Homework Writing Help on The issue of CEO compensation

The issue of CEO compensation

Your company extended an invitation to our research institution to investigate the issue of COE compensation. This is a report that we compiled after carefully investigating the issue. We have learnt a lot relating to CEO compensation and it is with great pleasure that we desire sharing the information with you. The study method, findings, conclusion, and recommendations are included in the attached report. Kindly contact us in case you need any clarification on any issue. We look forward to work for your company again.

Executive Summary

            The issue of CEO compensation is widely being debated following drastic increment that has been witnessed within the last few decades. The rate has reportedly been escalating at an alarming rate compared to that of subordinate employees, thereby causing public upset, poor company return, and economic impact on the wider national economy. The need to understand issue surrounding this increment attributed to compilation of this report to help establish ways through which the issue can be addressed.

            Primary research was carried out where questionnaire surveys and interviews were conducted in ten multinational corporations in ten different countries. The total number of participants that were included in the study included 10 CEOs, 30 human resource managers, and 300 subordinate employees. The ten CEOs as well as 10 human resource managers and 30 subordinate members were included in telephone interviews. Secondary research was also carried out, and it included a review of secondary sources on issues relating to CEO compensation. The results of this inquiry showed that high demand for quality talents, availability of stock options, poor performance among compensation members, and spiraling global compensation rates are important factors that drive CEO compensation so high. The results further showed that the rate of CEO compensation is similar in different countries and it does not always correspond with performance. Further findings confirmed that the size of the company is important in influencing CEO compensation.

            Based on these findings, it was concluded that escalating CEO compensation brings more harm than benefits. The recommendation made is that multinational corporations should follow state guidelines that govern CEO compensation to ensure that they employ appropriate increment standards.

1.0 Introduction

            By definition, the concept of compensation defines an act of giving an individual that may particularly include an employee monetary or other things that have an equivalent economic value in exchange for their services, goods or injuries incurred during their work-related routine activities. According to Kolb (2012), employee compensation is the biggest type of expense that an organization can incur in the attempt to retain its high performers. Organizations thus ought to adopt success factors while managing compensation practice to ensure that it only rewards employees for their great performance, prioritizes budget, enhances compliance with organizational vision and mission as well as eliminates minor errors (Kuo, 2013). The primary components of employees’ compensation mainly include guaranteed and variable pay as well as benefits and equity-based compensation. Organizational compensation managers thus assume a central responsibility in determining the total amount of compensation benefits that employees in the organization are paid. On the other hand, benefit managers’ plan as well as coordinate retirement and health insurance benefits among other types of benefits that employees can obtain from the organization (Khan, 2012). Understanding the issue of compensation within any organization is important to gain conversance on the various factors that can influence employees’ compensation.

1.1 Report background

            Although compensation for the overall workforce in most organizations has gained significance, the issue of CEO compensation has particularly attracted greater attention compared to subordinate employees. As argued by Khan (2008), it is rare to read business news without encountering reports that highlight issues pertaining to wages, benefits and stock options allocated to Chief executive officers in publicly operated companies. Analyzing the various CEO remuneration packages in order to make sense pertaining to how organizations reward their top executives is not always easy. The growing interest in analyzing executives’ compensation can be traced in the last three decades, which have recorded startling increase in executive pay as compared to that of average workers in United States among other nations around the globe (Julia, 2012). Concern has particularly been raised by observers who disagree on whether this drastic increase is as a result of natural and advantageous competition of limited business talents that can productively be exploited to significantly increase stockholder value in multinational corporations. Observers further raise concern pertaining to whether such drastic increments are as a result of socially destructive phenomena that emanate from social as well as political transformations that have ultimately ensured that executives have greater authority to regulate their own compensation packages.

