Discussion:
"Executive Pay" Please respond to the following:
1. Some evidence suggests that there is a direct and positive relationship between a firm's size and its top-level managers' compensation. Explain what inducement you think that relationship provides to upper-level executives.
2. Recommend what can be done to influence the relationship so that it serves shareholders' interests.
Conduct additional research and CITE YOUR SOURCE.
Response
Given the benefits that corporations have received via the new tax bill, and comparing that to the limited bonuses and stagnant wages of the workforce, executive pay is a topic that has some tension behind it. The average CEO is paid 300 times more than the average employee, on average. To give you an idea of what that really means, a CEO generally makes approximately the same amount of money in one day than the employees of that organization make in a year. An extreme example of this is the number of hours an employee at Walmart needs to work to earn the equivalent of 1 hour of pay for the CEO - 1,372 hours of work, or 34.3 weeks, if they have a 40 hour a week position.
The opportunity to earn that kind of money induces many senior managers to compete with their peers in an attempt to position themselves to become the next CEO. Many Fortune 500 companies encourage this competitiveness, which can lead to issues. First, upper-level management is required to spend a portion of their working time focusing on their chess moves within the competitive environment. In addition, competition can lead to infighting and backstabbing, which is counter-productive to collaboration. This can lead to siloing and lack of cohesive planning for the company. Finally, there is strong evidence that "ranking" can actually lead to worse performance within organizations. On the plus side, the correlation between firm size and compensation may lead senior executives to build the business, and make it larger, either through acquisition or distribution, to encourage the increase in overall compensation. However, as we've seen, this decision is not always beneficial for the business long term. It is possible that a CEO could make the decision to acquire another organization to promote growth, without understanding potential concerns with the transaction and long term health of the company.
In order to serve shareholder interests, the CEO compensation package should be tied to company performance. This strategy, especially when using multiple metrics, encourages the CEO to ensure that the business is operating smoothly. For example, if a CEO is measured on sales, operating expenses, and retention, the CEO must then balance the opposing forces of giving away money to target new customers, while maintaining an organization to support existing customers, and do so in a way that limits operation costs, therefore maximizing revenue growth. Even in a situation where metrics are tied to compensation, there is the possibility that business decisions will be made that increase metrics for which the CEO is judged, while negatively impacting the long term health of the organization.
Looking forward to your thoughts.