Term Paper on "Home Depot vs. Lowe's Executive Compensation"

Term Paper 21 pages (8368 words) Sources: 12 Style: MLA

[EXCERPT] . . . .

Home Depot vs. Lowes executive compensation

Compensation and Executive Compensation

Across the world, executive compensation is undergoing extreme instability. Lower market positions and a slew of corporate scams have resulted in apprehension among the shareholders over every type of executive compensation, inclusive of cash, stock and other added benefits. While growing executive compensation levels comes under scanner along with sliding profits of companies and shares prices, it invites the wrath of shareholders and they insist corporate action from the board responsible. If we delve deep into the bleeding issues of corporate governance and their insulations on executive compensation, we discover that corporate scams in USA that have revealed the arbitrary basis on which executive pay is doled out that have led shareholders to doubt if executive compensation given out in the form of stocks was the culprit for the distortion in the accounting of profit and loss. Besides, in some instances, shareholder apprehensions stems from the proof that rise in an executive compensation package was not a great deal of a reward for enhanced company results, rather it is just a manifestation of market forces like a rise of stock indices. Moreover, investors are suspicious of companies which create the danger of significant earning loss by having a bigger stock "overhang." Dilution levels received from stock options award have been going up progressively among the bigger U.S. companies in the last decade. (Board matters: Rethinking Executive Compensation)

Figures bear testimony to all these. Compensation awarded to the CEOs at the biggest U.S. continued its upward march last year. CEOs at the helm of affairs of the public companies listed on the Standard & Poor's 500 took home a neat $4.1 billion during 2006. While Yahoo's Terry Semel became the highest paid CEO receiving a phenomenal $71.17 million in pay, stock options and compensation in other forms, 50% of the companies surveyed by Associated Press netted in excess of $8.3 million. The highest paying industries were investment banks and energy companies. The second and third spot for highest CEO compensation were occupied by Bob Simpson of XTO Energy with a kitty of $59.5 million and Ray Irani of Occidental Petroleum with $52.8 million respectively. Excluded from the calculation are amount of monies which the executives received through exercising stock options that they received in the earlier years. The 2006-year figures underline the persistent contribution which stock options and other types of stock option make in augmenting executive compensation. (U.S.: CEO pay climbs to 'stratospheric heights')

In case of Yahoo CEO Sernel for instance, the bulk was in the form of compensation that cater to link the interests of executives to the short-term performance of the company's stock. On the flip side, while too much CEO pay has forced some objections from investors, these are comparatively taciturn because of the persistent rise of the U.S. stock market. As long as the value of the company stock goes on rising, huge executive pay does not seem to be a problem for bigger investors, as everybody in the apex 1% of the population is receiving his share. In the interest of the large investors, the work of the CEO is to guarantee sufficient returns on capital investment by way of driving down wages, constricting worker benefits, executing stock buyback programs, and restoring to other methods for enhancing profits of the company. (U.S.: CEO pay climbs to 'stratospheric heights')

Analyze whether Executive Compensation (CEO possibly other high ups) in the context of a specific industry align the company's long-term performance with shareholder interests. For example: Answer the question "Does CEO stock options and other compensation align the company's long-term performance with shareholder interests"

The Positive Side:

In American corporations, employees are always regarded as important stakeholders and of late are emerging as an important shareholder chunk. A lot of individual studies are pointers to the steadily expanding phenomenon of Employee Stock Options -- ESOPs since the past twenty years. Two recent changes in corporate governance have augur well for employee share ownerships helping to align the company's long-term performance with the interest of the shareholders. The first was the findings by business managers that companies were less prone to hostile takeovers in the event of a sizeable chunk of their holding in the form of shares was held by the staff or held for them in ESOPs or in the shape of other employee benefit plans. Executives justified that employees as well as employees benefit plans were secure shareholders who would not possibly sell their shares in the event of hostile takeovers. Even though employee-shareholders are able to vote against management and ESOP trustees can sell out in favor of a corporate raider, they hardly ever do it. Therefore, in case 15% or exceeding that of a company's shares is held in an ESOP, it will nearly be impossible for a hostile bidder to acquire an 85% stake. (Worker Capitalists: Giving Employees an Ownership Stake)

Maybe this might be the reason behind a lot of large corporations initiated ESOPs during the late 1980s. By 1991, oil major Chevron, energy company Enron and others like Fairchild Industries, Lockheed, Lowes Companies all had chunks of shares netting 15% or higher comprising outstanding shares held by or on behalf of employees. Share ownership by personnel has even risen through corporate restructuring in which employees received shares in their companies in as a replacement for remunerations and cuts in perquisites. Sometimes, total employee buyouts have been essential to check lockouts. However corporate restructuring that hands over employees a sizeable block of shares to determine labor disputes or provide takeover immunity might persist, predominantly in industries where there is labor union. Nevertheless, it might not augment employee share ownership to a large extent. (Worker Capitalists: Giving Employees an Ownership Stake)

Going a little back we witness in the past decade or so that the corporate world has been reconsidering the association between bigger companies and their workforce. Although in the absence of any social contract between large employers and their staff prior to the 1980s, powerful business concepts resulted both of them to suppose that employees would remain in the rolls of the companies for a considerable time, enjoy promotions through the ranks, take home a tidy remuneration and get certain benefits like pensions, paid vacations, and healthcare. Following the downsizing witnessed during 1980s and early part of 1990s saw old time employees laid off and some suffered cancelled healthcare benefits and converted pension plans to defined-contribution plans, thus transferring the investment risk on the shoulder of the employees. The situation metamorphosed during the mid-1990s with young workers in their 20s and 30s as also a lot of older workers who came to consider a lifetime tryst with a single company out of vogue. (Worker Capitalists: Giving Employees an Ownership Stake)

Similarly, and prominently, they even shunned the idea that they might owe their employer any loyalty. Some of the sectors of the economy such as high-tech new companies, software companies, financial services, consulting and other business services where attrition have been the most happening thing. It is roughly these sectors that have witnessed the use of ESOPs and other equity-based compensation schemes. Compensating the workforce, at least to some extent with ESOPs is believed to cater to several objectives that are lucrative in the present business settings. To begin with it helps to match employee's interests with those of the shareholders. Secondly, equity-based compensation sops can be conveniently engineered to encourage employees to stick to the company, although other pressures might urge changing jobs. The third point is that the equity component of the employee compensation is a variable component which implicitly reduces the fixed-cost component of compensation expenses. Besides, as a type of non-cash compensation, stock options assist new firms preserve cash. As a matter of fact, paying employees in stock options might help the company bring in cash, as when the employee casts his option, the employee must deposit cash to the company to purchase the stock although at a discount to the market value. Coupled with a skyrocketing stock market and special tax treatment for ESOPs, these factors render stock options distinctly appealing to employees as well as employers. (Worker Capitalists: Giving Employees an Ownership Stake)

The Negative Side:

However there is a downside as well. Two major risks might narrow down the growth in employee share ownership. The first one is the reversal of fortunes on the stock market. ESOPs and other equity-based types of compensation have gained popularity with the employees during a bull or a rising market. Moreover, employees' interest in stock options has been manifested by media attention to secretaries and other employees in case of high-tech companies whose stock grants have turned them into millionaires. However, in a sliding market, employee self-esteem might affect and ESOPs might lose their charm unless the corporate organizations are keen on repricing the options, an initiative that could fuel sharp reaction from shareholders. Employers those who were jubilant to share the good results of equity… READ MORE

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