On Executive Compensation - Literature review Example

Literature Review on Executive Compensation Advameg, Inc. Executive compensation, viewed May 22, from http www.referenceforbusiness.com/management/Em-Exp/Executive-Compensation.html The website notes that executives are compensated differently from other subordinates in firms. This is owing to the fact that their compensation is set differently. Their salary is based on benefits, incentives, bonuses, perquisites as well as the basic salary. Asides from understanding the aspects of managerial compensation there are other issues linked to their remuneration such as ethics and pay equity issues. To start with, the basic salary of executives is based the on views of the compensation committee. Generally, the basic salary for executives is higher than that of other employees in companies. Executives receive a variable compensation that is known as executive bonus that is based on attainment of organisational goals and objectives. Managers also get long-term incentives that are based on the firms’ goals and objectives. Executive perquisites and benefits are different than those that are offered to subordinates. This means that they receive higher levels of pension plans, fringe benefits, life insurance and health insurance. The website states that the pay rates for executive compensation in the US are higher as compared to the situation in other countries. The situation is similar in other nations including Asia and Europe. It is also clear that managers have the option to increase their levels of compensation. This has attracted numerous ethical concerns over the years. Armstrong, M. (2012) Armstrongs handbook of reward management practice: Improving performance through reward, Kogan Page Publishers. The book starts by stating that the issue of executive remuneration has attracted increasing attention over the years especially following the 2008/2009 banking crisis. This leads to the important question on the factors influencing executive remuneration. The recent discussion has shifted from how much the executives make in a month to how much they can make from their firms. The book notes that executive remuneration has spawn out of control in the recent past. In fact, it has become clear that the bonuses available to executive are approximately seventy percent of their basic salary. The High Pay Commission found verification that high pay for executives has negative impacts for society and the economy at large. The same commission found that while executives’ salaries increased dramatically over the years, the share prices have been observed to have declined significantly. Generally speaking, the main factors influencing executive remuneration include the decisions by remuneration committees, inherent values of executives, competitive forces in the market. There are two main theories that can further explain this occurrence: the tournament theory and the agency theory. The tournament theory is based on the premise that the increased salary for executives is seen as a prize and employees must work hard to get it. On the other hand, the agency theory states that the only way that companies can gain the loyalty of their executives is by paying them more. Bowie, N.E. & Schneider, M. (2011) Business ethics for dummies, John Wiley & Sons. This book focuses on some of the ethical dilemmas facing companies in the contemporary world. This entails a research conducted by the Penn State University, the University of Florida and the University of Alabama in 2010 on the controversial issue of executive compensation. This extensive research was conducted in over thirty industries and for eight hundred CEOs. The research explained that underpaid managers get enough experience from their firms and then move to find better rewards. On the other hand, overpaid executives improve their performance to validate their high compensation. It is clear that high achieving executives also receive higher payments and this furthers the cycle for the ever increasing CEOs remuneration. The book also includes the findings of a research that was conducted by the Investor Research Center Institute on the topic. The research states that there is no considerable relation between higher shareholder profits and executive pay in the largest companies in the US. The research noted that smaller firms falsely increase their executive compensation as they compare themselves to larger firms on the basis of market capitalisation and revenues. The research also noted that some of the companies with a dismally performance were comparable to companies that had overpaid executives. Cooper, M.J., Gulen, H. & Rau, P.R. (2009) Performance for pay? The relationship between CEO incentive compensation and future stock price performance, viewed May 22, 2014 from http://online.wsj.com/public/resources/documents/CEOperformance122509.pdf Academic literature on the managerial compensation and the agency theory have expressed that executive compensation is based on the company’s performance. In the recent past, the media and politicians have pointed out that the present executive remuneration practices force employees to take short-term decisions without taking into account the long-term benefits of the firm. As a result, recent proposals in policy have suggested that more money should be offered through long-term compensation and restricted stock not based on temporary performance. The paper shows that there is a positive link between a company’s future performance and long-term incentive remuneration. The paper addresses future shareholder affluence changes and executives remuneration. Frydman, C. & Jenter, D. (n. d.) CEO compensation, viewed May 22, 2014 from . The paper focuses discusses the controversial topic of increasing executive compensation. It starts by stating that there has been a drastic increase in executive compensation in the past thirty years that has sparked a heated debate on the factors affecting the pay-setting procedure and the factors influencing it. There is a common belief that executives are in a powerful position thereby set their own salaries. Others view the increase in CEO compensation as a result of increased competition for the executive talent. The paper further describes the empirical evidence on the development in the executive compensation and on the link between the firms’ performance and compensation since the 1930s.The paper states that the competitive forces in the market and executives’ power are significant factors that impact on managerial compensation. The review concludes that competitive forces in the market and managerial power are key in determining executives’ compensation. The paper adds that prior to the 1970s executives had low pay and there were moderate pay-performance relationships. The levels of executives’ compensation increased dramatically after this period. There were wider disparities across firms and observers link this to firms’ performance. The study also notes that executive’s compensation in the modern world can be reliable on optimal contracting and rental extraction. The findings of this study are consistent with the data analysis in the