The current economic crisis has brought numerous discrepancies in the way the world economies are run. Apart from exposing the weaknesses inherent in the systems issues of remuneration have hit the headlines hard. The financial institutions that triggered the credit crisis were the same firms offering some of the highest remuneration for their top executives. Indeed the ethical stands as well as morality issues concerning these remuneration levels elicit reasonable resentment among the general public. Within the last year the measures taken by the American president in establishing the maximum remuneration for chief executives working in institutions bailed out by the government. The action brought out the gravity of the compensation issue in public debates.
Indeed the remuneration of CEO’s has been on the rise in the last 15 years. During the period 1934 through 1938, the average salary and bonus for CEOs of leading companies was $882,000. Since 1982 until 1988, the average salary and bonus for the CEOs decreased to $843,000 (Tosi et al, 1989). The gap between the executive and the non-executive staff members has been rising. The major defining factors in establishing the level of remuneration are the size of the organization, the level of experience and expertise offered by the executives and the nature of business. The main categories of remuneration available are the basic pay, bonuses and allowances as well as stock options, and long-term incentive plans (Charles & Brian, 1988, p34)..
Bonuses are mainly based on the performance of the executive while the basic pay and allowances depend on other factors such as the ability of the organization to support the payments. The pay is higher in larger firms than in smaller firms however this relationship is diminishing over time. Smaller firms have found the need to attract highly qualified executives by offering high pay. The worldwide total remuneration report of 1997 shows the diminishing pay/sales elasticities for the period between 1970 to early 1990’s (The Wall Street Journal Survey of CEO Compensation, 2009, Par6)
There are numerous justifications for the often high payment packages are numerous. The most touted reason is the fiduciary duties offered. CEO’s and other senior officers at the corporations exercise some special duties that are accompanied by great responsibilities in comparison with other employees. Exceptional duty of care and royalty is the basic prerequisite for chief executives. The executives are the top most leaders of the corporations and their decisions have immense effects on the success of failure. The fiduciary duties bestow responsibility on them to diligently act in the best interest of the said corporation. This kind of responsibility and royalty requirements cannot be easily repaid. It is in this light that their packages differ significantly with those offered to other employees (Charles & James, 2003, p24).
Paying CEO’s highly not only motivates them towards developing best business models and structures but also ensures adequate and effective control of the entity’s resources as well as beneficial influence on the company’s prospects. More importantly, the executives wield fiduciary duties mainly on a moral rather than a legal sense (Moriarty, 2009, p8).
Most research on compensation has been based on economic theory but it is increasingly becoming clear that numerous non-economic factors are important in determining the pay offered to executives. Some studies have established that the form of organizational control prevalent in the directly affect the structure and level of executive compensation. Other studies suggest that the use of wage surveys as well as a common set of compensation consultants determine levels of remuneration (Scott, & Brian, 2009, Par9).
Appropriate compensation for CEO’s is also determined by the normal factors that determine remuneration for all other jobs. Effects in ensuring adequate attraction is availed for the jobs, motivation effects are achieved and the retention rates are high rank first. Considering the extra responsibilities described above, the executive jobs therefore must attract higher pays in order to lure determined and qualified personnel to take up the jobs. This can be supported by the fact that the structure of remuneration of CEO’s is not any different from that of other salaried employees. On average CEO’s receive 50% of their pay in form of annual bonuses though the ratio is higher for American firms (Carol, 2009, Par3).
The differences in salaries between the CEO and vice president are known to be very high. On a day when one is promoted from being a vice president to becoming the CEO, the remuneration package may triple. It is not easy to understand how the skills of the said person triple in a day. Therefore there is minimal economic sense to such action. This portrays remuneration of CEO’s as more of a tournament or lottery (Kevin, 1998, p6).
There exist social psychological explanations to the compensation levels of CEO’s. The most important is the fact that the chief executives remuneration is set by the compensation committee of the board of directors. This committee is comprised of very few board members who are not members of the management. This means that they have little interest in cost cutting measures. The methods used in arriving at the compensation are seldom based on economics mainly because it is never easy to gauge the performance of CEOs (Whittlesey, 2006, Par5.). This therefore leaves room for social comparisons instead of economic considerations. The committee members compare their own incomes as well as those of other CEO’s in establishing a suitable level of income for the CEO. More often than not, the figure arrived at is always higher than if the criteria used was based on economic theory (Lucian, & Jesse, 2003, p3).
The issue of separation of ownership and control presents another avenue for exorbitant compensation regimes. Management controlled firms as opposed to owner controlled firms are less likely to emphasize on performance standards. In this regard the management controlled firm may pay more to the chief executive as compared to the owner controlled firm (MacDonald, 2009, Par5).
The notion that CEO’s are often overpaid is not far fetch as far as the current remuneration trends are concerned. The need to attract retain and motivate highly effective chief executives cannot be challenged. However, there exists ethical and moral basis upon which the extremely high levels of remuneration are not justified. It is clear that in some of the scenarios observed, the huge pays cannot be supported the economic activities of the said firm. This means that despite the need to maintain the high status availed through the holding of top positions, considerations of performance as opposed to status must reign. This is the best way to ensure best corporate management.
Reference List
Carol B., 2009. Total Compensation Package as CEO of Yahoo! for 2009 – 2013. Web.
Charles, A. & Brian, G, 1988. CEO Compensation as Tournament and Social Comparison: A Tale of Two Theories. * Academy of Management journal 1996, Vol. 39, No. 6, 1568-1593.
Charles A., & James B., 2003. Social Capital At The Top: Effects Of Social Similarity And Status On CEO Compensation.
Kevin J. Murphy, 1998. Executive Compensation. Marshall School of Business University of Southern California.
Lucian A. Bebchuk & Jesse M. Fried, 2003. Executive Compensation as an Agency Problem. Journal of Economic Perspectives. Vol17 (3)
MacDonald, C., 2009. Ethics in CEO Compensation. Web.
Moriarty, J., 2009. How Much Compensation Can CEOs Permissibly Accept? Business Ethics Quarterly.
Scott, D., & Brian Z., 2009. CEO Compensation. Forbes. Web.
The Wall Street Journal Survey of CEO Compensation, 2009. Web.
Whittlesey, F., 2006. Perspective: The great overpaid CEO debate. Web.