The issue of estimating the executive compensation has remained a very thorny issue and corporate concern to the Boards of Directors of major U.S. companies to date. This is because most Boards of Directors spend a lot more of their time making decisions on how to compensate the top executives at the expense of valuing the shareholder and upholding the integrity of the company’s financial strength and reporting system. “ How executives compensate themselves has become a controversial topic and indeed, 73 percent of respondents in a Business Week/Harris poll indicated they believe that top officers of large U.S. companies receive too much compensation, while only 21 percent think executive compensation is just about the right amount” (Ferrell, Fraedrich & Ferrell, 2009). Furthermore, Ferrell, Fraedrich & Ferrell (2009) buttresses this point further that demonstrates the issue of executive compensation as an employee and corporate concern by demonstrating that many people harbor the belief that no executive is worth millions of dollars in annual salary and stock options even if they are solely behind the huge financial returns to the investors. Implementing a stakeholder perspective in regard to executive compensation must involve an analysis of five effective steps in the utilization of stakeholder framework in business ethics. These, according to Ferrell, Fraedrich & Ferrell (2009) include the assessment of corporate culture, identification of stakeholder groups, an assessment of organizational commitment to social responsibility, identification of resources and determination of urgency, and the gaining of stakeholder feedback.
To effectively enhance a high level of organization, all forms of social responsibility programs must take into consideration the overall corporate culture of an organization. This aids in the identification of the organization’s values, norms, vision, and mission that define their role in affecting the executive compensation. “In particular, relevant existing values and norms are those that specify the stakeholder groups and stakeholder issues that are deemed as most important by the organization”. Ferrell, Fraedrich & Ferrell (2009). Lack of a clear analysis of the corporate culture of an organization in the executive compensation process has the adverse effect of running contrary to the values, norms, mission, and vision of an organization. Such contradicts the role of the Board of Directors in achieving the best in the interest of the employee and the shareholder.
In the identification of stakeholder groups, it is paramount to take a deeper analysis of the stakeholder’s needs, wants, and desires that are maybe overlooked due to the overwhelming influence of other demands such as consumer groups and media interests. The role of stakeholders cannot be diminished. Ferrell, Fraedrich & Ferrell (2009) demonstrating this role by stating succinctly that stakeholders have some power over a business because they are in the position to withhold, or at least threaten to withhold, the organization’s resources and have the most power when there own survival is not adversely affected. The effective identification of an organization’s culture and stakeholder groups together leads to the identification of stakeholder issues. This step, therefore, aids in understanding the nature of underlying issues that remain most important to the stakeholder. “Conditions for collaboration exist when problems are so complex that multiple stakeholders are required to resolve the issue and the weaknesses of adversarial approaches are understood” (Ferrell, Fraedrich & Ferrell, 2009).
An analysis of organizational commitment to social responsibility in executive compensation cannot be overlooked. This is because these actions must match the interest of the organization. The understanding of the definition of this step will direct the Board of Directors to the evaluation of the current and accepted code of practices that assist in the selection of sound social responsibility initiatives. Executive compensation is then done in line with the knowledge of admissible and concrete social responsibility initiatives and activities. Such a commitment raises the stakeholder’s understanding of the current and future demands of the organization in direct comparison to its compensation plans.
The role of resource identification and determination of urgency in resource allocation forms one of the fundamental steps in executive compensation plans in an organization. This step underlines the prioritization of stakeholder issues and assists in sound resource allocation plans. In this step, Ferrell, Fraedrich & Ferrell (2009), explains that “two main criteria can be put to consideration: First is the level of financial and organizational investments required by different actions; second is the urgency when prioritizing social responsibility challenges”. When the executive compensation is then analyzed under all the above steps and recognized as important and significant, then it can be classified as urgent. The last step involves the gaining of stakeholder feedback in executive compensation. This can be carried out and achieved through a variety of means. The three generally accepted steps in gaining the stakeholder feedback include “First, stakeholders general assessment of the firm and its practices that can be obtained through a satisfaction or reputable surveys” (Ferrell, Fraedrich & Ferrell, 2009). Second is the gauging of perceptions that stakeholders hold in regard to the ways the firm undertakes its internal issues, stakeholder’s interactive media channels such as blogs, newsletters, Annual general assemblies, and websites. Third and last is the undertaking of formal research to understanding the response of the stakeholder in line with executive compensation.
Reference
Ferrell, O.C., Fraedrich, John, and Ferrell, Linda (2009). Business Ethics, Ethical Decision Making & Cases, Seventh Edition. Boston, MA: Prentice Hall.