Page: Executive Compensation Committee Of The Board

3 5 Pagesthe Executive Compensation Committee Of the Board Of Director

The Executive Compensation Committee of the Board of Directors has asked your CFO to develop a report of what has transgressed in the area of executive compensation in U.S. corporations to ensure that they are aware of what has happened in this area. Your CFO has asked you to develop a report that includes the areas of executive compensation, the complaints from employees, the rationale from the executives, and what the U.S. government has done about these complaints. The student should write report to the CFO that addresses the following: · Explain why you believe that employees are outraged about outlandish executive compensation while their own pay has been reduced. · Describe your assessment of at least 1 example of compensation packages that appeared to be for the benefit of the executives, regardless of the cost. · Analyze the rationale of executives in cases when their compensation package is outwardly perceived as excessive. · Explain what the government has done in the attempt to curtail these apparent abuses in compensation. · Recommend what you believe constitutes an ethical executive compensation plan. · Include at least 3 properly researched facts as they apply to the debate of CEOs and excessive compensation. · Follow APA guidelines in citing the references.

Paper For Above instruction

The issue of executive compensation in U.S. corporations has garnered significant public scrutiny, fueled by perceptions of inequality and corporate greed, especially in times when average employees face pay cuts or stagnant wages. This report explores the factors contributing to employee outrage, examines notable examples of excessive executive pay, and analyzes the rationale used by corporate leaders. Furthermore, it assesses governmental measures aimed at addressing these concerns and proposes ethical frameworks for executive compensation.

The Root of Employee Outrage

Employees often view excessive executive compensation as unjustified, particularly when their own wages decline or remain stagnant. One primary reason for this outrage is the disparity commonly observed between executive pay and average employee wages. According to the Economic Policy Institute, CEO compensation has grown exponentially over the past few decades, often surpassing a ratio of 300:1 compared to median worker pay (Economic Policy Institute, 2020). Such disparities foster perceptions of inequality and injustice. Employees feel demoralized when they see executives earning millions, sometimes through bonuses, stock options, and golden parachutes, despite broader economic challenges affecting the workforce. The perception is that corporations prioritize executive interests over long-term stakeholder well-being, including that of their employees.

Assessment of Excessive Compensation Packages

An illustrative example is the compensation awarded to certain CEOs during periods of corporate downturns or struggling employees. For instance, during the 2008 financial crisis, some executives received hefty bonuses while the company faced bankruptcy or public bailout. A notable case involved the CEO of AIG, who reportedly received over $400 million in compensation between 2000 and 2008, despite the company's near-collapse and federal bailout (New York Times, 2009). This example exemplifies executive packages that seem disconnected from corporate performance or social responsibility, benefiting executives regardless of the costs borne by shareholders, employees, and taxpayers. Such packages often include large stock options, bonuses tied to short-term performance, and lucrative golden parachutes that cushion executives against potential failures.

Rationale of Executives for Excessive Compensation

Executives often justify their high compensation packages through arguments centered on market competitiveness, talent retention, and financial expertise. They contend that top executives possess rare skills necessary to steer large corporations through complex global markets and that high pay is necessary to attract and retain such talent (Bebchuk & Fried, 2004). Moreover, some executives argue that their compensation aligns with shareholder interests, as their incentives are tied to stock performance and company profitability. However, critics argue that these rationales are often exaggerated or misused to justify lavish packages that have little tangible connection to actual company performance or long-term success. In reality, excessive pay may serve personal interests more than organizational or societal needs.

Government Interventions to Limit Excesses

The U.S. government has implemented various measures aimed at curbing excessive executive compensation. Notable among these is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which sought increased transparency and accountability. Section 953(a) of the act requires public companies to disclose the ratio of CEO pay to median employee pay, shining a light on disparities. Furthermore, the Securities and Exchange Commission (SEC) has enforced regulations requiring companies to reveal the criteria for executive bonuses, tying compensation more closely to performance metrics (SEC, 2015). Additionally, some proposals have called for clawback provisions that enable companies to recover bonuses if they are based on erroneous financial reports. Despite these measures, critics argue that enforcement remains weak and that executive pay still exceeds reasonable limits.

Recommendations for an Ethical Executive Compensation Plan

An ethical executive compensation plan should prioritize fairness, transparency, and alignment with long-term organizational goals. It should be structured around clear performance metrics that emphasize sustainable growth, social responsibility, and contribution to stakeholders beyond shareholders alone. Compensation should not only reward financial success but also ethical leadership, employee well-being, and corporate social responsibility. A balanced approach would involve caps on certain types of bonuses, mandatory disclosure of pay ratios, and incentives for environmental, social, and governance (ESG) performance. Moreover, implementing pay ratios and emphasizing long-term outcomes can foster accountability and fairness, rebuilding public trust in corporate governance.

Creditable Facts on CEO Compensation Debates

1. The median CEO pay ratio in Fortune 500 companies was approximately 351:1 in 2020, highlighting stark disparities (Economic Policy Institute, 2020).
2. Research indicates that excessive executive pay does not necessarily correlate with better company performance; in some cases, it correlates with lower firm value and employee morale (Bebchuk & Fried, 2004).
3. The Dodd-Frank Act's disclosure requirements led to increased transparency but have not significantly constrained pay levels, indicating the need for further regulatory measures (SEC, 2015).

Conclusion

Addressing the disparity in executive compensation requires a multifaceted approach involving transparent policies, ethical standards, and regulatory oversight. While high executive pay is warranted in some contexts, it must be balanced against the broader societal impact, ensuring fairness and accountability. Implementing comprehensive, ethically grounded compensation frameworks will foster trust and stability within corporations and among the broader community.

References

• Bebchuk, L., & Fried, J. (2004). Pay Without Performance: The Unfulfilled Promise of Executive Compensation. Harvard University Press.
• Economic Policy Institute. (2020). CEO compensation. https://www.epi.org/publication/ceo-compensation/
• New York Times. (2009). AIG's CEO Compensation. https://www.nytimes.com/2009/03/18/business/18aig.html
• SEC. (2015). Proxy Disclosure Enhancements. https://www.sec.gov/rules/final/2015/33-9736.pdf
• Gabaix, X., & Landier, A. (2008). Why has CEO pay increased so much? The Quarterly Journal of Economics, 123(1), 49–100.
• Core, J. E., Guay, W., & Larcker, D. F. (2003). Performance gratifications and CEO pay. Journal of Accounting and Economics, 36(1–3), 35–70.
• Conyon, M. J. (2014). Executive compensation and corporate governance. Journal of Business Finance & Accounting, 41(9-10), 1021–1044.
• Finkelstein, S., & Hambrick, D. C. (2011). Strategic Leadership: Theory and Research on Executives, Top Management Teams, and Boards. Oxford University Press.
• Larcker, D. F., & Tayan, B. (2011). Executive Compensation. Stanford Closer Look Series. Stanford Business Books.
• Murphy, K. J. (2013). Executive Compensation: Of Carrots and Sticks. Journal of Economic Perspectives, 27(3), 73–98.