            While there is no specific scholarly inquiry that has yet offered tangible explanation that can help to respond to these growing concerns, it is apparent that levels of CEO compensation have dramatically increased within the past decades. According to Robert (2012), CEO levels of compensation do not only increase in absolute terms but they as well increase in relative terms. Global statistics in 2007 for example indicated that the highest paid CEO’s were mainly Americans who generated over four hundred times the amount of compensation paid to average workers. This gap is estimated to be more than twenty times higher than it was in 1965 (Kenneth, 2011). Robert further establishes that the highest paid CEO in 2010 was Viacom’s Philippe Duaman who received compensation benefits estimated at 84.5 million dollars. United States particularly report the highest level of CEO’s compensation in respect to manufacturing production employees. Evidence to support this claim is derived from a 2005 estimate report, which indicated that United States’ ratio of CEO’s compensation to that of production employees is 39:1. This is extremely higher than the ratios in United Kingdom, Italy and New Zealand, which are estimated at 32:1, 26:1 and 25:1 respectively (Bebchuk & Grinstein, 2005).

            The need to analyze the various aspects linked to the issue of CEO compensation is perpetuated by the fact that executive pay has become a controversial issue in most global nations. This has seen this topic being deeply discussed among business organizations as well as academic scholars. As a result, the idea suggesting that big paychecks constitute to part of a beneficial system through which top organizational executives access incentives to effectively perform their duties has widely been questioned. According to Edward (2009), United States’ Securities and Exchange Commission has demanded that publically operated companies reveal information that portrays how their top executive officials’ compensation benefits are calculated. SEC has also posted compensation amounts on its website intended to guide investors in comparing CEO compensations paid by different company categories. Despite these provisions, CEO compensation in United States has continued to escalate, thereby outpacing organizational profits, economic advancement and the average compensation paid to subordinate workers. An inquiry by Martin (2011) for example showed that CEO compensation in United States grew at the rate of 8.5% per annum compared to corporate growth rate of 2.9% per annum and workers’ income growth of 3.1% per annum. The total percentage of corporate income that business entities in United States devoted to the topmost executives in public firms is estimated to have more than doubled from 4.8% to 10.3% between 1993 and 2003. Similarly, the total pay for first five top-earning CEOs in leading companies in United States between 1994 and 2004 was estimated at 500 billion dollars.

            The trend is similar in Australia where top executives in publically operated companies are reported to receive a huge amount of compensation packages. According to Robert (2012), although shareholders in this country can vote against escalating compensation, such votes are never abiding as organizational executives’ compensation packages continue to increase on yearly basis. As a way of addressing increasing expenses resulting from increasing executive compensation, shareholders in Australia resolve to sack some board members. This has further intensified the challenge related to escalating CEOs’ compensation packages. As a result, the Australian Securities and Investments Commission continually call for increased disclosure by companies pertaining to how they settle to various compensation arrangements for CEOs (Kolb, 2012).

            In United Kingdom, CEO compensation is thought to be outpaced by that prevailing in United States, but this has not been sufficient reason to overlook the UK executive compensation system. This is because the UK executive compensation has also perpetuated public upset, which has seen most reports quoting executive compensation and referring to it as being “corrosive”. The fact that high executive compensation affects corporate returns saw two of the leading investors in the country calling for greater shareholder coordination to prevent executive compensation from constantly escalating. As reported by Khan (2012), irrational levels of CEO compensation have as well reduced public trust and perpetuated a situation in which all executive employees are thought to be overpaid. The outright truth behind this assumption is that executive remuneration plans have become very complex and, in some instances overly generous in that they sometimes tend to go beyond the interests of the investors (Khan, 2008).

