Compensation Plans for CEOs in North America’s Private Sector

Introduction

Organizational leaders and chief executive officers (CEOs) are some of the key employees whose performances contribute to the success of their respective companies. Shareholders always expect such managers to use their abilities to move the targeted firms to the next level and make them profitable. However, these leaders require proper compensations if they are to remain motivated and deliver positive results. The purpose of this argumentative paper is to support the assertion that the current compensation plans for CEOs in the private sector in North America are unreasonable and unacceptable. The presented discussion is founded on different organizational and compensation theories.

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Compensation Plans for CEOs in North America’s Private Sector: Arguments

Business organizations use different methods to motivate their employees, attract competent ones, and empower them to achieve the targeted objectives. A compensation plan remains one of the most powerful tools for managing employee benefits and ensuring that the outlined goals are realized within the stipulated time. Hodak defines “compensation” as the payment or remuneration available to a given employee for the work or services completed within a specified organization (24). Such benefits can either be nonfinancial or financial in nature. A proper compensation plan or policy is essential in the private sector since it will dictate the performance and effectiveness of every company.

In North America, there are many corporations owned by shareholders and whose stocks are traded on stock exchanges. The current compensation plans for CEOs in such corporations are something that has attracted the attention of many researchers, economists, and organizational theorists (Seo and Sharma 228). Leaders’ packages consist of these components: stock options, retirement benefits, annual bonuses, and base salaries.

Alini reported that such companies in Canada and the United States offered competitive salaries to CEOs since they provided high-quality work, thereby delivering positive results. Organizations take this concept into consideration whenever compensating other employees working in different managerial positions. Such salaries have also been observed to retain or attract CEOs whose skills resonate with the unique needs of the targeted corporations.

Unfortunately, the issue of CEO compensation in North America remains divisive and questionable due to a number of aspects. The first one is that most of these executives tend to be overpaid. In a study by Irwin, it emerged that many CEOs in the region received higher remunerations in comparison with their counterparts working in similar-sized corporations and organizations in Asia and Europe. In a report released by the Canadian Center for Policy Alternatives, it was revealed that most of the leading private companies in the country were earning over 9.5 million US dollars annually (Irwin). Another challenge was that this figure was increasing significantly every year. Although such CEOs were being overpaid, the wages for typical industrial workers in Canada and the United States were quite low.

The second aspect or argument is that many boards use grant options to reward their executives after increasing the equity values of their respective corporations. This is a common practice that is replicated in the region’s private sector. CEOs can use such rewards to purchase shares, thereby standing a chance to make more money (Alini). Although some experts acknowledge that the approach encourages CEOs and leaders to drive performance, the outstanding fact is that the strategy eventually affects organizational profitability negatively.

The third issue borrows a lot from different concepts and models of compensation. Organizational theories are focusing on compensation guide companies to reward workers depending on their contributions, competencies, and roles. Employees should receive timely salaries, health benefits, and paid leaves if they are to improve operational efficiency (Hodak 23). Maslow’s hierarchy of needs theory also indicates that companies that provide competitive salaries to their workers will record better results within a short time. This is true since such workers will be willing to perform their duties diligently and eventually promote profitability.

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Unfortunately, this means that individuals should receive better or competitive remunerations in order to deliver positive results. The compensation plans for North America’s CEOs in the private sector, therefore, fail to conform to such theories. The structural model reveals that social standards are critical whenever determining managerial employees’ remunerations (Irwin). This means that executives of private companies should receive larger compensation amounts depending on their hierarchical levels. The theory goes further to indicate that such payments should reduce when those of other workers do. However, this has not been the case in North America’s private corporations.

Another aspect to consider when analyzing the reasonability of CEO compensation in North America’s private sector is that of performance. Marginal productivity theory is a powerful model that assumes that CEOs should receive competitive remunerations if they maximize the efficiency and productive output of their respective firms (Huang et al. 562). However, the situation in North America remains different since the compensation plans for executives in some of the leading corporations are untied to performance.

Irwin uses this knowledge to argue that most of the CEOs and leaders receive payments similar to those of bureaucrats. This malpractice explains why such executives fail to implement appropriate mechanisms and strategies to support the performance and profitability of their respective companies.

In many public-owned corporations, boards and leaders follow evidence-based plans to determine the compensations for their CEOs. This kind of practice continues to support the performance of such companies since the executives are usually expected to complete specified tasks and duties. This understanding explains why the models adopted in North America’s private sector remain unreasonable and inappropriate (Alini).

