Executive Pay

The topic of how much to pay the top brass, or more formally the executives of a company, has been debated for a very long time. As income inequality has worsened in America, that debate doesn’t seem to be going away anytime soon. However this begs the question: what does an executive do exactly? While that answer to that question may vary in its exact details, it would be useful to provide a brief description.

According to the Society for Human Resource Management and Indeed.com, a typical CEO’s job and duties might be listed as follows:

The Chief Executive Officer acts as the leader of a business who has the overall goals of seeing the company be profitable, expand, and provide a return on the investments of shareholders.

Responsibilities include but may not be limited to:

• Acting as the public face of the business
• Managing, developing, and implementing company goals or policies
• Setting the business tone and/or culture.
• Decide or participate in deciding company resolutions
• Communicating progress, goals, policies, or other company information to other executives, employees, stakeholders, shareholders, or the public
• Make staffing decisions, including at the top level of the business

A list of qualifications for a CEO could include things like:

• Extensive managerial experience
• Experience handling business finances and business operations
• Great communication skills
• Leadership abilities and experience
• Task and duty delegation skills
• Experience with high-stress situations
• Education/certification requirements

Summary of Questions

• What factors help to explain the rise in executive compensation? Explain.

According to the PBS video Executive Pay: The Issues it was typical for a CEO in the early 1970’s to make about 50 times that of your average company worker, but today that ratio could be as high as 400-700 times. There are four main reasons for the rapid growth in CEO pay. The first revolves around the desire for companies to secure top talent. Over time, this arms-race caused businesses to offer increasingly cushy salaries and other compensation. Another reason for the great increase in compensation involves changes in pay disclosure rules and regulations, as well as the availability of that information. Once upon a time, it was common practice for the compensation of top management to be held in relative secrecy by companies. According to the week 9 lecture slides Executive Compensation, the Security and Exchanges Act of 1934 required business to disclose top executive pay and the internet made that information easy to find. The result? Every time some other CEO gets a raise the board of directors often feels compelled to do so as well in order to stay ahead. That same board often ends up getting too friendly with the executives, and subsequently sets their compensation very high with the expectation that it may be beneficial to them personally later. Finally, the stock market boom that has happened since the mid-20th century means that many CEOs have benefited greatly from all the stock they hold.

• 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? 

Critics of the current income disparity between normal workers and CEO’s make a valid argument that the gap in performance between the two does not justify a 400 times difference in compensation. There is also a point to be made that CEO’s are not held accountable enough for their performance or receive sweetheart treatment, with benefits like gold parachutes as discussed in chapter 11 of Strategic Compensation not usually being offered to the rank and file. Concerns about the rising inequity in both individual companies and society at large are well-founded, but there is an argument to be made in favor of high CEO compensation. First of all, CEOs often have a very rare skill set that is utilized in a unique environment, so comparing them to a typical employee may not be entirely appropriate. Additionally, if any given CEOs performance is pleasing to the board of directors and shareholders, who is to say they don’t have the right to increase compensation? That being said, if the motives of those boosting pay are corrupted or misguided, then it would only be natural that the justification for continual increases comes into question.

• What changes, if any, do you think should be made to executive compensation? Why?

I think there are three main changes that could be implemented to curb the worst excesses of executive overcompensation. One thing that can be done is to consider CEO performance in light of overall market and industry trends. It seems odd that a CEOs performance might be considered exceptional if business company sales increased 10% in a year when the market is booming and the industry average is also around 10%. In context, this CEOs performance would not really be all that exceptional at all. Another potential change would be to tie the CEOs compensation to a ratio with the median income of the businesses workers. This would stop the worst excesses of CEO compensation inflation and incentivize CEOs to help lift up the rest of the company with them. A final change that could be made is restructure the makeup of boards of directors. According to Current Controversies in Executive Compensation: ‘Issues of Justice and Fairness’, too often directors have other business dealings that encourage them to not act in the best interests of shareholders, resulting in them offering more compensation than necessary. If stricter controls were placed to knockout incentives to do this, you would likely see directors being more critical of constant compensation boosts.

References:

Job descriptions. SHRM. (2022, December 2). Chief Executive Officer. Retrieved March 6, 2023, from https://www.shrm.org/ResourcesAndTools/tools-and-samples/job-descriptions/Pages/default.aspx

Indeed for Employers. Indeed.com.(2022, December 10). CEO (chief executive officer) job description. Retrieved March 7, 2023, from https://ca.indeed.com/hire/job-description/ceo-chief-executive-officer

Executive Compensation slides by Professor Swift

Chapter 11 of Strategic Compensation by Joseph Martocchio