain the reasons for the rapid increase CEO compensation
levels, whether it is unfair compensation, and if so, what steps to take to alleviate further
damage.
One of the questions under consideration is the ethics of scrutinizing CEO Compensation.
Compensation, according to Mercer.com, "needs to attract key talent, motivate performance, and
create alignment with business imperatives." Therefore, Compensation must be competitive.
This tenet may be necessary for attracting executives, but should it be the only consideration?
There are other stakeholders involved; Are they negatively affected?
The gap in recompense between CEO's and typical workers has always been an issue.
However, this study consists of data for the period between 1965 and 2014. During this period,
CEO compensation studies began to reveal the rates of growth and reasons for the increase. Each
study looked at the issue from its perspective. The most prevalent opinion is that CEO
compensation is the product of the compensation package design and "CEO's ability to extract
concessions." (Michel and Davis, 2015). A large portion of their compensation comes in the form
EXECUTIVE COMPENSATION 6
of stocks. The design of this type of compensation package may not seem advantageous,
especially during hard economic times, but it can be quite beneficial during market growth.
Economists refer to this power as "rents." (Hodgson,2015). The argument is that CEO pay
increases as the stock market rises; yet, there is no rise in performance output. The data in Figure
A (Federal Reserve Economic Database, 2014) displays the correlation between the level of
compensation and the performance of the S&P 500 Index.
During the same period, the rise in the wages of the typical worker remained slow. This
fact is a principal contention in corporate America. The average worker expectation is to endure
stagnant wages, low cost-of-living increases and a downturn in the economy, while CEO's reap
the benefits of short-term incentives and "rents." The effect on each stakeholder was never more
evident than during the recession of 2009. CEO compensation dropped 44 percent due to stock
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market loses. However, the average worker faced foreclosures, furloughs, and loss of
employment.
The result of these events, coupled with the realization that the top company executives