Term Paper on "Executive Compensation and Right to Work Laws"

Term Paper 3 pages (1384 words) Sources: 1+

[EXCERPT] . . . .

Executive Compensation & Right to work laws

Is executive compensation out of hand in the U.S.

The prevalence of excess capacity in a firm indicates that the enhanced investment in the firm is attaining less than the cost of capital and therefore wipes the values out for the shareholders and for society. However, the excess capacity entails considerable scope for generating values even in the absence of profitable investment opportunities. Particularly, generating values under excess capacity involves redirecting the resources from the production process that fetches less than the cost of capital that in turn indicates diversion of human and also physical capital from industries with excess capacity to the other available sectors. The generation of income from repurchase of stocks, dividends, cash acquisitions and special distributions generates value under excess capacity by compensating the shareholders in terms of cash instead on spending it unproductively. Likewise the curtailment of workforce through layoffs and abrasion create value by facilitating the transfer of workers to sectors where their skills and efforts are more extremely valued by the society. The transfer of human resources however, regrettably sometimes entails the real costs on redeployed workers particularly in the short run-however nevertheless an effective and essential rejoinder to the excess capacity. (Murphy, 1995)

However the potentialities of excesses with regard to executive compensation have presently been a matter of great ambiguity in most of the advanced nations like United States, Great Britain and Canada. Irrespective of the fact that the American law has no distinction between the private corporation and the quasi-public, the rationale behind the two are quite distinguishable. The differentiation of ownership from regulations exerts a condition where the interests of owner and ultimate manager may and often do, deviate. It is evident that only a small fraction of the stock of the company is actually captured by them those regulate the fate of the corporation which fetch to them only a very low proportion of the returns that the corporation achieve with their positive contribution. The stock holders alternatively to whom the dividends of the corporation go mostly seems not to have induced by the returns to commit for more effective use of the resources of the corporation as they have already left the resources at the disposal of the managers those are in charge of regulating the ventures. (Iacobucci, 1998)

The determination of the compensation optimally on the basis of performance is confined only to the managers those are not readily capable of diverting their human capital or skills which is the firm specific. Conversely, the shareholders are capable of diverting their ownership of resources within the firm. However, the managers are not so much involved with the risk factors as is with the owners of the firms. In the absence of perfect assessment of the performance of the managers the compensation is dependent upon the substitutes for her performances like the profits or share prices of the firm that varies due to the factors not under the control of the managers. As a result of this the performance related pay imposes costs of the risks on managers. The incentives not related to the performance, like salary has the great possibility of being a part of her contract so as to compensate the cost of risk that she is supposed to bear. (Iacobucci, 1998)

2. Arguments for and against right-to-work laws

It has been advocated by the followers that considerable benefit flows from the right-to-work situations. The examination of the most prevailing data exhibits right to work situations have much better rates of business prospects, state level economic advancement and employment generation and a lower cost of living that cater to the low nominal wage rates. The general beneficiaries are business owners; however, the enhanced productivity generates the workers also. The maximization of productivity is considered to be even more significant for the employers and employees as the international trade entails new competition and new opportunities. However, this does not imply that the workers are compelled to agree for lower wages. Actually this implies higher wages are to be earned with enhanced productivity and more quality instead of contract negotiations and demands. (the… READ MORE

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