CEO Compensation Today: Fair or Outrageous Research Paper

Abstract

The research work, which has been carried out, is aimed at analyzing such issue as the compensation of chief executive officers during the times of economic crisis. Despite the fact that the United States is currently passing through the stage of recession and financial decline, the salary of top management in leading companies remains relatively high. Subsequently, this gives rise to a heated debate in the public whether it is acceptable or not. We are going to examine both ethical and economic aspects of this problem. This paper studies the factors which shape wage policies in American firms. In addition to that, it explores this question from historical perspective a. Finally, we intend to propose a solution, which may possible improve compensation practice and establish a compromise between average employees, stakeholders and CEOs. It is of the crucial importance to draw a useful application for management, because at present there is a growing necessity for reconciliation of corporate power and public opinion.

Outline

• Abstract
• Chapter 1 –Introduction
  • Problem statement
  • Scope of the project
  • Objectives and importance
  • Organization of the study
  • Limitations of the research
• Chapter 2: Literature Review
  • The factors shaping the amount of compensation
  • Arguments in favor or against high salaries
• Chapter 3-Methodology
  • Research settings
  • Sample and Target participants
  • Research Process
  • Limitations of the research methods
  • Data Validity and Reliability
  • Research Design
  • Data Collection Methods
  • Analysis of Results
• Chapter 4:- Results of the research
• Chapter 5:-Conclusion and recommendations
• References
• Appendix

Introduction

The current economic crisis has brought out into focus the compensation for chief executive officers of the American corporations. The purpose of this paper is to investigate the wage policies and the salaries of the top management. Namely, it is necessary to discuss whether it is fair and prudent especially during this period. Chief Executive Officers are main decision-makers in any enterprise; therefore it is important to note that their compensation raises more questions than answers as to who these people are and why they are paid so excessively, particularly, in comparison with other employees.

During recent months, Chief Executive Officer Compensation has been one of major concerns for many companies. At present, the United States struggles with an economic crisis which requires the government to provide some balance in the form of financial assistance to bankrupt companies that are forced to make thousands of their workers redundant, and many tax-paying citizens are appalled at the compensation of the Chief Executive Officers in many of these companies. The same firms that have requested support from the government have been accused of paying out the stimulus in forms of bonuses and other compensation to their most highly-paid officials, while dismissing major sections of their workforce.

Chief Executive Compensation has become one a subject matter of national discussion in the last few years. Various companies have different compensation for their managing directors. This has raised questions as whether in some countries the CEOs, payment is justified. People are divided on this issue between what is appropriate versus what is fair. Is the high chief executive officer compensation necessary for a company to acquire and retain the best talent to prevail during these tough times? Or is the compensation so astronomical that is unjustifiably?

This research is intended to provide an overview of the current economic situation and government actions impacting Chief Executive Officer Compensation. The study will review historical compensation and offer an analysis on how this issue came to intensify, while providing an interesting comparison to the international market. The investigation will further examine the conflicting points of view on the issue and attempt to provide a solution.

The study has a limited scope on current events due to the vast amount of information on the history of executive compensation. We must also assume certain generalizations about compensation as total compensation packages provided to executives range widely and can change drastically from year to year.

In summary, as the United States continues to make its way through the economic crisis, company management will look to align the Chief Executive Officer compensation with investor and consumer expectations in order prevail. This research study will aim to be a throughout examination of this relevant issue and draw out useful application for management.

Problem statement

Chief Executive Salary is an important characteristic of the performance of any company. This information will help people and Board of directors take involvement in the management of the organization. The requirement of information as relating to compensation to Chief Executive Officers varies among different enterprises because of different economic background. Compensation for Chief Executive Officers in the third world countries may appear to be higher but in real sense compared to the US markets will be negligible. Yet, there are some universal features, in almost every country, employees are deeply concerned with the ethical and financial aspects of this question.

A highly compensation Chief Executive Officer is expected to deliver profits that will be used in running a company. However, there is evidence suggesting that this statement is not quite true. In this case, we need to discuss the factors that shape wage policies in many American companies and show the criteria according to which the salary of any top manager is determined.

