CEO PAY AND BUSINESS PERFORMANCE.

CEO Pay and Business Performance

CEO Pay and Business Performance

Introduction

The chief executive officer (CEO) is the driving force behind the modern corporation in UK, responsible for determining the strategy the corporation sets as well as implementing this strategy. Business practitioners, academics, government agencies, the popular press and the general public devote large amounts of attention to the factors which determine the levels and types of CEO pay, especially in trying to determine the effect of compensation on organizational outcomes.

There are theoretical and practical reasons for studying the influences on Chief Executive Officers and how their actions affect organizations. The chief executive officer has possibly the greatest influence on the performance of the organization based on primary managerial roles including symbolic actions, information processing and decision making (Mintzberg, 2009, 427), although other researchers dispute the efficacy of these roles. Additional roles that CEOs fulfill include solving problems (Smith & White, 2010, 269), allocating resources, being the chief strategist, and maintaining the organizational culture. The CEOs actions in filling these roles, in turn, affect the strategic outcomes of the organization.

Discussion

Explanations of the variance in levels of CEO pay can be directly attributed to the relationship of such incentive and organizational outcomes. No other individual has more influence on the strategic decisions of a firm than the chief executive officer. In order to get at the desired level of complexity, this system requires study of the activities of the board as well as the CEO and overall firm performance. Boards hire particular CEOs for their skills and abilities, compensating them, in part, in response to the external labor market.

In this manner, CEOs are rewarded either to provide a target for other individuals in the organization to strive for (Arnie, Smith, 2006, 39), or to differentiate between the CEO and lower hierarchical levels. Crystal (2000, 419) holds that CEOs in UK generally are overpaid for the effect they have on organizational outcomes. He posits that CEOs have more knowledge about the value of their services and that they over-represent this value to compensation consultants and committees of the board of directors. To further support the rationale behind this relationship, an examination of some theories and factors as they apply to managerial decision makers is in order.

Strategic Choice Theory

Academic study of chief executive officers is based, in large part, on the concept that the strategic choices made by an organization's decision makers have an effect on the outcomes of that organization. In general, the CEO is the focal individual in the coalition charged with making decisions, whether from a need for a certain hierarchy of command for decision, speed or for any other practical management rationale. These decisions often result in the allocation of resources, development and implementation of organizational strategies and growth of structures to support the decisions.

CEOs are charged with making the type of decisions necessary as the organization interacts with its environment, especially the external environment. In addition to direct managerial responsibilities, CEOs also have symbolic importance in ...