1.2 Report purpose

            The main purpose for this report is to find out the issues that surround determination of CEOs’ compensation in corporations across different countries. The specific objectives that will aid to accomplish this purpose include:

  • To determine the various major factors that lead to high CEOs’ compensation
  • To establish whether the high rate of CEO compensation is similar in different countries
  • To establish whether the size of the company determines the level of CEO compensation
  • To determine the extent to which CEO compensation corresponds to their performance

1.3 Report scope

            The scope of this report includes big corporations located in different countries that have a global presence when carrying out their operations. This will particularly include ten multinational corporations in ten western and Asian countries. The report will particularly seek to respond to the following questions:

  • What are the major factors that drive CEO compensation so high?
  • Is the rate of CEO compensation similar in different countries?
  • Does the size of the company determine CEO pay?
  • To what extent has CEO compensation corresponded to their performance?

2.0 Research

            The fact that there is a rapidly growing trend in increasing CEO compensation in major corporations in different countries in the globe demands for effective inquiry on the various issues linked to this trend. This is because amassing huge compensation to benefit a few corporate executives might not only harm corporate returns but it as well affects public trust, level of motivation among subordinate members and the overall national economic progress. This research will guide in conducting an inquiry that can help to compile an evidence-based report on the issue in question. Primary as well as secondary data collection methods will be employed to help gather relevant information that can help to effectively respond to the question guiding this report. Survey methodology will be used in primary data collection procedure to help gather important information in multinational companies. Data at this point will be collected using survey interviews and structured standard questionnaires. Secondary sources will also be used to help collect relevant information from journals, research reports, newspapers and magazine articles.

            The sample population that will be targeted in this inquiry will include the CEO, three human resource managers and thirty subordinate employees from each of the ten multinational corporations in the selected countries of inquiry. The inquiry will specifically target corporations operating in US, UK, Australia, Canada, France, Germany, New Zealand, China, India, and Japan. One major multinational corporation will be selected from each country and respondents from each company selected. Inclusion criteria for the selected corporations include having a global presence as well as reporting high corporate executive compensation. Participants for the inquiry will be indentified through LinkedIn and requested to participate in the exercise to help the scholar to accomplish his academic objective. They will be assured that the highest level of confidentiality will be maintained, hence the dire need for them to give as accurate information as possible.

            The study questionnaires will then be sent to the respondents via email and they will be requested to email them back after responding to the questions. Telephone interviews will then be conducted, and the target respondents will include the CEO, one human resource manager and three subordinate employees from each company in each country. The collected data will then be analyzed using the SPSS computer software and interpretations made in relation to the study questions.

Time line

The specific dates during which various research activities were carried out included:

March 17         Conduct Survey                      March 20         Conduct Interviews               

March 22         Analyze results                        April 30           Prepare preliminary sections  

April 15           Prepare visual aids                  April 18           Write rough draft                   

April 20           Write final report                    April 23           Turn in the report

3.0 Findings

3.1 Survey questionnaire results

            All respondents that took part in the study by filing in the emailed questionnaires agreed that the level of CEO compensation has drastically increased compared to the level of subordinate employee compensation. Most respondents quoted evidence from widely distributed company reports that outlined their respective CEO’s compensation.

3.1.1 Factors that drive compensation pay so high

3.1.1.1 Demand for quality talents

            In terms of factors contributing to drastically increasing CEO compensation, 85% agreed that high demand for quality but scarce talents contribute to high CEO compensation, 10% were neutral while 5% disagreed. This can be summarized in the figure below.

3.1.1.1 Demand for quality talents

3.1.1.2 Spiraling global compensation rates

            Findings of this inquiry further showed that most study respondents agreed to the fact that widespread increase in compensation levels in certain industries has seen most multinational companies following a similar trend thereby allocating huge compensations to their CEOs. 70% of the study respondents agreed to this fact, 20% were neutral while 10% disagreed. This is summarized in the table below.

 3.1.1.2 Spiraling global compensation rates

3.1.1.3 Widespread availability of stock options

            Findings further indicated that most respondents were supportive of the fact that availability of stock options in large institutions in their respective countries contributed to increased CEO compensation. 60% of surveyed respondents agreed to this fact, 22% were neutral and 18% disagreed. See the table below.

