Executive Pay Compensation - Research Paper Example

Executive Pay Compensation Introduction Currently, many businesses are developing various methods by which they can use in creating and consolidating on their market share. This is because; the modern business environment is composed of many businesses that are emerging to challenge those that have been in the industry for a long time. For this reason, various research studies have been carried out to establish ways in which businesses can remain to be competitive while achieving their mission and vision. One of the reasons for the increasing number of business activities is the liberalization of economies and the growing globalisation trends across the world. In ensuring that businesses can achieve their goals of remaining effective and efficient in the competitive business environment, consistent market research has been found to be an important practice. Through research, businesses can keep themselves abreast of changes in the market, which is important in developing goods and services that meet the identified needs ( Armstrong & Ann 2011, p. 67). However, doing this requires that business have staff that can create and implement strategies that can help these businesses in their operations. With an increasing number of businesses in many industries, there is a great competition for the managers and leaders that can revive the hopes of businesses. In this regard, businesses try to ensure that they offer the best compensation packages for their executives in encouraging them to remain committed to the business and assist them in their operations Executive Pay Compensation So far, research has indicated that people are the most important resources that businesses require in creating their competitive strategies. This stems from the fact that people have the capability to understand the business environment and ways of creating their success. In having a competent staff, one of the approaches used is ensuring that people get the best pay for their work they do in the business. Some business owners believe that having a competent staff is the key to having effective and efficient work. While it may be true, the approaches used in achieving an effective and competent staff are what differ from one business to another. One of the questions that have kept appearing among most of the researchers concerns the real worth that can be attached to business executives. Are the top managers and other CEOs justified by receiving millions of dollars at the end of their month on their paycheck? If that can be case, can their salaries be justified from the work that they do? These among other questions have formed the centres of discussion whenever employee compensation is mentioned. While some businesses often use money as a means of motivating their staff towards better performance, others often prefer using other non-monetary forms of incentives to achieve same; this has led to a huge controversy concerning executive compensation pay. Literature review Inasmuch as business executives have continued to be the beneficiaries of huge pays from their companies, some people have been outraged by this observation, making them to make inquiries about whether it is a wise move by multinationals and other corporations. The fact is that large businesses often have a diversity of work activities to be done in many of their business branches; in this case, they often require a top management that understands the business and the industry in general. With an increase in the number of businesses competing for the same market share, businesses are left with few options as attractive strategies for encouraging highly skilled staff to join their companies and business organisations. Therefore, the business that offers pay compensation that exceeds others in the same industry often end up getting the most effective and competent workers. According to research, some businesses end up creating success by offering high pays for their workers, but this strategy has been criticized for lacking a long-term effect on the performance of staff including business executives. According to Ferracone (2010), offering non-monetary rewards can also be an effective approach towards staff motivation. Smith (2007) explains that a number of considerations have often been raised to justified high executive pays for top business executives. On one hand, some people are of the opinion that the idea of a free market is in existent, and has become the main dictator of the kind of pay that company CEOs should be paid (American Bar Association. 2011, p. 34). Inasmuch as what other peers are doing is legal, critics look at company as being the “stars” of the business, something that underpins their high pay, in this understanding, American Bar Association. (2011) puts it that the companies in need of the services of these CEOs have to understand their track record in terms the companies they have managed before, their accomplishments in those companies and other factors that give them a cutting edge over other managers in the industry. In short, the reputation of such people is what companies look at before seeking their services with promises of hefty sums on their pay-check. By understanding all these factors, the companies often give huge offers knowing that these CEOs will have a positive impact on their operations and ultimately to the growth prospects of the business. Therefore, the company or business organisation that finds itself with the money enough to pay the CEO ends up managing to get their services. In this regard, . Armstrong & Ann (2011) explains that the free market situation gives businesses the leeway to find professionals that it can pay. A business that does not have the much-needed funds to manage this process can only go to the extent that its budget allows. The second consideration that underpins the need for hefty pays for company CEOs stems from the fact that in the business world, people have different gifting and talents that warrant the need for receiving hefty pays. In this regard, those managers and leaders that have special skills and talents in management sell their expertise and talent highly. This means that only those businesses that can match their particular offers have the right to hire them. According to Balsam (2002), these kinds of managers and leaders have unique skills and talents that the free market can afford to give the millions of dollars on annual basis. These people often drive many product and service sales in a manner that increases the revenue for the business. Armstrong & Ann (2011) explains that the pay for these managers is often long discussed before they are hired and their failure and / or is obvious. According to Balsam (2002), very few people have the capacity to successfully lead and manage multinationals that have more than 50,000 employees that generate more than $50+ billion in terms of annual revenue. With this shortage, it means that a great demand for the “stars,” who are the people with this potential remains high; therefore, to get these few that are in existent means that businesses have to pay heftily for their services. Executives have value Another important consideration that is given priority as far as executive pay is concerned is associated with the value that these people are said to bring to the table. Successful business executives are known to have special value to the business; they have always been