The Basics of Corporate Structures - Essay Example

of CEO Pay A chief executive officer (CEO) or chief executive is the highest-ranking corporate officer or executive officer of a corporation, company, or agency1; this is according to how the corporate world operates. As the top manager, the CEO is typically responsible for the entire operations of the corporation and reports directly to the chairman and board of directors. It is the CEO's responsibility to implement board decisions and initiatives and to maintain the smooth operation of the firm, with the assistance of senior management2. Often, the CEO will also be designated as the company's president and therefore also be one of the inside directors on the board (if not the chairman). The average CEO of a Standard & Poor's 500 company made $11.75 million in total compensation in 2005, according to a preliminary analysis by The Corporate Library. And that's just their annual take. At a time when most working families are looking at shrinking retirement nest eggs, many CEOs also have negotiated golden retirements for themselves3. The Top 6 companies noted to have offered the biggest compensation packages to their CEOs includes: Pfizer, Exxon Mobile, AT&T, IBM and Home Depot Inc, this is according to the recently published in AFL-CIO, America/s Union Movement. But how are CEOs being compensated We may ask. According to CNN/Money Staff writer Jake Ulick, these days, few corporate executives are doing the same despite a stretch of falling profits, rising job cuts and sinking stock prices. But a small dose of sobriety has emerged as companies reveal how they compensated their top executives last year. After enjoying a $17 million bonus in 2001 (Ulick. 2003), Sandy Weill, chief executive of Citigroup Inc. (C: Research, Estimates), took no bonus last year, when company shares fell 30.3 percent. The CEO of Eli Lilly (LLY: Research, Estimates), Sydney Taurel, earned a symbolic $1 salary in 2002 and was given options to buy 350,000 Lilly shares if they rise some 29 percent. The CEO of Oracle (ORCL: Research, Estimates), who took stock options but no salary and bonus last year (Ulick. 2003). Median executive compensation fell by 10.1 percent last year to $7.3 million, according to Equilar, which analyzed 161 proxies from Standard & Poor's 500 companies submitted to the Securities and Exchange Commission. But the figures from Equilar, a compensation research firm, also showed that median salaries plus bonus actually rose 3.7 percent to $1.56 million in 2002, after subtracting the value of stock option and restricted stock grants (Ulick. 2003). Thus shows how the executive are paid.Another survey concurred. The highest-paid U.S. executives received a 5.9 percent increase in total cash compensation last year, according to the Executive Compensation Index. The figures, from the Economic Research Institute, found that executive compensation grew faster than annual company revenue, which rose 0.89 percent in 2002 (Ulick. 2003). CEOs running 100 of the USA's biggest companies pulled in median 2002 compensation of $33.4 million, essentially unchanged from 2001, based on an exclusive database analysis by USA TODAY and the Investor Responsibility Research Center, a corporate-governance watchdog. Conclusions say that CEO salaries and bonuses surged 15% in a year salaries for rank-and-file workers averaged 3.2% gains; that Instead of stock options, many companies gave CEOs large blocks of restricted shares, less risky equity stakes. Among 36% of CEOs receiving them, the median value was $2.9 million; that More than 90% received fresh stock-option grants, with a median potential value of $23.2 million while nearly one-third pulled in compensation valued at $50 million or more. Even at companies where pay fell, pay packages remained large. PepsiCo CEO Steve Reinemund's pay package fell 62%, but was a still-impressive $76.5 million (Strauss & Hansen. 2003) Economists have determined that not only is there a strong statistical link between firm performance and executive compensation (Abowd and Kaplan, 1999:149) but that executive wages are also related to the executive's potential marginal product and factors such as the risk inherent in their job with regard to the stability of the industry or the business environment. According to Business Week, the average CEO of a major corporation made 42 times the average hourly worker's pay in 1980. By 1990 that had almost doubled to 85 times. In 2000, the average CEO salary reached an unbelievable 531 times that of the average hourly worker. "Pay for performance"4, tying executive compensation to the financial success of their company, has become very popular in the past decade. In the face of the largest bull market ever, that isn't surprising. It also isn't realistic. John Mariotti, president and founder of The Enterprise Group, asks "CEO Pay: How Much is Too Much" and answers the question himself. Citing Derek Bok, he points out that as business becomes more complex, the demand for top executives increases and thus they command greater and greater pay. He also noted that such huge awards do little to motivate these outstanding performers, who are generally more motivated by