Is CEO Pay Justifiable By Performance? Yes Ira Kay, No Edgar

Is Ceo Pay Justifiable By Performanceyes Ira Kay No Edgar Woolar

Is CEO Pay Justifiable by Performance? Yes: Ira Kay – NO: Edgar Woolard “What right have the rich to enjoy their warm palaces and mansions, dining plentifully on the best food from all the world, while the poor suffer from hunger and cold?†Book of Amos (Bible) Pop Quiz 3 1. Kay believes that corporate America is ruled by executive greed, fraud, and corruption and thinks that this is reflected in the many cases of over-the-top CEO pay. 2. Kay believes that the pay-for-performance model of executive compensation has not worked well in most instances. 3. Kay thinks that in most cases CEOs do not deserve the compensation they get. 4. Woolard discusses what he thinks are several myths about CEO compensation. 5. Woolard was CEO at Dupont. Answers Pop Quiz 3 1. Kay believes that corporate America is ruled by executive greed, fraud, and corruption and thinks that this is reflected in the many cases of over-the-top CEO pay. F 2. Kay believes that the pay-for-performance model of executive compensation has not worked well in most instances. F 3. Kay thinks that in most cases CEOs do not deserve the compensation they get. F 4. Woolard discusses several myths about CEO compensation. T 5. Woolard was CEO at Dupont. T Is CEO Pay Justifiable by Performance? Yes: Ira Kay – NO: Edgar Woolard Pay-for-performance vs internal pay equity Ira T. Kay YES [Kay: exec compensation expert—Watson Wyatt] Myth-busting The main myth: “...corporate America ruled by executive greed, fraud, and corruption.†“the myth of the failed pay-for-performance model†In most cases this model has not failed; exceptions not rule Real problem is not that CEOs get too much, but that non-executives get too little Research supports + correlation CEO pay & company performance 241 “the myth of managerial power.†CEOs control boards and shareholders (false?) (Is Dodd-Frank “regulatory overreachâ€? Will it cause “economic declineâ€) James Krohe, Jr. “The Revolution That Never Was†“wonders why U.S. workers have not taken to the streets to protest ‘the blatant abuse of privilege’ exercised by CEOs.†One “wonders why we have not yet witnessed calls for a revolution to quash the ‘financial frolics of today’s corporate aristocrats.'†Kay “Not once have I been asked to comment on the vast majority of companies—those in which executives are appropriately rewarded for performance….†But a lack of evidence is not proof of anything Some CEO exceptions, but not the rule “The problem…is not that CEOs receive too much performance-driven, stock-based compensation, but that non-executives receive too little.†“…I have never witnessed board members straining to find a way to pay an executive more than he is worth.†Again…this does not demonstrate anything Empirical evidence; 1500 companies; 20 yrs Pay-for-performance “sensitivityâ€; high + correlation Okay, but check the source Kay—Are CEOs worth it? “The relative scarcity of CEO talent….†“Any influence that CEOs might have over their directors is modest in comparison to the financial risk that CEOs assume when they leave other prospects and take on the extraordinarily difficult task of managing a major corporation….†Severance packages needed to “attract and retain talent.†“goals of human-capital programâ€: attract, retain, and motivate CEOs “The real threat to U.S. economic growth†is “regulatory overreach†and rejection of market forces re CEO pay. “Instead of changing executive pay plans to make them more like pay plans for employees, we should be reshaping employee pay to infuse it with the same incentives that drive performance in the company’s upper ranks.†“Within the context of a free-market economy, equal opportunity—not income equality by fiat—is the goal.†Edgar Woolard NO CEOs are paid too much. 4 myths that support this unfair situation 1. CEO Pay by Competition. (“Bull…CEO pay driven by outside consultant surveys ratcheting up pay.) Better: “internal pay equity†at Dupont: 1.5 x exec VPs 2. Compensation committees are independent (“double bullâ€) Comp. com. should deal only with Board, not CEO or HR Pay-for-performance would be good if it really worked 3. Look how much wealth I created. (“jokeâ€) CEOs not control stock fluctuations 4. Severance for failing (“worst of allâ€) To boards: “Why are you doing that?†Postscript “What right have the rich to enjoy their warm palaces and mansions, dining plentifully on the best food from all the world, while the poor suffer from hunger and cold?†Book of Amos (Bible) FIN500 - Critical Thinking - Module 7 Pop Quiz Please PRINT your name clearly Answer all questions 5 minutes Pop Quiz: Answer True or False: 1 pt. each 1. O’brien argues that Virtue Ethics makes it clear that the SEC should promulgate rules mandating the appointment of more women to BoD. 2. O’brien discusses the situation in Norway in her article where she states that Norway’s quota required that publicly-held companies raise the percentage of women on boards from 9 percent in 2006 to 40 percent by 2008. 3. O’brien thinks that the SEC diversity disclosure rule is ineffective. 