known to create more than mere entertainment in that they steer businesses to unprecedented heights in terms of achievements. Business executives create more jobs that deliver lasting wealth for businesses and their investors. They have life-changing ideas and innovations that make businesses stand out in their industries. Smith (2007) posits that a good example of such managers is Lou Gerstner, who is credited with driving IBM to its current status it enjoys as one of the best companies as far as technology is concerned. According to Smith (2007), Harvey Golub, the man behind American express has been effective increasing the shareholders’ value at the company by record numbers, something that justifies the company’s decision to pay him million of dollars annually. There are several examples of executive managers and leaders that have helped businesses make millions of revenue even in tough economic times, yet these leaders remain rare in many industries. This means in response to the law of demand, the few that can be found have high price tags that only businesses that can meet their wage demands can afford them comfortably. Controversy with executive pay According to Wharton university of Pennsylvania (2007), a research was done to investigate the need for hefty pays among businesses executives in different multinationals and international corporations. Thomas Dunfee, one of the professors at the institute wondered whether paying heftily for the services these CEOs and business executives are an indication of efficient markets or those that have failed. One of the questions that featured in most discussions is whether companies fully disclose the pay levels of their business executives. Additionally, the question of whether shareholders should often have a say in deciding the pay of their business executives featured most. One of the main points of controversy is whether there are any forms of fairness and justice in the decision to pay business executives hefty pays when compared to other company workers in the same business. During the panel discussion that also featured Zioa, the managing associated partner at Glocap, it was discovered that several hedge fund leaders and managers make more than $ 5000 million annually through some arrangements that generate them more than 20% of revenue to their firms compared to the yearly profits made. Additionally, they are able to get annual fees of up to 1%-2% on the assets that they manage at the company (Smith 2007, p. 7). When this is done on an annual basis, these managers end up making millions of dollars from the company. In this understanding, the panel realized that investors only know the amount of revenue that the firms make as compensation, but will never have a perfect understanding of what the single individual executives get in return for their services to the company. Therefore, there is some consensus that little or no transparency exists as far as what company executives exist, something that amounts to some amount of ethical violation. Graham, Thomas & Dawn (2008) says that for there to be transparency as far as company management is concerned, it is important that such information as pay structured be fully disclosed to the company shareholders. As the company increases its revenue, any adjustments in the pay structures should be revised and disclosed accordingly to encourage better performance. In some cases, Graham, Thomas & Dawn (2008) explains that for firms that trade publicly, some form of transparency has been established, which has been the source of controversy in executive pay in the recent past. In this regard, critics have pointed out that while the pay given to business executives in these has been rising considerably, the pay for other lower level workers has remained highly stagnant. According to the studies by some publications, it was discovered that the compensation given to company CEOs was way beyond 400 times that of the average workers, which raises the question of whether this is an ethical perspective that companies should consider in their management. Inasmuch as top level managers are significant in creating strategic management approaches, it is important to realise that the implementation of such ideas is the most essential; therefore, the people implementing them should be given due consideration just like the top managers. In this case, companies can have a highly motivated workforce that can revolutionize its operations and hence the success. Summary and conclusions The current controversy surrounding executive pay in multinationals and international corporations means that businesses are expected to ensure that they remain to be as transparent as possible. Inasmuch as the demand for top business executives remains to be high among these multinationals and international corporations, the other middle and lower level workers are also of equal important to the business. When these staff is not properly motivated by the company, what results is an increase in staff turnover, which can lead to a decrease in the performance of the company. Therefore, businesses should ensure that they stick to their ethical practices of not favoring any of its workers because all of them are important for the success of the business. Companies should try to develop and implement different ways of creating and managing the motivation of its workforce, knowing that what a motivated staff can produce is greater than what an individual can bring on board, businesses that follow this approach end up developing competitive advantages that are unmatched in the industry and therefore ultimately, the success of the business is guaranteed at present and in future. According to Kay & Steven (2007), creating effective and high performing work teams is an important approach that businesses can often adopt. This means grooming its current staff so that it can handle the different and changing roles in the industry. Additionally, this empowerment can enable the business to have highly effective productive human resources under proper pay and intrinsic motivation that may deliver the much needed success for the business as compared to when it would have gone to outsource the services of a “star” manager. It is not always guaranteed that the supposed “star” manager will be successful in the new business environment. Therefore, talent management should always be at the heart of businesses that want to have lasting impacts in the present and future times. Bibliography American Bar Association. 2011. Executive compensation. American Bar Association, Joint Committee on Employee Benefits, Washington, D.C. Armstrong, M, & Ann C. 2011. The reward management toolkit a step-by-step guide to designing and delivering pay and benefits. Kogan Page, London. Balsam, S 2002. An introduction to executive compensation. Academic Press, San Diego. Ferracone, R. A. 2010. Fair pay, fair play aligning executive performance and pay. Jossey-Bass, San Francisco. Graham, M. D, Thomas A. R. & Dawn D. 2008. Effective executive compensation creating a total rewards strategy for executives. AMACOM/American Management Association, New York. Kay, I. T & Steven V. P. 2007. Myths and realities of executive pay. Cambridge University Press, New York Smith A. 2007. Executive Pay Controversy. Accessed 23 June 2015 Wharton University of Pennsylvania. 2007. Current Controversies in Executive Compensation: ‘Issues of Justice and Fairness’ Accessed 23 June 2015 Read More