Scope of the project

Scope of this project is defined as a range of Chief Executive Officers payments or compensations including whether this compensation is ethically justifiable and economically prudent. Various corporations appear to have broader scoop working on a wide variety of compensation schemes with different objectives and goals.

For example, some of them pay bonuses that depend on performance of the whole organization while national firms or local companies a bonus is paid based on performance of a specific branch to a certain Chief Executive Officer. Most evaluations will be done on the entire company in the USA both local and international instead of just one specific company. This research will focus on American-based corporations and the approach they take to this question, namely, what are the factors which influence the wages of chief executive officers.

Objectives and importance

Compensation of the Chief Executive Officers has produced mixed reaction and has become a hot topic during this economic crisis in many countries. Questions are brought up all over the world as to whether this compensation should be regulated to ensure an individual doesn’t benefit from a company while he is performing poorly. Some of the objectives of this research paper will be

• to enquire about the compensation made to the Chief Executive Officers
• To find out about the moral issue on the compensation of the Chief Executive Officers during this period of economic crisis.
• To find out the minimum and maximum compensation to Chief Executive Officers of various corporations in the United States of America.
• To find out whether the level of performance of a company is taken into consideration when deciding the compensation for a Chief Executive Officer.
• To find out whether during the economic crisis and companies are performing poorly, the salaries of the Chief Executive Officers are adjusted downwards.
• To find out whether the compensation to the Chief Executive Officers is as a result of changes in inflationary rate in the market.

In line with the above mentioned, we may single out the crucial research question, whether it is ethically and economically permissible that chief executive officers are paid so much. Although, it is too early to jump to any conclusions, we may advance a hypothesis that currently such policies cannot be justified because in the vast majority of cases, the compensation given to the top management does not correspond to the companies’ performance, which in turn sparks off a storm of protest among citizens and employee.

Organization of the study

The first chapter will be an introduction to the research because it will outline the purpose of the research and lay the ground for research by informing the leader briefly on some major differences between compensations to Chief Executive Officers. The second chapter will have literature review discussing various books or scholarly articles, dedicated to this issue.

The third chapter will describe the methods, employed during this investigation and present the very process of research. The fourth chapter will summarize the key findings and their implications and will discuss the data that has been collected in the course of the research. The final section five will contain recommendations and conclusions.

Limitations of the research

The study cannot cover all the aspects of this problem due to several reasons: first some information about compensation of CEOs is strictly confidential and therefore it is very to difficult to access. Furthermore, it is quite probable that some companies compensate their high-ranking officials on non-monetary terms which are not reflected in the books or are reflected in a form of expense. The scope of the study does not allow the researcher enough time and space to discuss reasons behind the moral questions “compensation to Chief Executive Officers is it outrageous or fair. The research will be carried out in a limited scale but will be done in a short period. The sample will not be sufficient in carrying out the research.

This research doesn’t break any ethical codes; however, it has certain limitations in the areas of not being able to authenticate the facts, figures and assertions in both the primary and secondary sources consulted in the course of this research. This is a common issue in every quantitative analytical method.

Literature review

Prior to carrying out any independent analysis, it is vital for us to discuss the views of distinguished scholars on the compensation of chief executive officers. We need to pay special attention the arguments they advance in favor or against such high wages. Yet, at the very beginning we need to concentrate on wage salaries in American corporations and especially as far as top managers are concerned. These sources are helpful to the extent that they give deep insights into the inner structure of leading companies and more importantly, show how the peculiarities of decision making process. Furthermore, they show how employees perceive this problem and analyze their impact on managerial policies.

At first, we may refer to such research article as Executive Compensation written by Kevin Murphy. Although, this investigation was conducted in late nineties, it should be pointed out that this work is still quite relevant because it describes the trends in pay practices which has not undergone significant change in their very core. The overarching thesis that the author proposes is that that there are no clearly established performance standards, they can be of various types for instance, sales rates, net income or operating costs.

The scholar maintains that it is rather difficult to ascertain whether they depend only on the efficiency or inefficiency of the chief executive officer, consequently, we may deduce that the amount of compensation is not always performance-based (Murphy, 1999, p 4).

