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The size of compensation and salaries typically provided to chief executive officers (CEOs) is a topic of debate in the spheres of business and economics, as a result of the fact that economists and analysts are inclined to concentrate on “extraordinary pay increases” when the discussion turns to changes in CEOs’ compensation packages (Mishel & Davis, 2015, para. 1). The purpose of this paper is to discuss whether the compensation of CEOs should be regulated or not, since executive wages can involve considerable sums.
Although CEOs work to increase the competitiveness of their firms, and a company’s development depends on decisions and choices made by its executives, the salaries and compensation of the latter should be regulated to avoid such situations as when CEOs are overpaid, their wages are not correlated with external economic factors and compensations do not correspond with a company’s performance. This paper aims to call attention to the necessity of regulation, with a focus on describing connections between CEOs’ wages and firms’ performance and analysing the impact of different factors on the situation, as well as discussing opponents’ viewpoints.
CEOs’ Wages and Firms’ Competitiveness
It is possible to state that the problem is in the fact that CEOs are often overpaid as a result of being viewed as responsible for developing their company, negotiating with partners and controlling financial operations. However, researchers note that extremely high wages for CEOs are not directly associated with their firms’ competitiveness (Ferri & Maber, 2013). Mishel and Davis (2015) pay attention to the fact that constantly increasing payments are usually associated with a high demand for executives’ skills.
Thus, when shareholders want to attract qualified executives, they choose to pay them extremely high compensation. Still, according to Dicks (2012), even if executives are perceived as highly paid professionals, there are no guarantees that their efforts will result in gaining a competitive advantage for the company. From this perspective, a complex analysis of CEOs’ impact on their firms’ competitiveness is required when there is a question about any further increase in wages. Analysts’ conclusions regarding the CEO’s role in a company’s progress should be used for regulating executive pay. In this case, regulations do not always mean a reduction in wages, and are discussed as necessary to provide CEOs with fair earnings.
CEOs’ Compensation and the Impact of External Factors
Another problem requiring attention is any constant and unregulated increase in CEOs’ wages that does not depend on specific external economic factors. It is important to note that different economic factors can influence a company’s overall development and revenues. These factors include changes in the stock market, the financial crisis and changes in supply and demand, among others (Jouber & Fakhfakh, 2011).
According to Mishel and Davis (2015), in many companies, the compensation of CEOs is not regulated with a focus on change in the value of stocks, or other fluctuations in the stock market. As a result, the compensation of CEOs can remain stable, or it can even increase despite a firm’s position in the market. Ferri and Maber (2013) accentuate the idea that CEOs need to receive high payment in order to propose a strategic plan for their company, along with overcoming challenges. However, there are many situations where wages of CEOs are extremely high, and these resources can be used in order to contribute to the company’s further development.
Environmental contingencies and a variety of factors influencing the business world should also be taken into account when determining a reasonable sum for CEOs’ wages. Jouber and Fakhfakh (2011) note that when the company’s revenues decrease or the company’s prospects change in the context of an economic crisis, these aspects should influence the process of determining payments for executives, in order to address such external factors and guarantee a balanced development.
However, such regulations are typical only of small and medium companies, while wages of CEOs in large companies and multinational corporations can remain extremely high despite the economic situation in the domestic and global markets, and a difference between the wages of executives and workers is obvious (Jouber & Fakhfakh, 2011; Mantel, 2015). More regulations are necessary in order to address the CEO-to-employee wage ratio in large companies, as this ratio indicates whether the company is sufficiently “healthy” to respond appropriately to negative economic impacts.
Compensation and Companies’ Performance
The regulation proposed with regard to compensation provided to executives can be discussed as necessary, since CEOs’ wages are often significantly higher than can be considered reasonable for a company, when the focus is on its performance. It is also possible to note that such situations can lead to the ethical dilemmas associated with downsizing, as well as to financial shortages. There are two sides to this problem.
First, the ratio reflecting differences in compensation between CEOs and workers tends to increase annually, and according to Mishel and Davis (2015), it was “303-to-1” in 2014 (para. 3). Second, such a ratio is often not correlated with the actual performance of the company. According to Mantel (2015), CEOs can influence the performance of firms, and their compensation can be discussed as reasonable in some cases; but in most situations, high wages are provided despite the fact that the firm has limited resources.
Therefore, such a high ratio reflects an imbalance in the compensation policy followed in the company, and increases in wages can be achieved with the help of reducing the number of employees and decreasing their payments (Ferri & Maber, 2013). From this perspective, regulations developed to control increases in CEOs’ wages are necessary, because the practice of raising compensation only for executives does not reflect the actual performance of the firm.
Another Approach to Discussing Regulations
Proponents of the idea that CEOs should receive competitive wages argue that a company’s progress depends on executives’ efforts, and they should be paid accordingly. Mantel (2015) notes that when competition in the market is intense, high compensation provided to the CEO is viewed as payment for developing the necessary aggressive and effective strategy to overcome market barriers.
Taking this point into consideration, any regulation imposed to monitor wages of CEOs can affect the overall competitiveness of a firm (Jouber & Fakhfakh, 2011). However, Ferri and Maber (2013) support the idea that, although CEOs develop strategic decisions and are paid for their experience and leadership, these factors should not be overestimated, and the size of salaries and compensations should be regulated according to the principles that are used to monitor the wages of the other staff. Thus, effective regulation policies should be proposed.
More attention needs to be paid to developing methods that can be used in order to regulate compensation without influencing a firm’s competitiveness. According to Mishel and Davis (2015), high wages can demonstrate how CEOs are valued by shareholders and how skills and efforts of executives are appreciated, but they cannot influence the actual performance of a firm when the focus is only on leadership.
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While comparing approaches to compensation regulations applied in large and small or medium firms, it is possible to concentrate on the fact that only a limited number of large companies choose to regulate wages of CEOs (Ferri & Maber, 2013). As a result, performance and executives’ payments are more balanced in small and medium companies, where regulations are likely necessary because of resource shortages.
The regulation of CEOs’ wages is a controversial question, and the answer to this particular question depends on a variety of factors. While trying to draw conclusions with regard to the necessity of regulations, it is possible to focus on the following aspects: the role of CEOs in increasing their firms’ competitiveness, the effect of external economic and business factors on a company’s development and executive salaries and an appropriate difference between the compensation of CEOs and that of workers.
The research indicates that analysts are inclined to find connections between executives’ high compensation and expectations regarding positive changes in a company’s performance. However, there are also many supporters of the idea that adequate regulations, provided in the form of policies and governance, are necessary in order to overcome the problem of an inadequate ratio that demonstrates a difference between employees’ and CEOs’ wages. From this perspective, the answer to the question under discussion about the necessity of regulations is positive. It is possible to agree with the idea that CEOs’ compensation should be regulated in the context where extremely high executive wages become the prevailing trend in the business world.
Dicks, D. L. (2012). Executive compensation and the role for corporate governance regulation. Review of Financial Studies, 25(6), 1971-2004.
Ferri, F., & Maber, D. A. (2013). Say on pay votes and CEO compensation: Evidence from the UK. Review of Finance, 17(2), 527-563.
Jouber, H., & Fakhfakh, H. (2011). The institutional determinants of CEO compensation: An international empirical evidence. International Journal of Business Science and Applied Management, 6(3), 43-57.
Mantel, B. (2015). Executive pay. Web.
Mishel, L., & Davis, A. (2015). Top CEOs make 300 times more than typical workers. Web.