Research Proposal on "Executive Compensation Pay"

Research Proposal 5 pages (1738 words) Sources: 5

[EXCERPT] . . . .

Executive Compensation / Pay

As deregulation has been occurring, there has been a push to allow executives to determine their own compensation. Where, this system was believed to help encourage innovation and creativity. Yet, the last ten years have shown that some kind of limitations, are required. As the gaps between the compensation of employees and managers has become very large. This is problematic, because in many situations executives are putting their self-interest above the company (even if it is on the verge of bankruptcy). As a result, this proposal will examine the issues of: executive compensation and the various challenges that can be prudently addressed.

Over the last several years, executive compensation has been increasingly brought to the forefront. Part of the reason for this, is because of the large gaps that are occurring in the compensation of executives and employees. Where, administrators are offered salaries that are at acceptable levels. Yet, it is when you consider the other forms of compensation such as: defined benefits plans, stock options and corporate expense accounts that the levels of pay become lopsided. Evidence of this can be seen by looking no further, than a study that was conducted by the AFL CIO, which found that total compensation for CEOs and other executives declined by 9% (during 2009). However, when you look further at this number; the overall amounts of retirement benefits increased by 23%. ("Trends in CEO Pay") This is problematic, because it highlights a trend that is occurring, as the underlying amounts of pay are declining, while the benefits are increasing. Over the course of time, this makes it appear as if executive compensation is falling, when it is really skyrocketing. At which point, the income disparities between executives and employees becomes very large. This causes the staff and the general public, to view many executives as out of touch with reality. Where, the majority will continue to take lavish pay packages at the expense of shareholders and employees. A good example of this can be seen by looking no further, than the time that the former CEO of General Motors (Rick Wagoner) was testifying before Congress (about receiving a government bailout). To arrive in Washington from Detroit, Wagoner would utilize the company's private jet to fly him to the meeting. (Ross) This is troubling, because it shows the level of arrogance and complacency that many executives have about compensation. As they believe that they are entitled to these lucrative benefits, despite the fact that their company could be facing serious financial challenges. This is significant, because it shows how the levels of compensation have become so extreme, that this has turned into a common practice for the majority of publically traded companies. To fully understand the overall scope of the problem requires: examining various statistics on executive pay packages (in comparison with the financial situation of the company) and looking at different levels of compensation at multinational organizations. Together, these different elements will provide the greatest insights, as to the overall trends that are occurring and how they can be mitigated.

The Objective

The objective is to understand the overall scope of the problem surrounding executive pay. This is especially troubling when look at the pay packages of some of the top executives last year. As compensation continued to remain high, despite the fact that corporate earnings were declining and some firms were receiving government bailouts. A good example of this can be seen by looking no further than John Havens of Citigroup. Despite the fact that company was losing money and on the verge of bankruptcy, Havens continued to receive pay packages that are considered to be excessive. In 2009, his total compensation was $11,267,454. This is troubling because, the CEO Vikram Pandit took a $1 million pay deduction (during the same time). When you compare this to the earnings, the company would post a $1.6 billion loss for all of 2009. The fact that a subordinate is making more money than the CEO (while the company is on the verge of bankruptcy) shows the overall disconnect between executives and the real world. ("Case Studies: Citigroup") ("Citi 2009 Annual Report")

Goals

The goals of this report are: to understand the overall scope of the problem and help to identify possible solutions to rectify the situation. To do this, we would need to compare the levels of compensation with American corporations, to that of multinational organizations. When you contrast the two different types of entities, the overall amounts of pay are greater at American corporations. This is because shareholders are less energetic, in selecting a board that practices advocacy. Where, these kinds of boards will question the compensation packages and the activities of management on a regular basis. This makes it difficult for executives, to create inventive levels of compensation, as the board, will more than likely not approve of such actions. A good example of this can be seen with Nissan's Carlos Ghosn, whose total compensation package was $9.8 million (for 2009). This is in response to him helping the company post a profit of: $42 billion, during one of the worst recessions for the auto industry since the 1970's. (Inaoe) When you compare this with American corporations; it is clear that foreign-based entities have an independent board of directors (who will tie compensation to the performance of the company). This is because, the board is less active in this aspect, which means that they will often approve outrageous pay packages (despite the fact that the company could be losing money). (Randall)

Solutions

To reverse the trends that are occurring requires, that some kind of effective solution is implemented, to address the problem. Two ways that this can be accomplished is through increased regulations and having an independent board of directors. Improving regulations on executive pay could be imposed in such a way that it does not discourage innovation, but it will prevent individuals from trying to exploit the situation (for their own benefit). In this case, what would happen is the government could impose regulations that could cap executive pay, based upon what the company is earning. Where, a percentage could be used to determine: pay and levels of compensation. For example, if a company is earning $42 billion a year after increasing their profits, executives could have a pay cap set at 3% of the total earnings of the company. This would set their pay packages at about $12.6 million a year. If the company is seeing a decline in earnings or they are asking for pay cuts / freezes from the staff, then executive compensation would face similar actions. This would prevent management from asking everyone else to sacrifice, during times of various challenges, while they receive a pay increase.

A second option would be to increase the independence of the board of directors. Where, the majority of directors are required to show, they are acting in the best interests of the company and there are term limits for how long someone can remain on the board. At the same time, nearly all of the directors should have no financial incentives, for supporting various management activities. Instead, they would receive their compensation, based upon the levels of profits that are increasing and their ability to control the activities of management. If this kind of system was utilized, it would prevent managers from having a board of directors that will rubber stamp a host of activities. At which point, compensation levels for executives would be closely aligned with the success of the corporation. Once this takes place, is when you can introduce mechanisms that will prevent these abuses from occurring.

Example of the Changes

Over the last several years, the total amounts of outrage from shareholders have become more heated. As they believe that many executive pay packages are becoming outrageous (especially when you consider the economic landscape). This challenges the status quo, as the activities of the past are no longer being accepted by shareholders. Once this takes place, it means that: the board of directors, management and the way compensation packages are decided will change. A good example of this can be seen with Shell, as the company would see a shareholder revolt over the pay packages that were being awarded to executives. What happened was, shareholders would vote down the proposed pay packages of executives, following management's failure to meet internal objectives. This would lead to a radical restructuring of the board and the way executive compensation was determined. As a result, total compensation awards have been reduced by 20% and all future pay will be determined based upon management's ability to meet organizational goals. (Chazan) This is significant, because it highlights how a shift is occurring, where the levels of outrage are becoming so extreme, that shareholders are no longer tolerating excessive pay packages. As a result, in those organizations where this is taking place, these actions are addressing the underlying challenges facing the problem.

Clearly, the overall amounts of executive compensation… READ MORE

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