According to him, there is no often direct dependence between the organizations overall performance and the actions of the management, because net income can be influenced by external environment, which is often beyond CEO power. In this regard, Kevin Murphy believes that in large corporations in large corporations, which constitute S&P 500 group, there is virtually no opportunity to tell how exactly, a CEO impacts the profitability.

The thing is that such enterprises usually consist of many divisions, departments that can be located in various regions. Therefore, much depends on local managers but not on higher-ups. This article enables us to see that the compensation is not always performance-based. Naturally, the author does not claim that that these people play any role but he insists that there is practically no connection between their salaries and the overall profitability. His ideas partially confirm our hypothesis that such amount of compensation is not always justified.

In order to develop this theory further, we should discuss the book Searching for a Corporate Savior , Rakesh Khurana, who argues that there are no exact guidelines for establishing a connection between the performance and CEOs incentives. The most crucial point that the writer wants to make is that very CEOs are primarily oriented on toward short-term results, for a certain period time, the effects of their decisions can be noticeable but they are not lasting. Moreover, Rakesh Khurana believes that the compensation to this people does not change even if the company experiences constant difficulties.

For example, the author draws an example of such company as Stanley Home Tools and its managing director John Traini. Although this enterprise underwent many hardships mostly due his rather actions the amount of his compensation did not change (Khurana, 2004, p 172). The scholar shows that even in times of economic difficulties their salary is never diminished. The underlying cause for these wage policies is that people are not well aware of the functions which a CEO performs.

Secondly, the management is usually inclined to underestimate the importance of local officials. From her standpoint, the return on investment or ROI as it is also known is very poor. Another issue, which Khurana explores is the impact of public opinion, she assumes that shareholders can compel the owners to cut down expenses on the compensation of leading officials but for that purpose, close collaboration is needed. Thus, at this point, we may conclude that these costs on leadership can be both unethical and wasteful.

Similar ideas have also been expressed in the book Pay Without Performance by Lucian Arye Bebchuk, and Jesse Fried. They are firmly convinced that in corporate America, CEOs have become virtually untouchable. The major problem is that existing legislation does not impose any restrictions on the amount of compensation, thus it can reach almost astronomic numbers, such as in case of Michael Ovits, one of Disney top managers, who received practically $100 dollar during his employment yet his actions were considered by many as detrimental (Bebchuk et al, 2006, p 47).

It should be borne in mind that the image of the company suffered a very serious blow when this fact was made public. There was a widely held opinion that Walt Disney was not involved with the needs and demands of people, who significantly contribute to the well-being of this organization. This work lets us understand that such huge amounts of compensation can also tarnish the reputation of any corporations therefore, which is even more dangerous that simply great expenses.

On the one hand, it has to be admitted that occasionally such salaries are not adequate. Nevertheless, we cannot disregard the opposing views on this problem. In his article CEOs Arent Overpaid, Mark Hodac agrees with the statement that managerial influence over the board of directors is very strong but he does not concur with the belief that the pay is undeserved (Hodac, 2008). He urges us not to forget that a person who occupies this position in any American corporation has to assume heavy responsibility. Besides, he or she is not only an employee but a shareholder at the same time, consequently, this individual risks to lose not only the job but money as well.

The economists attach primary significance to the competition for talent by saying that in modern market everyone who possesses the qualities of a good CEO is a very valuable asset. Michael Hodac claims that sparse failures are mostly due to the incompetence of the board. Probably, we need to reconcile these opinions. Michael Walden and Peg Thorns state that people make a blatant mistake when they so resolutely say that all CEOs are overpaid.

First, one has to attract a suitable candidate for this position, by providing a powerful stimuli and monetary reward is one of the ways to do it. The authors say, that the board of directors has to maintain equilibrium between encouragement of CEOs and the dependence upon them (Walden et al, 2006, p 45). Now that, we have discussed these sources, it becomes quite evident that this question under investigation cannot and must not be answered straightforwardly because there are many exceptions. Yet, judging from the aforesaid, we may suggest some adjustments should be made to the wage policies otherwise leading American companies will fall into bondage of CEOs, and people should not overlook this danger.

