This paper explores the importance of CEO pay for the stakeholders of Caterpillar and John Deere companies. Specifically, the analysis revolves around the significance of CEO pay to different stakeholders. Besides, the paper investigates the approaches of the Caterpillar and John Deere to CEO pay. In the summary, the paper presents recommendations on the best strategies that the two companies should use to address the CEO pay.
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Literature Review: Identify Issues
Shareholder Reports& Public
Across the globe, shareholders have keen interest on CEO pay since it is an indication of how well a company in performing. For instance, the representative of the shareholders in the board of directors might be interested in the best strategies to adopt to ensure that the CEO pay is not only motivational but within the margin of profitability in a company. On the hand, the general public has displayed concern in terms of the disparity in the CEO-to-Worker Pay-Ratio, which is currently averaged at 1:300 for most of the Fortune 500 companies (Frydman & Jenter, 2010).
The common public opinion suggests that this widening disparity gap has made some companies unpopular since the level of employee motivation in such environments is often very low (Shropshire, 2015). The public seems to imply that there should be rational justification of the CEO-to-Worker Pay-Ratio to guarantee labor sustainability and organizational performance.
International Press such as the Bloomberg and Forbes always publish the compensation of CEOs, especially for big companies. In the 2015 edition of the New York Times, Oracle’s CEO was reported as having the highest compensation of $78 million. The magazine noted that nearly all Fortune 500 companies have CEOs who earn millions of dollars as pay compensation each year (Press, 2014).
The compensation to the CEOs comes in the form of monetary value, stocks, and stake in company ownership. Several professional presses such as Bloomberg have seriously questioned the rationale behind some of the compensational plans adopted by some companies. For instance, the 2015 edition of the Bloomberg questioned the sustainability of the Oracle CEO’s compensation plan in the midst of inequality in the financial rewards to other employees. As indicated in the Bloomberg report, “two-thirds of executive compensation is tied to stock-based incentives, and one study found that more than half of all pay-for-performance compensation is tied to long-term equity incentive plans” (Frydman & Jenter, 2010, par. 9).
Many local and international new channels such as the CNN and Aljazeera have delved into the CEO compensation plans adopted by companies across the globe, in terms of relating these plans to level of organization performance. For instance, the popular Business Traveler program, hosted by Richard Quest in the CNN channel, has become an important source of information on the profiling and compensation plans for CEOs of different companies.
The findings in most of the interviews conducted by Richard Quest suggest that there is need to create an ideal CEO compensation plan that considers the salaries of other employees in order to establish a holistic and sustainable work environment (Frydman & Jenter, 2010). Apparently, from the popular press, companies need to create strategic and sustainable CEO compensation plan in order to optimize performance and level of CEO accountability.
Approaches of Caterpillar and John Deere to CEO Pay
In both companies, the CEO and middle level employees are valued by the board of directors and their respective compensation committees. At the Caterpillar Company, the CEO has a job satisfactory rate of 70% with annual compensation of $4,210,000. The annual increment is $59,600 (National Association of Manufacturers, 2014). Despite this high compensation, the ratio of CEO pay to middle level employees is only 71:1, which is among the lowest for the Fortune 500 companies (Pettus, 2014).
On the other hand, the CEO of the John Deere Company has job satisfaction rate of 61%, which is lower than that of the Caterpillar Company. Specifically, the CEO of the John Deere Company has annual compensation of $8,310,000 and annual increment of $54,900. However, the ratio of CEO pay to middle level employees is 151:1 (Rivers, 2014). Apparently, the CEOs of the two companies are the most valued employees considering their high pay and other benefits such as annual increment of more than $50,000.
Besides, the CEOs are accorded special shares in the form of company ownership at the end of each financial year (Deloitte, 2015). However, the high disparity in the CEO to other employee compensation ratio of 151:1 at the John Deere Company is an indication that the board of directors values the CEO more than other employees. This could be attributed to the fact that the company uses a complex performance management system headed by the CEO, who is expected to take full responsibility of the business. The risks associated with this business model provide the rationale for the high pay (Rock Products, 2016). In contact, the board of directors at the Caterpillar Company values the CEO and other employees more as depicted in the lower ratio of disparity at 71:1.
Firm with Clearer and Accessible Communication
The Caterpillar Company has clearer and more accessible communication model than the John Deere Company. At the website of the Caterpillar Company, it is easy to access all information about the CEO benefits and compensation plan, organization of the human resource, size of the work force, and relevant data on organization performance for the last two decades (Caterpillar Company, 2015).
The Caterpillar’s communication model assumes the inverted triangle and bilateral approach towards sustaining the functions of the CEO, as part of performance management. For instance, at the Caterpillar Company, the CEO is empowered to sustain organizational communication with the support of the board of directors (Shropshire, 2015).
