Essay on "Executive Bonuses"

Essay 4 pages (1293 words) Sources: 4 Style: MLA

[EXCERPT] . . . .

Executive Bonuses

When the Bush administration bailed out the banking industry in the fall of 2008, some of those banks, paid out substantial bonuses to their executives. The resulting uproar compelled the Obama administration to put caps on executive bonuses for banks that have received bailouts. The situation -- in particular the AIG debacle -- raised once again the issue of executive compensation (Quijano, 2009)). Since the bulk of compensation for most senior executives is in the form of various bonuses, it is the bonuses that are most at issue. It is my view, however, executive bonuses should not be subject to caps by anybody other than the shareholders in that company. Federal legislation capped or curtailing bonuses would be wrong-headed, and fail to address the core problems in executive compensation.

The History

The current model for executive compensation evolved in the 1990s as a means to align the interests of management with the interests of shareholders. Mehran (1995) showed that equity-based compensation was positively correlated with higher firm performance. A revolution in executive compensation was sparked. Stock options became the norm, because executives would need to drive a higher share price in order for the options to be in the money. It is also in the best interests of the shareholders that the share price be driven higher. The use of equity-based compensation was encouraged by the tax treatment of such compensation at the time.

Equity-based compensation was flawed, however, in that stock options have an expiry. Thus, the interests of management were aligned with the interests of the shareholders for the d

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uration remaining on their options, but not beyond. This encouraged short-term risky behavior in order to increase the share price in advance of option expiry. Shareholders liked this, too, since for the most part they could sell when the stock ran up as well. Longer-term shareholders were more likely to bear the brunt of the risk taking since eventually the lack of long-term value building in the organization would result in a collapse of the share price.

Shareholders, however, were becoming increasingly oriented towards long-term growth, a function of increasing dominance of institutional investors. When the Financial Standards Accounting Board issued Statement No. 123(R), it removed the tax advantage that equity-based compensation had once enjoyed (Mullen & Guigliano, 2009), it signaled a shift in executive compensation. Plans emerged based around a variety of bonuses, as corporations attempted to maximize the tax-favorability of their executive compensation plans.

The Two Sides

There are many problems that the proponents of capping or curtailing executive compensation are trying to solve. Some of the most common views are that executives do not earn that level of pay; that they earn too much in proportion to the rank-and-file; and that such pay is not directly tied to the long-run stability of the firm.

The flip side of the argument is that such plans are necessary to attract and retain key talent, and that employees must be oriented towards maximizing shareholder wealth in some way. Furthermore, opponents of caps argue, companies are free to do as they please. If the shareholders did not like the bonus structure paid to their executives, they would simply replace the board and cut new deals with the executive team.

Indeed, many shareholders do precisely that. Warren Buffet does not award excessive bonuses to the CEOs of his companies because he does not view that as being an effective means of motivating executives in the right ways. Major institutional shareholders, such as CalPERS, also take an active interest in the executive compensation at the firms in which they are invested.

The Case Against Caps

The AIG situation was unique. The President demanded the caps in part because the American taxpayer was a de facto if not de jure shareholder in AIG. The President's move may have been motivated by optics as much as anything else,… READ MORE

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Quoted Instructions for "Executive Bonuses" Assignment:

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Topic: Executive Bonus / Employees Paycuts

Requirements: Argumentation is a basic human communication tool--we all desire our thoughts and beliefs to be heard and maybe even accepted. A formal definition of Argument is the art of persuading people how to think through speeches, debates, and informal discussions. And in any situation, those who present the most engaging arguments tend to have the most influence. Strategy is the key to good argumentation, especially for academic writing. It*****s more than just throwing your beliefs and examples at your readers. It involves developing effective appeals, such as logos, ethos and pathos, addressing opposing arguments, and avoiding blatant attacks and logical fallacies.

1. You will write an essay arguing a particular position on a contemporary issue that is considered problematic in nature, interesting to you, and significant to your readers; it MUST have opposing viewpoints. Your position can*****t be an issue stance that everyone agrees on, such as the need to rid the world of poverty, AIDS, or animal abuse. You will consider your audience as skeptically neutral. Consider how you are going to get your audience to acknowledge your position by connecting to your audience*****s beliefs and values. Therefore, your objective is not to convince your readers of your position, but have them at least acknowledge your position. Your essay will not be just a debate; it should be a well-crafted classical argumentation.

2. Your essay should be a minimum of 1,200 words and a maximum of 1,500 words.

3. Your essay will include at least four outside resources as evidence and a Works Cited page listing those resources. You must use MLA to document your resources. Use the correct format for your Works Cited page and essay*****s parenthetical citations. Beware of Internet references that do not have authors or experts backing up the evidence. Do NOT use Wikipedia or Google/Bing as main sources on your Works Cited page! Always go for the peer-reviewed sources first.

4. Your essay must take a stand on a position and acknowledge alternative views (aka counterarguments). Analyze those counterarguments by rebutting or refuting in support of your position. If the counterarguments are solid, then concede them and move on quickly.

5. Use appeals to ethos, logos and pathos effectively. How can you increase your audience*****s perception of your credibility and trustworthiness? Also use personal experience as evidence.

6. Watch out for fallacies and statements that may sound reasonable and true, but are deceptive and dishonest.

7. You are required to hand in a formal outline with your essay, which should include an Introduction, Body, and Conclusion. Your Works Cited page should be included with your final essay. Your writing strategy will determine Body organization:

a. Introduction of your main claim/thesis

1. Background/preliminary information

b. Body paragraphs (your own order)

1. Arguments supporting your own position

2. Objections and counterarguments

3. Response to objections through refutations or concessions

c. Conclusion

d. Works Cited page (on final essay)

How to Reference "Executive Bonuses" Essay in a Bibliography

“Executive Bonuses.” A1-TermPaper.com, 2009, https://www.a1-termpaper.com/topics/essay/executive-bonuses-bush/61817. Accessed 28 Sep 2024.

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