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Is executive
compensation too
high?
CEO Packages
Emma Kitchen, Laura JibsonGeorge Rispin, Xue Junzhao
Introduction: Aims
Illustrate historical and current levels of CEO compensation
Assess views of justice in wages
Examine arguments for and against high levels of compensation
Recommendations
2
The average workers compensation only increased by 36%
During the time period of 1991-2001, CEO compensation increased by 340%
Background
CEO’S pay has increased significantly following the enactment of anti takeover laws passed in 1980’s.
This resulted in CEO’S receiving a large proportion of their compensation in the form of stocks and shares
There is an increased sensitivity to performance and the amount they received was dictated by the market and industry factors.
This is especially relevant now as the cheap stocks which CEO’S received during the stock market decline are starting to rise, resulting in huge pay-outs
4
Two Decades of CEO Pay
5
Justice in Wages
According to Moriarty (2009) there are three common views frequently applied to justice in wages:
– The Agreement View “Appropriate prices for goods are obtained through arms length negotiations
between informed buyers and informed sellers”
– The Desert View “People deserve certain wages for performing certain jobs, whatever they might
agree to accept for performing them”
– The Utility View “To maximise a firms wealth by attracting, retaining and motivating talented
workers”6
The Agreement View
CEO compensation is decided by the ‘Compensation Committee’
This is made up of directors who serve on the company's board
Directors are elected by shareholders
Members should be informed and independent
7
The Desert View
Compensation should be based on contribution and performance
Which other factors should be taken into consideration?
How can CEO contribution be measured?
8
Example: Fred Goodwin
Fred Goodwin is the former chief executive for RBS, of which 70% is now owned by the taxpayer.
The guardian newspaper referred to him as “The worlds worst banker” due to his irresponsible dealings in the sub prime mortgage market.
He received an very large payoff after he agreed to resign
His pension is £16.9 million, this works out at an average of £693,000 per year
Cont.
His payoff is in line with fellow bankers who receive an average of £650,000 per year
The high pension caused anger with taxpayers and MP’S
Bank of England governor criticised Goodwin's large pension, saying that it encourages reckless gambling and rewarding bad behaviour
Example: Black and Decker
New USA legislation passed in 2010 resulted in public companies having to let shareholders vote at least once every three years regarding CEO compensation
In 2011 only 12 companies voted against CEO pay, this is due to industry pressure to “pay the going rate”
The board voted against Black and Decker’s CEO John Lundgren receiving $32.6 million
But the board eventually gave in to pressure and paid Lundgren, making him the fifth highest paid CEO in 2010
Cont.
Theory of Managerial Power supports this. As Lundgren was very powerful he could demand the package
Due to public anger, the board tried to disguise the amount he received by issuing him 325,000 shares valued at $18.7 million
With the average employee earning $40,000, this resulted in a pay gap of 325-1
Example: John Lewis Group
69,000 employees as ‘Partners’, essentially owning a share of the profits
Bonus structure is the same for every worker at every level, a common % of income based on the group’s annual profit
2009 Operating Profit £316.8m, Partners’ Bonus = 13% of salary, total £125.4m
2010 OP £389.7m, Bonus = 15% of salary, total £151.3m
2011 OP £431.0m, Bonus = 18% of salary, total £194.5m
13
Arguments For and Against
Arguments For
Economic Analysis
Correlation between CEO pay and company performance
Will provide an incentive for innovation and risk-taking
Attract, retain and motivate talented leaders
Arguments Against
The relation between executive and average employee’s compensation
Widening gap between executive and average employee’s compensation
Gap between domestic and foreign executive compensation
Compensation equity vs. work equity
Distributive equity
Recommendations
Base CEO compensation on improving real measures, such as; earnings per share, return on invested capital and market share
Ban executives from selling shares for a fixed number of years
Specify the dates on which equity awards will be given
17
Cont.
Payoff shares based on an average stock price, rather than a single stock price
Introduce a measure whereby executives must release a statement detailing how and when they will sell any shares
Salary caps
18
References
Boatright, J. R. (2010). Executive Compensation: Unjust or Just Right? In G. G. Brenkert, & T. L. Beauchamp, The Oxford Handbook of Business Ethics (pp. 161-201). New York: Oxford University Press.
Cheng, S., & Indjejikian, R. J. (2009). The Market for Corporate Control and CEO Compensation: Complements or Substitutes? Contemporary Accounting Research, 26(3), 701-728.
Crane, A., & Matten, D. (2004). Business Ethics. Oxford: Oxford University Press.
DeGeorge, R. T. (2010). Business Ethics. New Jersey: Pearson Education.
DesJardins, J. (2009). An Introduction to Business Ethics. New York: McGraw-Hill.
Henderson, B. C., Masli, A., Richardson, V. J., & Sanchez, J. M. (2010). Layoffs and CEO Compensation: Does CEO Power Influence the Relationship? Journal of Accounting, Auditing and Finance, 25(4), 709-748.
McCall, J. J. (2005). Assessing Executive Compensation. In J. R. DesJardins, & J. J. McCall, Contemporary Issues in Business Ethics (pp. 102-112). Belmont: Wadsworth, Cengage Learning.
Meredith, D. R. (1992, September). Exploding Myths of CEO Pay. (79), pp. 32-44.
Moriarty, J. (2009). Do CEO's get paid too much? In T. L. Beauchamp, N. E. Bowie, & D. G. Arnold, Ethical Theory and Business (pp. 692-702). New Jersey: Pearson Education.
Nichols, D., & Subramanian, C. (2001, February). Executive Compensation: Excessive or Equitable? Journal of Business Ethics, 29(4), 339-351.
Perel, M. (2003). An Ethical Perspective on CEO Compensation. Journal of Business Ethics, 48(4), 381-391.
Rawls, J. (2998). Distributive Justice. In T. Donaldson, & P. H. Werhane, Ethical Issues in Business: A Philosophical Approach (pp. 222-232). New Jersey: Pearson Education.