- What factors help to explain the rise in executive compensation? Explain.
- According to Knowledge-at-Wharton’s article “The Current Controversy over Executive Compensation: ‘Issues of Justice and Fairness,’” there are several factors that help explain the rise in executive compensation. Some of these factors include Market forces: A significant factor is market forces. As the demand for talented executives increases, so do the salaries offered to attract and retain these executives. Companies competing for top talent in the global marketplace are often willing to pay high wages, bonuses, and other incentives to executives who help drive growth and profitability. The complexity of the job: Another factor is the complexity of the job. Senior executives are responsible for making tough decisions that can significantly impact their companies, and they are often under tremendous pressure to execute. This can make the job more demanding and increase the compensation needed to attract and retain top talent. The structure of a company’s board of directors can also help improve executive compensation. If the board is dominated by the CEO and other executives, they may be more likely to approve high compensation packages for their peers. In addition, boards may be reluctant to question executive compensation for fear of losing top talent. Finally, cultural norms can play a role in executive compensation. For example, in the United States, there is a cultural expectation that successful executives will be paid well for their achievements. This can make it difficult for companies to resist market pressures to offer high compensation packages, even if they are willing to do so. These are all factors that can help executive compensation rise.
- Discuss the two views on executive compensation – 1) that it’s excessive, and 2) that it’s appropriate. In what ways is each view valid? In what ways are they not?
- The view that executive compensation is too high: This view is that executive compensation has risen to too high a level and is not in line with the performance or market conditions. Arguments for this view include Disproportionate pay: Executive pay has increased significantly faster than average employee pay, resulting in a widening gap between rich and poor, which is seen as unfair.
- Poor correlation with performance: Critics argue that there is little correlation between executive compensation and company performance. This suggests that executive pay is unrelated to actual value creation and is therefore too high. High pay for mediocre executives: Some executives receive high compensation even for mediocre performance. This is seen as a waste of resources and unfair to shareholders and employees.
- The view that executive compensation is appropriate: This view argues that executive compensation is appropriate given the value executives bring to the company and the market conditions they face. Market forces: The market for top management talent is highly competitive and companies must offer competitive compensation packages to attract and retain top talent. High risk and responsibility: Executives assume significant risk and responsibility for the success of their companies. They are often under tremendous pressure to execute and make difficult decisions that can have significant consequences. Positive impact on company performance: Proponents of this view argue that executive compensation is tied to performance and is therefore justified. Well-compensated executives are more likely to be motivated and perform well, which benefits the company as a whole.
- Importance of retention: Retaining top talent is critical to a company’s success, and high salaries help prevent executives from being poached by competitors.
- What changes, if any, do you think should be made to executive compensation? Why?
- The main thing in my view is to increase transparency in executive compensation. Shareholders and other stakeholders may be more willing to accept high levels of compensation if they understand how it is determined and what factors are taken into account. Greater transparency might include disclosure of the specific metrics used to determine executive compensation, as well as the compensation of other employees within the company. There is no one-size-fits-all solution to the executive compensation issue. Depending on the company and the market in which it operates, different approaches may be more appropriate.
Leave a Reply