 3.1.1.3 Widespread availability of stock options

RankingPercentage
Strongly agree32
Agree28
Neutral22
Disagree10
Strongly disagree8

3.1.1.4 Poor compensation committee level of performance

            Findings of this inquiry further confirmed that most respondents were supportive of the fact that poor level of performance among the compensation committee members contributed to escalating CEO compensation. 78% of study respondents were supportive of this fact, 18% were neutral and 4% disagreed. See the figure below.

3.1.1.4 Poor compensation committee level of performance

3.1.2 The rate of CEO compensation in different countries

Findings of the inquiry showed that most respondents were supportive of the fact that the rate of CEO compensation was similar in multinational corporations operating in different countries. 50% of the respondents agreed to this fact, 30% were neutral and 20% disagreed. See the figure below.

3.1.2 The rate of CEO compensation in different countries

3.1.3 CEO compensation in relation to size of the company

Most study participants agreed that the size of the company was important in influencing the level of CEO compensation. 88% of the participants agreed to this fact, 10% were neutral and 2% disagreed.

3.1.4 The extent to which CEOs compensation corresponds to performance

            Most study respondents confirmed that CEO compensation does not always correspond to performance. 67% of the respondents were supportive of this fact, 27% were neutral and 6% disagreed. See the figure below.

3.1.3 The extent to which CEOs compensation corresponds to performance

3.2 Interview results

            A total of fifty respondents that included 10 CEOs, 10 human resource managers and 30 subordinate employees participated in telephone interviews. In terms of factors that drive CEOs compensation very high, 80% confirmed that demand for quality talents contributed to escalating CEO compensation while 20% denied this fact. 69% agreed that widespread spiraling global compensation rates further contribute to high CEO compensation while 31% denied this fact. 83% of the telephone interview respondents confirmed that availability of stock options perpetuated high CEO compensation levels while 17% denied this fact. The fact that poor compensation committee performance contributes to escalating CEO compensation was confirmed by 92% of the telephone interview participants. Only 8% of these participants denied this fact. 93% of the interview respondents confirmed that the rate of CEO compensation was similar in different countries while 7% denied this fact. All telephone interview respondents agreed that the size of the company determined a CEO’s level of compensation. 67% of the interviewed respondents agreed that CEO compensation does not correspond with performance while 33% denied this fact.

3.3 findings from secondary sources

3.3.3 Factors that drive CEO compensation so high

3.3.3.1 High demand for quality talents

            Literature review from various sources further provided sufficient evidence that made significant contribution in responding to the study questions. Literature by Khan (2012), showed that high demand for quality talents influence the drastic increase in CEO compensation. In his article, Khan argues that the huge compensation benefits that CEOs receive is usually perpetuated by increasing demand for quality talents. He further states that CEOs’ talents are worth a significant amount of compensation that can reward the amount of time spend while acquiring the skills. The high level of compensation set aside for CEOs is thus intended to reward them appropriately in return to the high value that they bring to the company.

3.3.3.2 Availability of stock options

 Kuo (2013) in his article confirms that availability of stock options contribute to escalating CEO compensation. He states that in addition to their gross basic compensation, CEOs are usually granted long-term incentives mainly in the form of stock options. According to this article, stock options, valued at one million Euros on average, constitute to a significant element of CEO pay in most leading multinational corporations.

3.3.3.3 Spiraling global compensation rates

            Literature by Martin (2011) showed that widespread spiraling global compensation rates further contributing to escalating CEO compensation in different countries. He quotes CEO compensation in 1980s, which was about 40 times what subordinate employees in the studied companies received. With this multiple intensifying on yearly basis, today it has reached about 500. Records of giving a huge compensation to the best available CEO that can help to turn around their companies have also been placed in databases. These records, which have been used in most companies around the world, serve as references in compensating CEOs in today’s companies.

