The recent market trends indicate that the compensation for executives has increased tremendously. Statistics indicate that some chief executives earn over $52 million annually. Further, studies indicate that there is a high disparity between the compensation received by executives in the emerging markets and developed economies. Also, there is a large wage difference between the executives in an organization and other workers (WorldatWork Research, 2009).
The growth and intricate nature of the executive compensation has attracted a lot of public scrutiny. However, there are reasons why the executives demand for high wages. The first reason is that high executive pay contributes to high performance. A study carried out using data collected between 1973 and 2003 revealed that there is a high association between performance and pay (Graham, Roth & Dugan, 2008). The second reason is social and political factors. The third reason is the conflict of interest. The executives are paid a high salary as a cost of the agency problem. The final reason is psychological factors and an increase in the number of pay consultants.
Recent market surveys indicate that the senior executives do not deserve the high compensation. This can be attributed to the fact that there is no connection between the performance of a company and pay, especially after the recent economic meltdown that affected several economies (Lorsch & Khurana, 2010). A recent survey revealed that executive pay is rising faster than performance (Mishel & Sabadish, 2012). Secondly, the high executive pay leads to the wage inequality in an economy (Bebchuk & Fried, 2004).
Based on the qualifications and management expertise, the senior managers deserve a high pay. Executives in most companies are under pressure to make vital decisions in a company. Besides, the executives have gained vast experience over the years before they reach the top. Thus, they have extensive experience in their fields. From an economic point of view, there are few personnel who have a combination of both expertise managerial skill and qualifications. This creates a high demand for executives that pushes up their pay. Besides, the executives have a duty to serve the interest of the investors in the company, these are, the shareholder’s. Therefore, the executives have a responsibility to manage the conflict of interest (Jensen & Murphy, 2004).
In the recent years, it has been found useful to connect the performance and achievements of the executives to the outcome of the organization because it improves accountability and it can be used to regulate remuneration they earn at the end of the year. This structure of remuneration has been cascaded down in many organizations and it has improved employee motivation and organizational culture.
Recommendations
Companies need to improve their recruiting methods so that higher pay does not form the basis of attracting good managers. Also, companies should discourage the use of pay and bonuses as a way of motivating employees because it may have a long term negative effect on the success of a company. Thirdly, the government should come up with regulations that can control the increase of the executive pay. Further, more disclosure may be necessary to regulate the executive pay. For instance, companies may be required to attach a monetary value to the executive pays when filling forms 10K. Finally, a change of the composition of the executive package and corporate governance may regulate the pay increase (Brewster & Harris, 2012).
Conclusion
In the recent years, the executive pay has been increasing at a faster rate than the performance of most organizations. It is important to keep the rate of growth of the executive pay under check. This will minimize the negative impact of the growing income inequality in most economies.
References
Bebchuk, L., & Fried, J. (2004). Pay without performance – the unfulfilled promise of executive compensation. USA: Harvard University Press. Web.
Brewster, C., & Harris, H. (2012). International HRM. USA: Routledge. Web.
Graham, M., Roth, T., & Dugan, D. (2008). Effective executive compensation: Creating a total reward strategy for executives. USA: AMACOM Div American Management Association. Web.
Jensen, M., & Murphy, K. (2004). CEO incentives: It’s not how much you pay, but how. USA: Harvard University Press. Web.
Lorsch, J., & Khurana, R. (2010). The pay problem: Time for a new paradigm for executive compensation. Web.
Mishel, L., & Sabadish, N. (2012). CEO pay and the top 1%: How executive compensation and financial-sector pay have fueled income inequality. Web.
WorldatWork Research. (2009). Executive compensation case studies: A supplement to the WorldatWork executive rewards questionary. Web.