Methodology

This chapter shows the research design which is going to be used in carrying out this study. It is mainly going to focus on way in which the process of investigation is going to be selected and the reason of choosing particular research techniques. In this paper, we intend to use both qualitative and quantitative methods, which would address such issues as compensation of CEOs in leading American companies, the views of employees and shareholders, the connection between the performance of the enterprise and the salary of the top management.

For this purpose, we should use such methods as checklist survey, which would enable us to measure the opinions of average citizens, working in large firms. In particular, it is necessary to use the so-called Likert scale, which is best suitable for this task. This type of scale is chosen because it lets the researcher to capture a persons attitude toward a certain question. Secondly, we can use the method of unstructured interview with a chief executive officer.

The major advantage of this technique is that an interviewer is able to ask specifying questions, and observe the respondents reaction. These are the primary methods of data collection. As for the secondary ones, we can mostly speak about the study of scholarly articles, and comparative surveys. They will allow us to understand dependency between the compensation to CEO and the profitability of the firm.

Research settings

The research work, which is going to be carried out, will be based on question whether the CEO are paid fairly or outrageously. Namely, we are going to examine the situation in the US-based firms. We need to explore the reasons for such enormous compensation and especially the factors which determine its amount. Then the data gathered from various sources will be combined together and analyzed in order to come up with the answers to the questions which have been raised in the beginning of the study and possible solutions to the situation, which has recently emerged. The prosess of research will consist of the following stages: 1) to make an exhaustive list of resources – online, journals, reference books etc.

The next step would be to identify the relevancy of these sources from this exhaustive list and narrow down the scope of the investigation to fifteen to twenty sources, which are most relevant to the question under investigation. The information, obtain in this way will either substantiate or strike down the hypothesis that has been formulated at the beginning of the research basing on the commentary from these sources. The third stage of this investigation will be to interview people who are deeply concerned with this problem, for instance, employees, shareholders, and naturally chief executive officers. Once the comments have been identified, the next and final step would be to make a conclusive finding based on these data.

Limitations of the research methods

It would be very ambitious to presume the evidence, collected during this research, will be conclusive. First, it should be taken into consideration that some data, especially concerning the compensation of CEOs is not always made public and such disclosure is not always legal.

Thus, we will not always be able to find most accurate and up-to-date facts. Furthermore, while studying the public opinion we will not survey a large group of the population, approximately thirty to fifty, which means that ideas of some people can slip our attention. As regards the interview, one should bear in mind that Warren Buffett and Tom Brokaw were discussing various questions and they only partly touched on the compensation of chief executive officers. Yet, even such results can significantly contribute to our understanding of this question.

Sample and Target participants

The primary participants of the study are targeted population is made up of CEO, average shareholders and workers. The reason for choosing these people is because they have more information concerning their compensation. Moreover, they are most interested in the resolution of this conflict. Naturally, we will not have to many respondents, their ideas can give us a glimpse of this issue.

Research Process

The research with relevance to the above stated aspects should be first conducted by reviewing secondary data which is readily available. The various sources that have been reviewed as part of this research such as journals books, research works, and Web-based articles can effectively contribute to better understanding of this question. It is necessary to analyze them from numerical and qualitative perspectives. If a qualitative research method is adopted, it is possible to explore various attitudes and perceptions. This method also helps to show the way in which various scholars approach this question.

In our case, we should say that many scholars try to investigate the interdependence between CEO compensation and the functions that they perform. They are almost unanimous in their belief that one cannot possibly trace these relations mostly due to the fact that the profitability significantly depends on many external factors which are not always under the control of the top management, for example, the situation in the market, inflation, finance declines and so forth.

While studying various books we tried to get insights into the wage policies of leading American companies, particularly as far as CEOs are concerned. It has to be admitted that even now there is no consensus among scholars whether there are clear guidelines for determining the pay to the chief executive officers (Walden, 2007, p 58). Moreover, it should be pointed out that ethical side of this question still requires thorough analysis: on the one hand high salaries during the time of economic crisis cannot be justified, because this is not fair to many workers who have been dismissed.

But there is a different facet of this issue: the management should attract talented people, who may possibly bring some improvements, and one of the ways to do it is to stimulate them (Hodak, 2009, p 1). Certainly, in-depth information can be obtained through qualitative research which further helps in the determination of the subsequent attributes of the study. But, we should not forget that it is always subjective in its nature. In order to prove this standpoint we should refer to the interview with Warren Buffett. We have employed this interview in our research because it throws light on the views of CEOs on this question.