study. Frydman, C. & Molloy, R. S. (n. d.) Does tax policy affect executive compensation? Evidence from postwar tax reforms, viewed May 22, 2014 from . There has been a wide range or literature in labor economics and corporate finance have offered several explanations for the increase in managerial pay and the growth in performance based pay in past thirty years. Tax policy is a possible factor since the increase in salary followed with a decrease in marginal income tax. A number of studies have found a close link between executive remuneration and tax policy. The results from these studies are in line with existing literature on responsiveness on taxable income. There is minimal response of corporate executives’ salaries to changes in tax rates. The trends in labor income levels and executive remuneration since the 1940s demonstrate a high elasticity in taxable income in relation to tax guidelines. In contrast, the structure and level of managerial compensation has been highly insensitive to tax incentives in the past two decades. However, the impact of the relative tax was minimal on different forms of pay during this period. Using a sample of executives of leading companies between 1946 and 2005 there is a short-run reaction of bonuses, stock options and salaries. It can be concluded that tax policy is the other aspect that impacts of executive compensation in the past years. Gregg, P., Jewell, S. & Tonks, I. (2010) Executive pay and performance in the UK, viewed May 22, 2014 from . This paper is highly relevant to the topic in question as evaluates the link between the monetary compensation for executives and the firm’s performance. It looks into a sample of well-established UK companies by paying attention on the banking industry that has been blamed for being responsible for the financial crisis in 2007/2008. The paper show that the basic salary, benefits and bonuses of UK executives has increased significantly in the years between 1994 and 2006. The paper also gives supporting evidence on the link between pay and performance over the years. It has been found that even if the pay in the financial sector is high, the relationship between the salary and performance in financial companies and banks is not considerably higher than in other industries. It is claimed that this assumption evaluates the grounds for regulatory changes to payment procedures in the banking sector. An asymmetric relationship between pay and performance is established for all companies and it is clear that companies with high stock returns also have high pay-performance elasticity. It is also clear that the pay-performance relationship is less elastic when there are low stock returns. These findings apply to all industries, not just the financial sector. McConvill, J. (2011) ‘Positive corporate governance and its implications for executive compensation’ German Law Journal, vol. 6, no. 12, pp. 1778- 1804. The journal article confirms the increased controversy of the issue of executive pay. This is as a result of a high number of high-profile corporate collapses across the globe together with the constant reporting on shareholder funds being directed to high executive compensation schemes, golfing and corporate jets. This results to the widespread view that executives across the board are guided by self-interest and have no concern on what is good for their companies. As a result of this negative opinion, there has been a drastic increase in the number of rules and guidelines in corporate governance. The article states that establishment of such regulations prevents the occurrence of a looming disaster. It is important to allow positive corporate governance that focuses on the virtues and strengths of company executives. This means that there can be a shift from an environment that is highly regulated to one that is characterised by positive corporate norms within companies. This corporate governance can be used to address the problem of increasing managerial compensation that has negative impacts on the economy and the company’s stakeholders. The article states that the pay for performance system is flawed in determining executive compensation and states that corporate governance is the best approach in determining executive pay. Oxelheim, L. (2008) Markets and compensation for executives in Europe, Emerald Group Publishing. The issue on increasing executive compensation has become a divisive topic in the Atlantic over the past decade. The timing of these pay increments as well as the comparative corporate success has drawn attention from the media and infuriated politicians, employees and other stakeholders in the region. This leads to the question on whether the executives are misusing their power to award themselves high salaries or whether this development is a result of efficient market mechanisms. The book is meant to fill the gap that results to the present focus on the management, financial and economic research that looks into executive compensation in the US. Furthermore, the book determines whether the findings from the US can be generalised to Europe, whether the managerial compensation methods in Europe benefits the citizens and shareholders and whether there is a European model that is applied for managerial compensation. The book states that executive compensation is decided on by the board of directors that calls on experts to help them in designing a remuneration procedure. Companies opt to maintain a low profile with regards to executive compensation. At the same time it is clear that companies maintain a highly competitive scheme for executives in order to attract skilled and talented individuals. Sigler, K.J. (2011) ‘CEO compensation and company performance’ Business and Economics Journal, vol. 2011, pp. 1-8. This paper makes a key contribution to the topic as it examines the link between CEO compensation and company performance for two hundred and eighty companies that are on the New York Stock Exchange between 2006 and 2009. This period is highly sensitive as it followed the implementation of the Sarbanes Oxley Act. Furthermore, this was the period after the SEC implementation of the corporate governance regulations influencing managerial compensation in NYSE firms. Both were approved to improve the link between executive remuneration and the company’s performance. There was found to be a considerable and positive relationship between the CEO remuneration and firm’s performance that was determined by the return on equity for these companies in the time frame between 2006 and 2009. The size of the company is a key aspect in determining the level of executive compensation. The results of the article state that the tenure of the executive as the other important variable. To sum up, the first article states how NYSE guidelines and the Sarbanes Oxley Act are formulated to influence executive compensation. The paper then evaluates the efficiency of corporate governance in conducting executive pay that is based on performance and presents a model that is used to evaluate this relationship. The paper winds up by giving the results that are used to describe the relationship between pay and performance. Read More