The Issue of CEO Payments - Essay Example

The Issue of CEO Pay Outline I-Summary A Contrarian Look at Whether U.S. Chief Executives Are Overpaid On average, American companies pay their executives multiple times more than other countries. People think that executives in America are usually overpaid and the actual compensation plans are not disclosed. It is not always linked to performance. For instance, Kenneth L. Lay received a salary of $8 million just before the collapse of Enron. Two economists namely Xavier Gabaix and Augustin Landier argue that salaries are justified by the increase in the stock value of corporations. In short, they argue that in the twenty three years from 1980 to 2003, market capitalization of large companies has increased by a sixth, and hence, salaries have too increased by that fold. Furthermore, the article argues that shortage of good executives would drive pay up even further in the future. The top 250 executives do not have a big difference in talent; it's merely a case of the size of the company these executives run. Also, Lucian Bebchuk argues that pay is not parallel to performance or productivity, and that CEO's take great care to hide their true compensation. Reform or Bust The practices of the bankers brought the financial system on the brink of collapse. After help from taxpayer dollars, the financial system is getting back to normal and paychecks are reaching are in line with financial recovery. These are times of rising unemployment and executives are using all forms of power within their reach to stop any reforms from the government. Is the U.S. government ready to take on the bankers just yet Mr. Summers criticized the U.S. Chamber of Commerce and their campaign of forming an agency to protect consumers against financial abuses. But apart from this, a major change in the way executives are paid is required. Executives are paid huge amounts when they deliver short term profits, but they aren't punished when their short term decisions turn into long-term barriers for growth and profit. They walk away with their rewards, leaving their corporation in trouble and hence, pushing the financial system into rubble. The Fed wants to enact laws which would decrease executive salaries if banks face losses, and it would make it compulsory for banks to link pay with long term results rather than short term. The administration's stance on reforming pay structure is not just a populist stance, but also good politics and good economics. Outline II-Economic Analysis A Contrarian Look at Whether U.S. Chief Executives Are Overpaid According to this article, CEO Pay is measured by the increase or decrease in the stock value of the company. In the past two decades, pay has increased in line with increases in the market capitalization of corporations. The writer is off the opinion that increases in stock value is a sign that economic decisions made by the executives are quality ones, and hence, they deserve high pay. Another argument that they present is the fact that the number of companies is more relative to the number of good executives. Therefore, an executive or CEO who worked for a big company would easily get a CEO position in another company and get paid high salary. Part of the reason for this is the shortage of CEO's in the United States. Perhaps, the demand and supply in other countries is at a better equilibrium and this has resulted in lower relative salaries. The advocates of reformed pay structure argue that high pay is correlated to bad governance and is not related to productivity. Reform or Bust This article points out that since executives are not punished when their corporation faces loss, but given rewards when their decisions cause short term profits, it facilitates excessive risk taking on part of the executives. Executives take risk because there is no accountability. Furthermore, the author of the article says that the Fed is considering making it compulsory for banks to link pay with long term performance. This would make CEO's more accountable and would urge them to try their best to bring the company into profits. Furthermore, companies would save money in times of losses. It would also motivate workers to perform to the best of their ability, as they would know that even the top people have to work to get their paychecks. The government would also have more control over the money of the ordinary Americans. Outline III-Conclusion In short, the first article briefly explains the reasons for high executive pay and tries to justify those reasons with practical comparisons such as change in stock value of American corporations. The other article is in favor of reforms against the unbalanced pay structure in American corporations. It wants the Fed to restrict the extra ordinary powers of the bank and protect consumer interests through a specific agency. Moreover, the article points out that the Fed should keep a strict monitor on banks and their performance, and pay executives according to performance. After doing a thorough analysis of the two articles, I personally, base my opinion that CEO's in America are both underpaid and overpaid. In situations where the company performs well consistently and where success is attributable to the executives, high pay is justified. People might argue that pay should not such high levels. However, I feel that CEO's have a huge responsibility on their shoulders and they have to accountable to the Board of Directors. Therefore, CEO's who have a tough task at their disposal, and who perform well consistently deserve bonuses and pay increases beyond levels that have existed in the market. On the contrary, CEO's who do not perform well consistently, should not be paid too much. It is clear that even these CEO's have a huge responsibility and burden, but that should be portrayed in their dealings. These CEO's do not act as they should and do not portray an image of their corporate culture, and therefore, cannot succeed in the long run. For these people, compensation in other forms such as stock options and bonuses should be removed; however their salary level should be in line with market forces given the level of responsibility they undertake. As far as the argument on CEO pay with respect to other countries is concerned, I feel that American corporations are relatively bigger in size and have a notable global presence. This makes the American CEO's more vulnerable to public scrutiny and checks, and therefore more pressures not just from rival firms, but also from the media. Hence, comparing American CEO pay with other countries is not a viable comparison tool and might not properly address the issue in our society. Works Cited 1. Cowen, T. "A Contrarian Look at Whether U.S. Chief Executive Are Overpaid". Nytimes.com. 18 May 2006 2. Krugman, P. "Reform or Bust". Nytimes.com. 20 September 2009 Read More