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Executive Compensation and Board of Directors’ Decisions Report (Assessment)

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Updated: Sep 17th, 2022

Board of Directors’ Decision

In the job market analysis in the 21st century, the executive pay level should increase proportionally as the company’s size expands. The company’s culture should also be considered. All compensation and benefits packages arrived at by the board of directors should reflect the company’s values and take into account the goals, especially those related to the pay for performance (Gunderson, 2014). The level of equality and inequality within a company is a crucial metric that needs evaluation. Equality can be achieved by assessing the executives’ pay compared to the average employees within the firm. Equality can affect their morale, especially in companies where the compensation formula is not well distributed.

Executive Compensation Procedure

The Board of Directors or a compensation committee annually evaluates the company’s executive on performance basis. In this way the board plays an oversight role. The evaluation involves a thorough procedure where the board or the committee determines the employee’s input to the organizational productivity. Thereafter, based on the information collected, the board or the committee recommends the findings and the conclusion of the preferred compensation structure.

Effects of Underpaying/Overpaying Executives

Lack of allegiance increases the probability of the underpaid executive employees to develop attitudes that are characterized by irrational behavior. Whenever these executive employees feel that the board of directors does not care for them, then the staff will not bother to provide a quality output. They are likely to feel disengaged and undervalued thereby lowering their performance, as opposed to when they are well compensated (Gunderson, 2014). As established above, a lack of motivation is a major cause of unproductivity and a lack of dedication.

Second, underpayment denies organizations the ability to attract and retain talented and highly skilled personnel. With the growing competitiveness in the job market, no employee would desire to be underpaid with an exception of an underqualified individual. Third, low morale may arise, thus causing dissatisfaction among executive employees, which can spread to other staffers. As a result, issues such as illness, absenteeism and mental health deterioration are the consequences of the emotional contagion (Reed, 2019). Accordingly, underpayment negatively affects executive employees’ motivation and lowers their workplace productivity.

Way above market price remuneration for executives makes them captives to their wages limiting their exit strategies. Practically, if an executive with limited skills receives significantly higher salary than he or she should be compensated, that creates a problem for the firm (Schmitz, 2015). They may not afford to transition to new roles or employers that would instead fit their skills because they are already comfortable with the current compensation plan. Overpaying executive employees, especially when compounded over time, can significantly compromise the ability to appropriately reward other employees. That can lead to low morale and bad turnover in the organization. This eventually becomes an expense to the firm’s budget.

Effects of Underpaying/Overpaying Executives on the Risk of Fraud

Overly compensated executives are more prone to fraudulent activities than the under-compensated ones because they are in the capacity of being loyal to their employers and the board to act as their servants to keep earning massive bonus payouts (Thacker, 2013). The fraudulent reporting of the annual financial reports by these executives violates ethics. Besides, it misrepresents the company’s progress to investors, thus eventually affecting the company’s long-term goal achievement plans.

The Influence of Chief Executives

CEOs have a central role in organizational leadership. The CEOs’ influence is to the extent to which the employers, clients, investors, and other stakeholders look up to them. Key projects that require significant financial allocation, and are of symbolic value need the goodwill and personal engagement of the CEO to succeed (Planellas & Muni, 2019). The profiles of new CEOs have played a role in driving the share values of the company.

The internal motivation, mindset, and consequent levels of performance are affected by the CEO. The staff expects the senior to live up to the famous proclamation by Mahatma Gandhi, “For things to change, first I must change.” CEOs, therefore, serve as role models to the other company employees (Thacker, 2013). The junior employees look up to the seniors and therefore, their actions need to be beyond reproach.

CEOs who are also founders generally tend to yield more power than the non-founders. Several variables affect the level of influence CEOs have in their companies (Saidu, 2019). The factors include but are not limited to education, ownership, founders’ state, and professional background. The CEOs with significant shareholding are likely to have more influence (Saidu, 2019). The founder status gives the officer principal status that yields him or her more power than when one is hired by the company.

Companies are considered as brainchild of their founders, and in most cases, they make the key decisions because they are the principal vision bearer. The level of influence affects the amount of compensation the chief executive officer receives. In a company where the shareholders and the board recognize the CEO’s significant influence, the duo tends to set revenues, profits, and stock prices performance-based compensation plans for the CEO as an incentive.

CEO-Worker Compensation Ratios

Masses continue to be laid-off and there are persistent cases of employees going unpaid. In the U.S., while the CEO-workers’ pay gap had narrowed in 2019 to 264 from 287 in 2018 the economic impacts of COVID-19 are likely to escalate the disparity (Kerber, 2020). COVID-19 has meant that most businesses are either closing down or retrenching employees to save on costs. As a result, the employees in the lower levels are also disproportionately affected by pay cuts; the executives’ stock-based remuneration leaves their compensation largely untouched. The lost earning by the millions of laid-off employees, those going without pay, and those facing pay cuts is likely to escalate the pay ratios dramatically in 2020.

The government should intervene and make an effort to control the pay-ratios. The vast difference in the pay between the employees and the executives communicate an increasing income disparity in the country. If left to operate on their own, managers and employees tend to oppress their workers by underpaying them. The free market models result to capitalism, a system characterized by inefficiency and inequalities.

The higher-income disparity is a negative development for countries’ economies, and the government needs to control such cases. Some of the negatives of wide income disparities such as decision making and political power are likely to be concentrated in the hands of a few people and consequent social crises that result in economic and political instability (Attanasio, 2018). While there is no established negative relationship between productivity and pay ratios, merit-based performance is seen to incentivize performance.

References

Attanasio, J. B. (2018). Politics and capital: Auctioning the American dream. Oxford University Press.

Gunderson, M. (2014). . Human Resource Management Review, 11(4), 431-452. Web.

Kerber, R. (2020). . U.S. Web.

Planellas, M., & Muni, A. (2019). Mckinsey Portfolio. In strategic decisions: The 30 most useful models (pp. 116-119). Cambridge University Press. Web.

Reed, P. (2019). Learning and motivation, editorial. Learning and Motivation, 65, A1. Web.

Saidu, S. (2019). . Journal of Global Entrepreneurship Research. Web.

Schmitz, A. (2015). Executive compensation best practices, 43-55. Web.

Thacker, R. A. (2013). Introduction to special issue on human resource management certification. Human Resource Management Review, 22(4), 245. Web.

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