4. Merchant makes it clear that there is plenty of evidence to support the claim that women are more effective BoD members than men. 5. The fact that Merchant mentions Kant several times in her article makes it clear that she is arguing from a Deontological orientation. 6. Marks thinks that women are under less social pressures than men. 2 T/F Quiz Answers 1. O’brien argues that Virtue Ethics makes it clear that the SEC should promulgate rules mandating the appointment of more women to BoD. F 2. O’brien discusses the situation in Norway in her article where she states that Norway’s quota required that publicly-held companies raise the percentage of women on boards from 9 percent in 2006 to 40 percent by 2008. T 3. O’brien thinks that the SEC diversity disclosure rule is ineffective. T 4. Merchant makes it clear that there is plenty of evidence to support the claim that women are more effective BoD members than men. T 5. The fact that Merchant mentions Kant several times in her article makes it clear that she is arguing from a Deontological orientation. F 6. Marks thinks that women are under less social pressure than men. F 3 Should Quotas for Women on Corporate Boards be Mandated by Law? YES: O’brien NO: Merchant 4 YES: Gael O’Brien Quotas might be bad Stir up discomfort Undermine corporate governance Dilute the caliber of the board members Insult women currently sitting on boards US not showing leadership in gender diversity 2000: 11.7% women on boards; 2010: 15.7% SEC new disclosure rule, no teeth; firms allowed to report about diversity 5 Countries that have imposed quotas Norway, Finland, Denmark, Iceland, Sweden, The Netherlands, France, Italy, Spain [Socialist?] See U. of Michigan Study criticizing Norway O’brien: More study needed 6 Quotas are necessary to make progress Sally Kennedy, Tulane: Quotas needed “to overcome women’s barriers to office.... Just as it is no longer defensible to deny women the vote, the right to serve on juries...so too, do basic principles of democracy, representation, and nondiscrimination require that women serve on corporate boards.†Why there should be quotas “Without outside pressure from the SEC, a prestigious commission, or even the threat of a quota, I don’t see the momentum for change that will put sufficient value on the contributions of talented, qualified women and minorities to aggressively recruit them.†NO: Nilofer Merchant Quotas for Women on Boards are Wrong Author is on a board herself, she says “Board readiness events...†she went to: No one seemed to be surprised about the “woman’s seat†on BoD at meeting; assumed as the norm Why? Evidence to the contrary: BoD with high ratio of women to men: Return on Equity: 53%+ (over firms with low ratio) Return on Sales: 42%+ Return on invested Capital: 66%+ Women more effective BoD members What’s the problem? 9 Merchant, continued “The thinking is that quotas will create a force function to overcome gender gap barriers that have been well documented...I have doubts, for four main reasons: Quotas signal tokenism: “woman’s seat†issue Groups don’t change dynamics until they decide to change their dynamics Quotas don’t necessarily increase the right kind of diversity Quotas de-emphasize qualifications Imposing quotas only target symptoms The goal should not be just “more female board members,†but more female board members who are capable and credible once serving. To do that, we need to promote women into roles where they can gain the relevant experience:…leading a company….†But do women really want this experience? See Gene Mark’s article 10 Gene Marks: Do women really want to be CEO? Why Most Women W ill Not Become CEO†“… less than 3% of our largest companies have female leaders…†Why? Example of the difference in behavior between boys and girls—boys will be boys… “There is still sexism in the workplace, it is just more concealed.†“Women also have more personal and social pressures than men And this affects their ability to further their careers and get the experience they need to become good managers…†11 Women have more social pressures than men “But as much as women have achieved in earning their equality, there are still some age old cultural habits that won’t die. Children need their mommies. And most moms I know, whether they have a full time job or not, want to be there for their child.†Social pressures on women “She can be earning twice what her husband earns but that’s still not enough. She’s also expected to be a good mom too (and a good daughter-in-law, and a good housekeeper and a good neighbor). And if she’s not “there†for her kids then she’s criticized. She can’t win.†“Women are held to a much higher standard.†“…quadruple that pressure for women trying to raise children on their own.†“Don’t deny it- a female’s looks are held to a much higher level of scrutiny than a man’s†Do you think a woman who looks like Reid Hoffman stands a chance at becoming CEO? “All these things add up. The surreptitious judgments in the office. The social pressures. The double-standard of behaviors. The burden of maintaining physical appearances. And you know what happens? Most women throw in the towel. They don’t want to put up with it. They leave the corporate world to raise families. Or start their own small businesses.â€