3.3.3.4 Poor compensation committee level of performance

            As reported by Khan (2008) in his article, members of corporate committee in various organizations have never been able to independently act as the sole overseers of company interest implementation. Alternatively, they often rely on CEOs’ talents who tend to influence their decisions in administering high compensation recommendations. On the other hand, compensation committee, who cling to the thought that bringing a CEO that act as a “free agent” can bring change to their company, comply with these demands and thus allocate them huge compensation benefits.

3.3.4 CEO compensation in different countries

            Evidence from the reviewed literature showed that the rate of CEO compensation is similar in different countries. Literature compiled by Kenneth (2011) shows that the fixed cash pay to CEOs in Europe is about 650,000 Euros and an additional 644,000 Euros in form of bonuses. This is comparable to compensation paid to CEOs in United States where they receive about 575,000 Euros in form of cash pay and about 777,000 Euros in the form of bonuses. These rates are similarly comparable to what CEOs in Asian countries receive as they receive a slightly higher amount of compensation compared to that paid to European CEOs.

3.3.5 CEO compensation in relation to the size of the company

            Literature compiled by confirmed that the size of the company was important in determining CEOs’ pay. The size of a company perpetuates drastic increase in the scope of CEO responsibility, which ought to be rewarded accordingly. Statistical evidence compiled in this literature shows that CEO compensation in top-100 world companies is about seventy times higher than that paid to CEOs in other companies in different countries.

3.3.6 CEO compensation in relation to performance

            Literature compiled by Robert (2012) shows that CEO compensation in different countries is more founded on trend and greed than performance. The fact that most executives hold top authority allows them to influence compensation decisions. This leads to escalating compensation levels that do not necessarily reflect any improvement in performance.  

4.0 Conclusion

            The issue of CEO compensation has ignited a lot of debate as the rates continue escalating on yearly basis. Study findings have confirmed that demand for quality talents, availability of stock options, spiraling global compensation rates and poor level of performance among compensation committees contribute to escalating CEO compensation. The rate of CEO compensation is similar in different countries and it is largely influenced by size of the company. The level of compensation however does not correspond with CEO level of performance.

Recommendation

            To help curb the issue of CEO compensation, companies should comply with state regulations that govern CEO compensation increment. This would ensure that unreasonable CEO compensation escalation is prevented, which would in return curb subsequent effects on national economy, the public and company returns.

 

 

 

 

References

Bebchuk, L. & Grinstein, Y. (2005). The Growth of Executive Pay. Retrieved on 16th April, 2015 from http://www.law.harvard.edu/programs/olin_center/papers/pdf/Bebchuk_et%20al_510.pdf

Edward, L. (2009, June 16). Fixing Executive Compensation: Right Time, Wrong Approach. Chief Executive, 240, 39-78.

Julia, W. (2012, January 24). Anger Grows over Executive Pay; Britain Looks into Giving Shareholders a Binding Vote on Compensation. International Herald Tribune, pp. 1A, 2A.

Kenneth, F. (2011). Symposium on Executive Compensation Keynote Address. Vanderbilt Law Review, 64(2),  811-960.

Khan, V. (2008). Is Executive Compensation Different Across S&P Listed Firms? Quarterly Journal of Finance and Accounting, 47(4), 111-189.

Khan, V. (2012). Executive Compensation and Gender: S&P 1500 Listed Firms, Journal of Econimics and Finance, 36(2), 122-157.

Kuo, L. (2013). Chief Executive Compensation: An Empirical Study of Fat Cat Ceos. The International Journal of Business and Finance Research, 7(2), 281-309.

Kolb, R. (2012). Too Much is not Enough: Incentives in Executive Compensation. New York: Oxford University Press.

Martin, C. (2011). Executive Compensation Consultants and CEO Pay. Vanderbilt Law Review, 64(2), 81-187.

Robert, D. (2012). Executive Compensation: In a Culture of Greed and Selfishness is there Room for a Theory of “Enough”. Faulkner Law Review, 4(1),79-159.