Exploring the Relationship between Excessive Executive Compensation and Corporate Failure

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A Review of the Professional and Academic Literature

This chapter provides the relevant literature on the relationship that prevails between excessive executive compensation and corporate failure.

Excessive executive compensations attract investors, public, academic and media attention. It is expected by the investors that the executive incentive and pay arrangements are aligned closely with the performance of the organization (Wilhelm, 2009). The media and investors seize the arrangements that seems to be excessive and particularly if the performance is poor (Schneider and Hanges, 2009). The public tends to express indignation on increases in the salary in comparison to the nations average earning at the magnitude of the incentives that are long-term. The uneasiness of investors and the significant changes in the corporate governance of the banking industry in the United States have been debated considerably with regard to the determinant of the executive pay (Shaw and Gupta, 2010).

As organizations seek to attract and retain talented managers under the gaze of the public and shareholders on executive pay, it is imperative to have a fair and transparent system of executive compensation (Petty and Singleton, 2009). In order to assist in addressing the issues prevailing because of executive pay, consultants work with compensation committees, as well as with executives from all sectors, from a large company's worldwide players, even the non-profit organizations (Robinson and Shimizu, 2010).

It has been observed through researches that one of the major reasons for the inequality of income in the US is due to the dramatically increasing pay of the corporate executives, even if the organisations that they work in are not performing well (Robinson and Shimizu, 2010). With the increase, in the pay scales of the executives reduces the wages of the employees working in the same organization (Osterman, 2010). Therefore, due to the increasing pays of the corporate executives and the low performance of the organization, it is seen that the corporation fails (Nichols and Subramaniam, 2010).

Executive pay is an essential component of the corporate governance and is determined by behavior that seeks risk it has been seen through researches that the failure to create a document that is robust and consistent relationship that prevails between the executive compensation and the performance of the firm which has frustrated the practitioners and scholars for around a quarter of a century (Osterman, 2010). The researches that have been carried out on compensation have ...