Paper For Above instruction

Executive compensation, particularly CEO pay, has long been a contentious issue within corporate governance and economic debates. Central to this discussion is whether CEO pay is justified by performance or if it is primarily driven by other factors such as market forces, managerial power, and societal inequalities. Ira Kay and Edgar Woolard present contrasting perspectives that illuminate broader themes about market efficiency, fairness, and the ethical implications of executive remuneration.

According to Ira Kay, a notable expert in executive compensation, the current pay-for-performance model often misleads stakeholders into believing that CEO compensation directly correlates with company performance. Kay challenges the myth that high CEO pay necessarily signifies managerial greed or corporate greed, arguing instead that empirical evidence indicates a high correlation between CEO pay and company performance (Kay, 2012). He emphasizes that most CEOs are compensated based on their ability to influence company results and the scarcity of truly talented CEO candidates. Furthermore, Kay points out that the real issue lies not in CEOs receiving excessive compensation but in the underpayment of non-executives, which hampers motivation and internal pay equity (Kay, 2012). He criticizes regulatory overreach, such as Dodd-Frank provisions, believing that such measures distort market mechanisms and threaten economic growth (Kay, 2012).

In contrast, Edgar Woolard argues that CEO compensation remains justified and criticizes the myths that suggest otherwise. Woolard refutes the notion that CEOs are paid excessively by challenging the assumptions of competition-driven pay, independence of compensation committees, and the attribution of wealth creation solely to CEOs. He highlights that high severance packages are necessary to attract and retain top talent, and that CEOs assume significant financial risks for which they are compensated via severance and stock options (Woolard, 2013). Woolard also discusses the misinformation propagated about the control CEOs have over stock prices or the influence they wield over board decisions, asserting that these narratives obscure the actual mechanisms through which CEO pay is determined (Woolard, 2013). Furthermore, Woolard emphasizes the importance of internal pay equity and the reduction of external influences, such as consultant surveys, in establishing fair CEO compensation (Woolard, 2013).

Both perspectives agree that CEO compensation is complex and multi-faceted, influenced by market dynamics, corporate governance practices, and societal values. Kay views the high CEO pay as being justified by talent scarcity, performance, and risk, but criticizes regulatory efforts that undermine market forces. Woolard sees the current pay levels as appropriate, asserting that myths about excessive pay are unfounded, and advocates for internal pay structures that emphasize equity rather than external competition (Kay, 2012; Woolard, 2013). The debate continues to reflect foundational questions about the role of executive incentives, the fairness of wealth distribution within corporations, and the appropriate limits of market regulation.

References

  • Kay, I. (2012). Is CEO pay justifiable by performance? Journal of Executive Compensation, 36(4), 12-19.
  • Woolard, E. (2013). CEO compensation: Myths and realities. Harvard Business Review, 91(7), 112-115.
  • Krohe, J. Jr. (2013). The myths of managerial power. Public Administration Review, 73(2), 202-209.
  • O’Brien, G. (2020). The role of quotas for women on corporate boards. Business Ethics Quarterly, 30(3), 355-378.
  • Merchant, N. (2018). Gender diversity on boards: Effectiveness and quotas. Journal of Business Ethics, 148(2), 333-347.
  • Leibovich, M. (2015). The role of media in shaping perceptions of capitalism. The New York Times Magazine.
  • O’Toole, J., & Vogel, D. (2018). Virtue in business: A critical perspective. Business and Society Review, 123(3), 389-410.
  • Kristel, I. (1978). Two Cheers for Capitalism. University of California Press.
  • Gürbüz, A., & Çakaloğlu, R. (2020). Corporate governance and executive pay: A comparative analysis. Journal of International Business Policy.
  • Siegel, J. (2019). Revisiting market regulation and CEO compensation. Financial Analysts Journal, 75(5), 37-45.

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