Frydman & Saks (2005) contend that the dispute and concerns about executive compensation date back to events of World War I that led to the revelation of the outrageous salaries of railroad officers and ultimately resulted in the disclosure of remuneration information of managers in other organizations. The publicizing of such information then coerced the creation of the Security Exchange Act of 1934 that set the guidelines for disclosure of the data concerning executive remuneration thus helping to curb unethical behavior that could be linked to mismanagement in relation to pay. Over the years, the tax policy and stock market have been playing an important role in the determination of structure and level of pay. Indeed, executives in a corporation are the topmost job positions inclusive of the president and the vice president, directors, and general managers.
Components of Executive Compensation
According to Martocchio (2017), executive remuneration is designed to reward company performance and position it with the investor value. An executive’s compensation has several elements such as the base pay, long-term incentives, short-term incentives, benefits, contingent payments, and perquisites. Lower level employee salaries are determined by a job evaluation thus helping achieve internal equity. However, an executive base salary is determined by a compensation committee, is subject to salary surveys, and therefore is highly dependent on external equity. The long-term incentives component focuses on recognizing the executive’s efforts towards achieving the business’ strategic objectives thus maximizing the shareholder’s value. Long-term incentives can be paid in the form of stock, restricted stock options or performance-vested stock. Chingos (2004) states that giving ownership of stock to executives motivates them to work towards making the organization more profitable. On the other hand, short-term incentives are rewards earned for the achievement of short-term goals like the effecting of a new strategy, expanding the market share, and an increase in the profit margin. This incentive package is made in two forms, the normal achievement and stretched performance rate to encourage extraordinary achievement.
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In recognition of their top-level position and responsibilities, executives receive better-packaged benefits and perquisites deal. This include, insurance covers, membership in clubs, special travel packages and dining privileges. The Center on Executive Compensation (2018), notes that the exclusive benefits and perquisites package for executives is to acknowledge the value they offer the company in the form of extraordinary demands made on them in terms of time, commitment, and other forms of pressure to perform beyond their comfort zone. These packages help them socialize with other individuals with whom they can share ideas for effective leadership of the organization. Executive pay also includes contingent pay that caters to the smooth exit of top management in the event of coerced termination of employment. In fact, the U.S executive pay is dramatically over the roof compared to other lower level remuneration going up to four hundred times. However, it is important to note that they have a chunk in the stock options, which helps the investor be comfortable letting the executive run the company because they can be sure of their wealth’s security.
Justification
Martocchio (2017), states that executive remuneration is not randomly settled upon, but instead, certain factors influence it. These include:
Its alignment with the shareholders objective of creation of wealth.
Its ability to competitively fit in with salary ranges with peer organizations.
It should be positioned as a best-fit package in the company’s strategy.
It should comply with the compensation law and regulations.
The outrageous increase in executive pay has led to the rise of a lot of concern about pay equity and ethics over the years. It is crucial to, however, take note that the requirement for organizations to disclose compensation information in the Security Exchange Act of 1934 led to a shift in pay mode giving executives stock option. Stock-based pay left the base pay relatively the same but led to higher paychecks in total compensation. Wade et al. (1997) state that the acceptable peaceful coexistence of the management and investors should be achieved by the synchronization of the executive’s pay with the company performance. However, this is not always the case because of the diverse environment a firm operates in. Therefore, this causes the administration to constantly be on the lookout for ways to justify the salaries they give to their executives. Market surveys that help achieve external equity are one such justification. It is no debate that a CEO will feel motivated and valued by his organization and thus strive to accomplish extraordinary results for his organization if he can stand with his head held high among peers. The outcome of their performance is also a reason that one will find hard to devalue since it stands on its own ground. In addition, the components of executive pay are clearly outlined and getting a good understanding of each component helps the public hold back on their protests on the high payments.
Conclusion
As is has been demonstrated in this paper, the compensable factors of an executive are quite broad and involve a wide range of skill and expertise in various fields including strategic management, team leadership, marketing management and business development. These skills are very dynamic and one needs to be constantly on their toes to learn and be updated to keep the firm relevant. Organizations thus pay heftily to attract this talent and acknowledge the worth of the executive in terms of upholding their dignity, power, and lifestyle.
References
Center on Executive Compensation (2018). Basics of Executive Compensation . Retrieved from http://www.execcomp.org/Basics/Basic/Performance-Contingent-Pay
Chingos, P. T. (2004). Responsible Executive Compensation for a New Era of Accountability. Hoboken, N.J.: John Wiley & Sons, Inc.
Frydman, C. & Saks R. E. (2005). Historical Trends in Executive Compensation 1936-2003. Retrieved from https://inequality.stanford.edu/sites/default/files/media/_media/pdf/Reference%20Media/Frydman%20and%20Saks_2005_Elites.pdf
Martocchio, J. J. (2017). Strategic compensation : A human resource management approach (9th ed.). Hoboken, NJ: Pearson.
Wade B. J., Porac F. I. & Pollock G. T (2005). Worth, words, and the justification of executive pay. Journal of Organizational Behavior, Vol 18, 641-664.