This plan is well structured and has systems to support its functioning, with the CEO at the apex of the hierarchical ladder. The compensation plans are communicated through the CEO on behalf of the board of directors. Although the John Deere Company has a stable communication channel, there are several loopholes in the structure and scope of its operation. For instance, the company is silent on the compensational structure of other employees, despite being a global outfit (Frydman & Jenter, 2010). Besides, the functions of the CEO are not confined to the representation of the board of directors. In addition, the company’s website only provides basic information about the total compensation as part of the company cost.
Logical and Winsome CEO Compensation Package
The Caterpillar’s rationale for its CEO compensation package is more logical and winsome than that of the John Deere Company. For instance, the CEO compensation package at the Caterpillar Company is founded on the premise of sustainable business, through minimizing the compensation disparity, to motivate higher job satisfaction and full cooperation between the employees and the CEO.
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The lower disparity ratio of 71:1 has been instrumental towards motivating higher CEO satisfaction level of 70%. This is possible because the reduced compensation disparity creates an ideal environment for employee motivation, since the aspects of perceived fairness and balanced financial reward are part of the organization satisfaction culture. In contract, the high compensation disparity between the CEO and employees at the John Deere Company could be attributed to the low level of CEO satisfaction at 60% (John Deere Company, 2015).
The low CEO satisfaction is as a result of managing poorly motivated employees, who might feel that their compensation plans are not proportional to duties allocated (John Deere Company, 2013). The perception about unfair pay between different ranks in the company might compromise the level of employee motivation to perform optimally. In the case of the John Deere Company, the compensation disparity ratio of 151:1 has created a hostile management environment to the CEO, thus the low job satisfaction level recorded at 61% (John Deere Company, 2011).
Evaluation and Recommendation
From the above analysis, it is apparent that CEO compensation plan affects company performance and level of employee satisfaction or motivation. Apparently, the CEO of the John Deere Company has better compensation plan than the CEO of the Caterpillar Company. However, the CEO of Caterpillar Company has higher level of job satisfaction than the CEO of the John Deere Company. In terms of compensation disparity between the CEO and other employees, the John Deere Company recorded the highest disparity at 151:1 against 71:1 for the Caterpillar Company.
Despite the efforts by the two companies to create an ideal CEO compensation plan, there is need to reduce the disparity level in order to improve the CEO’s level of job satisfaction. This can be achieved when Caterpillar and John Deere companies implement the following recommendations.
Modeling the compensation plans
The two companies should model the current compensations plans to reduce the disparity ratio as a strategy for creating an ideal environment for entire workforce motivation. This motivation will guarantee increased CEO satisfaction, which translates into better performance. In the end, the CEOs will become more innovative and command respect among the majority of employees. The proposal will create an ideal climate for innovation and communication between the CEOs and other employees.
Modeling the compensation efficiency
There is need for the two companies to model the current CEO compensation plan to integrate the aspect of non-monetary motivational rewards to boost the performance of the CEOs. Since the variables to be considered include payroll system, line of business, location, and groups of employees, the two companies might benefit from this proposal since they will be in a position to micromanage the efficiency of the current and future CEO compensational plans.
From the above analysis, the CEO pay at the two companies is important in identifying pertinent issues for the shareholders and other stakeholders. The John Deere Company has better compensation plan for their CEO than the Caterpillar Company. However, the Caterpillar Company offers higher level of job satisfaction for their CEO than the John Deere Company. In terms of communication approaches, the Caterpillar Company has clearer and more accessible communication model than the John Deere Company. The two companies should model their current compensation plans and efficiency trackers to improve the performance of their CEOs.
Caterpillar Company. (2015). Notice of annual meeting of stockholders of Caterpillar Inc. Web.
Deloitte. (2015). Executive compensation: Plan, perform & pay. Web.
Frydman, C., & Jenter, D. (2010). CEO Compensation. Web.
John Deere Company. (2011). Notice of annual meetings of stockholders. Web.
John Deere Company. (2013). Notice of annual meeting of stockholders. Web.
John Deere Company. (2015). Board of director biographies. Web.
National Association of Manufacturers. (2014). Doug Oberhelman: Immediate past chair of the board. Web.
Pettus, M. L. (2014). Inside the mind of a global CEO: An interview with Caterpillar CEO Douglas R. Oberhleman. International Business and Entrepreneurship Development JIBED, 7(4), 258.
Press, D. K. (2014). Caterpillar’s CEO compensation cut 32% to $12M. Web.
Rivers, M. (2014). John Deere: Management. Web.
Rock Products. (2016). Deere & Co. achieves gold status. Web.
Shropshire, C. (2015). Caterpillar shareholders have their say on pay. Web.