The manager was open for the discussion and he accepted that occasionally, the impact of managerial power can be overbearing. Furthermore, he did not deny the fact that sometimes the amount of compensation can be truly excessive (Buffet, 2008, p 1). This interview was conducive to our research but it seems that some details were either omitted or deliberately disregard. However, it has shown that even among some CEOs believe that some changes should take place.

In turn, quantitative research, on the other hand, is descriptive in nature and helps in obtaining hard data by way of surveying a set of sample population to find out the kind of behaviors, attitudes etc, that are exhibited by the selected sample. In this research, we have employed a statistical survey, which was meant to measure the attitude of shareholders toward the compensation to CEO. Our intention was to find out whether they agree whether that top-managers should be paid such salaries. Secondly, we wanted to learn about their suggestions that may possibly resolve the problem. In this case, we gave preference to scaling questions because they are most affective for capturing peoples attitudes (See appendix 1). We have tried to survey as many people as possible. On the whole, we received answers from 50 respondents who were quite willing to collaborate with us.

Data Validity and Reliability

At this point, it is of the crucial importance for us to test the accuracy of the data that we have obtained. The quality of the research project depends on the validity of the information and the conclusions that are arrived at. In order for the research to be of high quality, it is necessary to avoid any ambiguity for example we have tried to formulate the questions in such way that respondents should be as objective as possible.

Secondly, data validity can be defined as the accuracy or precision of the information that has been collected. When conducting mail interviews, one disadvantage is that the collected data may not be reliable. People upon whom the data is to be collected and the people who actually give the information may be different. That way, the data so collected will lack reliability. Unfortunately, some information cannot be entirely trustworthy, because some companies prefer not to disclose the compensation to their CEOs; moreover, the exact amount always varies. Therefore, we have attempted to use the most up-up-to-date statistical sources of 2008 or at least 2007.

Analysis of Results

Once the information is collected, it is edited and coded. The data after coding is tabulated and evaluated using statistical applications. Before starting to analyze the data collected, it is important to review the method of data collection – quantitative or qualitative. If the data collected is of numerical nature regression, descriptive and correlation

• Correlation is a statistical tool that helps to measure and analyze the degree or extent to which two or more variables fluctuate with reference to one another. Thus, correlation denotes the inter-dependence among the variables. For correlation two phenomena, it is essential that the two phenomena should have a cause-effect relationship and if such relationship does not exist, then the two phenomena cannot be correlated (ICMR, 2004). In this particular case, we tried to analyze the relationship between CEO compensation and the companies overall performance. Most recent statistical information indicated that these two notions are no intertwined. Moreover, they can be even in inverse proportion to each other (Coviello, 2008, Bebchuc, 2006).
• The term ‘regression’ literally means ‘stepping back towards the average.’ The technique of regression analysis is used to determine the statistical relationship between two or more variables and to make prediction of one variable on the basis of the others ((ICMR), 2004). Simply put, regression is a mathematical measure of the average relationship between two or more variables in terms of original units of data. This analysis provides estimates of values of the regressed variables from the values of regression variables. Estimates of regressed variable i.e. the dependant variable can be made using the regression line, which describes the relationship existing between two variables. The results were obtained by means of regression analysis. In confirmed our belief that CEO compensation and profitability of the enterprise are not always dependent on each other.
• Descriptive analysis was used present the attitude of employees and shareholders. (For detailed information about the findings, please refer to Appendix 1).

If the data collected is qualitative in nature it is of the crucial importance to eliminate every possibility of subjectivity or prejudiced because they may entirely ruin the research. The data collected through qualitative is to be organized properly and then it has to be categorized and arranged. A method called Content Analysis is used for Qualitative analysis of data. According to content analysis, the data collected is carefully read first. Then the main themes and topics of the information or the data are identified, coded and categorized. We basically focused on the arguments which scholars advanced in favor or against high compensations to CEOs, and more importantly on the solutions they propose. S

Results of the research

The information, which we have gathered and analyzed, concerns both economic and ethical aspects of this question. Judging from the statistical data, we may state that, there has been a sizable increase in the salary of top Chief Executive Officers for the last (15) fifteen years. This salary increase has been on the upward trend except in the year 2003 and 2004.