Although the main objective is to drive performance in such corporations, the outcome is that most of the CEOs fail to engage in actions and initiatives that can maximize productivity and profitability. This means that there is a need for companies in the private sector to trim the compensations of their respective CEOs and implement superior strategies that have the potential to drive organizational performance.

Counterarguments

The above section has presented several arguments to explain why the current compensation plans for CEOs in North America’s private sector are unreasonable. However, there are some arguers and theorists who believe that there is a need for boards of such companies to such models since they are appropriate. For example, Gerdeman indicates that the current high packages for CEOs in private companies encourage them to work harder and introduce superior models for improving productivity. This is something informed by different theories of compensation. Eavis goes further to indicate that the decision to provide competitive salaries and benefits enhances performance and productivity. This is the reason why such compensations have been on the rise within the past two decades.

Another argument presented by those who support the idea that the current remuneration plans are reasonable is that a competitive salary will always make it possible for boards to attract intelligent, sharp-minded, hardworking, charismatic, and brilliant CEOs. Such leaders will use their leadership models and skills to drive performance and solve emerging problems that have the potential to disorient productivity. The additional benefits and stock options are also essential since they result in increased levels of commitment.

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The issue of competition is also taken seriously within the private sector. With many companies operating in the same industries or sectors, rivalry remains a major obstacle that can result in reduced competitive advantage. This predicament explains why many companies prefer to reward their CEOs using increased salaries. The practice will result in a superior leadership model that can transform organizational culture and eventually drive performance. Gerdeman argues that competitive salaries and remunerations can discourage CEOs from engaging in corrupt dealings or accounting malpractices, thereby enhancing the efficient utilization of available funds and resources.

Conclusion

The above argumentative essay has indicated that the current compensation plans for CEOs in North America’s private sector are unreasonable. The discussion has used the cases of Asia and Europe to explain why there is a need to trim such salaries and remunerations. Different theories of compensation also explain why CEOs should receive rewards and benefits that match their contributions. This is not the case in many private companies across the region. Although individuals opposed to such arguments highlight issues such as accounting malpractices and the inability to attract top talent, leaders of such corporations should design evidence-based compensation plans that can empower CEOs’ needs while at the same time boosting organizational performance.

Works Cited

Alini, Erica. “Here Are the Pay Perks You’d Enjoy if you were a CEO in Canada. Global News, 2017. Web.

Eavis, Peter. “Executive Pay: Invasion of the Supersalaries. The New York Times, 2014. Web.

Gerdeman, Dina. “If the CEO’s High Salary isn’t Justified to Employees, Firm Performance May Suffer. Forbes, 2018. Web.

Hodak, Marc. “The Growing Executive Compensation Advantage of Private versus Public Companies.” Journal of Applied Corporate Finance, vol. 26, no. 1, 2014, pp. 20-28.

Huang, Qianqian, et al. “The Effects of Labor Unions on CEO Compensation.” Journal of Financial and Quantitative Analysis, vol. 52, no. 2, 2017, pp. 553-582.

Irwin, Neil. “How Much Is a C.E.O. Worth? America’s Confused Approach to Pay. The New York Times, 2015. Web.

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Seo, Kwanglim, and Amit Sharma. “CEO Overconfidence and the Effects of Equity-Based Compensation on Strategic Risk-Taking in the U.S. Restaurant Industry.” Journal of Hospitality & Tourism Research, vol. 42, no. 2, 2018, pp. 224-259.

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StudyCorgi. (2021, June 13). Compensation Plans for CEOs in North America’s Private Sector. Retrieved from https://studycorgi.com/compensation-plans-for-ceos-in-north-americas-private-sector/

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"Compensation Plans for CEOs in North America’s Private Sector." StudyCorgi, 13 June 2021, studycorgi.com/compensation-plans-for-ceos-in-north-americas-private-sector/.

1. StudyCorgi. "Compensation Plans for CEOs in North America’s Private Sector." June 13, 2021. https://studycorgi.com/compensation-plans-for-ceos-in-north-americas-private-sector/.


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StudyCorgi. "Compensation Plans for CEOs in North America’s Private Sector." June 13, 2021. https://studycorgi.com/compensation-plans-for-ceos-in-north-americas-private-sector/.

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StudyCorgi. 2021. "Compensation Plans for CEOs in North America’s Private Sector." June 13, 2021. https://studycorgi.com/compensation-plans-for-ceos-in-north-americas-private-sector/.

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StudyCorgi. (2021) 'Compensation Plans for CEOs in North America’s Private Sector'. 13 June.

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