THE DEBATE ON EXECUTIVE COMPENSATION

The Debate on Executive Compensation

The Debate on Executive Compensation

Introduction

A corporation experiences many difficult issues such as, social responsibility, corporate governance, corporate wrongdoings, workplace discrimination, and workplace harassment, however; executive compensation may be the most debatable subject. A Chief Executive Officer (CEO) holds the highest position within a corporation and needs to help structure the corporation. Some say the CEO deserves the large compensation which comes with the job. A CEO is known for their knowledge, experience, and leadership skills. A CEO is also responsible for the direction the organization and to make sure that all employees are positively contributing to that direction. A CEO brings much to the table, but the number one goal for the CEO is to maximize profits and secure the financial strength of the company.

Even with all the knowledge and experience that a CEO offers are such large compensation benefits ethical?

An executive pay package usually consists of the following five components: (1) base salary, (2) short-term incentives or bonuses, (3) long-term incentives or stock plans, (4) benefits, and (5) perquisites (Managing Human Resources p. 448). A CEO's base salary is about 30 to 40 percent of total annual compensation (MHR p. 448). Most of the base salary is in the form of long-term incentive rewards and bonuses. Companies normally have compensation committees that given the task of comparing outside pay packages to that of their own company. Comparisons can be based on organization size, sales volume, or industry groupings (MHR p. 449).

Discussion

Executive compensation is a broad subject that has been largely studied, mainly in Anglo-Saxon countries. On the other hand, outside the Anglo-Saxon literature, the material found is not as extensively developed and more research is needed in order to reach similar levels as in the United States of America or the United Kingdom. However, there are so many dimensions in the subject that would be impossible to cover all in this paper. Therefore, the focus of this research is on the main body of literature, that test whether compensation schemes of top executives align their objectives with those of the shareholders, and therefore, whether agency conflicts exist or don't. Understanding how the alignment works, and therefore the relationship with the performance of the organization, is a key element to be aware Agency Theory problems and the emerging best practices on Corporate Governance.

The association between shareholders and executives is a perfect example to explain the agency relationship. This relationship was perfectly defined in 1976 by Jensen and Meckling, in their Theory of the Firm as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making”. They suggest that under this relationship, the agent will not always act in the best interest of the principals as they will act moved by their own self interest. Agency problems therefore rise from the separation of ownership(principal) and control (agent) in the organizations; an issue that has ...