Historic CEO Compensation

The Chief Executive Officer pay has been going up as shown in the diagram above. The increase in the Chief Executive salary has been as a result of competition (Hodal M 2008). This increase is reserved because we have helped corporations make huge returns which in turn are consumed by various stakeholders to the company. The sky rocketing of the Chief Executive Officers compensation is actually captured well by the competition that is taking place in the world today. Competition has become very stiff meaning that nay serious corporation must hire the best human resource that should be paid well to be motivated and produced.

However, we cannot say that the amount of compensation is always shaped by the organizations profitability or overall performance. For example, Morgenson (2009), argues that Chief Executive Officers are paid huge salaries while companies’ profitability is going up in smoke. In his argument, it appears that the Chief Executive Officers are compensated even though performance is going down. He has found little evidence on the profitability performance differences in the companies as there are differences in the salaries of the two individuals.

According to the survey, there is a growing dissatisfaction among many shareholders and workers, 75 percent of them are firmly convinced that the compensation is not adequate. Apart from that it can be observed that in large corporations they cannot in any way alter the attitude of the management mostly because there are practically no legal guidelines for it. Besides, 65 per cent of respondents believe that some constraint on the compensation of chief executive officers. The interview with Warren Buffett indicates that at present the strength of managerial influence on the board of directors has become extremely immense. He concurs with the statement that sometimes, the top management completely disregards the demands of shareholders.

Conclusion and recommendations

Therefore, it is quite possible for us to arrive at the conclusion that the compensation of chief executive officers is not always based on the performance of the company. In the vast majority of cases, it is determined by the stock share fraction. Secondly, we may argue that very often the exact amount of salary is very difficult to determine because there are various types of compensation and not necessarily only monetary award.

Judging from the result of survey, we have conducted, we may state that approximately eighty per cent of respondents were not satisfied with wage policies, established in many American companies. The major cause of their discontent is that in the times of economic prices leading corporations should cut down some of their expenses, especially considering the fact that many workers are made temporarily and permanently redundant.

Namely, the interviewees were instating that they should be more transparent and more moderate. In their opinion, the compensation to chief executive officers has to be performance-based. They believe that it is both unethical and wasteful to spend such amounts on money on the salary of the top management. Furthermore, many shareholders are firmly convinced that the government should impose some restrictions on the salaries of CEOs, because they are often unable to intervene into the decision-making process and or in any way influence the current situation. Their views only confirm our initial hypothesis about this question.

Their claims are quite grounded and in this respect, we may come up the list of recommendations. First, the management should pay more attention to the image of their companies, because such high compensation to CEO leads to the belief that the well-being of other workers or shareholders, is of no importance to them. Secondly, the shareholders must have a right to influence the waging policies. Officially, they can intervene, but actually, they have to opportunity to impact the managerial power, which subsequently gives rise to their dissatisfaction.

References

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Appendix

Questionnaire

• Do you believe that chief executive officers should be so excessively compensated?
  • Strongly Agree; (5 %)
  • Agree (10%);
  • Do not Know (10%);
  • Disagree () (40%);
  • Strongly Disagree (35%);
• Can share holders of your company influence the wage policy?
  • Strongly Agree (7%);
  • Agree (10 %);
  • Do not Know (13%);
  • Disagree (45 %);
  • Strongly Disagree (35%);
• Do you think that compensation to CEOs is always performance based?
  • Strongly Agree (10% );
  • Agree (20 %);
  • Do not Know (15%);
  • Disagree (31%);
  • Strongly Disagree (24%);
• Do you consider such high compensation economically prudent and ethical especially during the time of economic crisis?
  • Strongly Agree (7%);
  • Agree (8 %);
  • Do not Know (15%);
  • Disagree (50%);
  • Strongly Disagree (20%);
• Should the government impose restrictions on the salaries of the top management in leading American companies?
  • Strongly Agree (23%);
  • Agree (42%);
  • Do not Know (10 %);
  • Disagree (10%);
  • Strongly Disagree (15%).