challenge. According to John Reh, it has minimal effect on their performance. It has no quantifiable effect on the performance of their companies. The only measurable effect is to drive an ever widening gap between the CEOs and the people they depend on to produce results. It is up to us as Management Professionals to return some equity to compensation of upper management and the individual contributors while trust and respect between the two parties still can be salvaged. If we don't, worker motivation, and resultant innovation, will plummet. Therefore we ask ourselves, should we or should we not limit the pay of these executives And if so, who should ensure that this is regulated My answer is very simple, I believe that one of the many reasons why our economy is at time very erratic is due to the financial demands that these executives require. While they may be among the key decision makers in the company, it is an undeniable fact that their position is not at all salient or clearly critical to the overall performance of the company. Why are CEOs paid in ways that don't benefit their companies and shareholders Corrupt corporate governance is one reason. A board assembled by a CEO is not especially independent. Pay is tied to performance in companies where a powerful shareholder, like an institutional investor, can discipline top management, and that's less likely to happen at a corporation where the board is beholden to the CEO. But better governance alone is not enough. CEO compensation packages should be designed to correlate to company performance. In 2005, the best predictor of executive compensation is not profitability, but firm size, giving CEOs a big incentive to look for merger and acquisition opportunities. The lack of relationship between executive pay and bottom-line performance has led to calls for reform. But how At issue are our beliefs regarding the right way to pay CEOs. To date, many companies have gotten it wrong. We wouldn't expect a CEO in a volatile competitive business to be paid in the same way as someone in a regulated utility. A CEO leading a risky turnaround requires different compensation than one managing a firm targeting long-term growth. The wrong compensation scheme can cause executives to forgo investments in research and development or in work force training, focusing instead on short-term profits where corporate strategy calls for growth. By abandoning long-term strategies that benefit both investors and workers in favor of cash-flow tricks and stock-price maneuvers, executive compensation becomes an end in itself, diverging from the health and prosperity of the company. Incentives, which are certainly important in the "war for talent", must be the right ones to protect an organization's long-term interests. Exorbitant bonuses, options and other incentives, written into total compensation packages, convey a sense of entitlement, perpetuating the notion that a single individual can make the critical difference to a company's success. This notion ignores the strategic value of a firm's asset mix: human and intellectual capital. The higher the ratio of CEO to worker pay, the greater is the disconnection between the results that stakeholders hope for versus what's actually being rewarded. Out-of-whack ratios lead to lower quality and innovation. Office workers and point-of-service employees are sensitive to the signals that big pay packages send when company performance doesn't justify them. Even setting CEO pay based upon industry benchmarks may not be an effective standard given the distinctive contributions required of a given CEO and the inflated nature of many current compensation packages. Genuine incentive compensation means paying CEOs based on strong business strategy and suitable measures for gauging its accomplishment. It means internal equity where the basis of compensation makes sense to both employees and investors. And it means transparency where the compensation package can be disclosed without embarrassment. A board's responsibility is to see to it that the CEO compensation package does what good reward systems do: attract competent people and reward them for objectively above-standard contributions and long-term performance. Executives should certainly be paid well, as long as their companies do well, too. Bibliography Abowd, J. M., & Kaplan, D. S. (Autumn, 1999). Executive Compensation: Six AFL-CIO. (2005). "Executive Paywaytch." Retrieved June 8, 2005 from http://www.aflcio.org/corporateamerica/paywatch/ Reh, J. (2005). "CEOs are overpaid." A guide to Management. [Online]. Accessed on May 14. 2006 from < http://management.about.com/cs/generalmanagement/a/CEOsOverpaid.htm Rousseau, D. (May 15, 2005). "Puts & Calls: CEOs aren't overpaid, they are wrongly paid". The Business News of Post Gazette website. [Online] Stause, G and Hansen, B. (2003). "Bubble hasn't burst yet on CEO salaries despite the times". USA Today posted Mar. 31 2003 [Online]. In Money Section. "The Basics of Corporate Structures". (Feb. 23, 2003). Investopedia webpage [Online]. Ulick, J. (2003) "Ceo Salaries, bonuses keep rising". CNN Money (Mar. 25, 2003) [Online] < http://money.cnn.com/2003/03/25/news/ceos/executive_compensation> Read More