Chapter 11 Questions

Alleyse Lipscomb
BA 310-01
Chapter 11 Compensation: Methods and Policies 1.) Should the federal government place a ceiling on CEO compensation? Why or why not?
CEO compensation is not a problem for the federal government to police, but due to the over compensation and stock options CEOs are receiving, they may need to step in. As of now, executive pay is “pay for performance”, which is covered by a base salary, bonus, and long-term incentives. Some companies have employment agreements that spell out everything that an executive will receive, regardless of performance. Some of these compensation packages that CEOs receive need to be revamped and be more based on the performance of them and the company. Also with some of the leadership and power some CEOs have, they are able to over-power the board of directors to obtain higher pay and bonuses. In situations like these, there needs to be someone, an organization or a company group that cannot be affected by the CEO’s power, that can police the CEO’s and company’s performance. The broad of directors are supposed to handle this, but there are some reasons that the board of directors fail in allowing excessive compensation to CEOS. As stated in the text, “many board of directors are passive and do not play an active or questioning role in setting executive compensation”, “executive pay is higer than would be obtained under thorough and intense arm’s length bargaining”, “the compensation portion is in many cases a less significant amount of the total payment”, and “salary and nonperformance compensation packages lack incentives that align managers and shareholder interests”. So yes the federal government could put a ceiling on CEO compensation, but for the CEOs that are truly working and producing a growing company, that ceiling could actually diminish their work ethic.

2.) Is pay compression a potential problem in terms of employee morale? Why?
The definition the textbook gives for pay compression is that it “occurs when less-experienced employees are paid as much or more than longer-term employees because of market-driven increases in starting salaries”. If individuals find out what others are being paid, they may wonder if there is an issue with their performance or if they are no longer an asset to the company. Since the market has driven many prices and pay rates upward, that does not mean the company must go through all employees and increase current salaries due to market increases. Employees must understand that with the change of time, there will always be a change in pay rates, but also employers must fully explain the salary and its raise options so employees can understand that this is the position and pay at this time. Granted that people will act in ways they feel, but employers need to be able to be in a position to see the changes in morale and be able to address them. If there are reaccuring issues, companies made need to follow some of the solutions given in the book. For example: “reexamining how many entry-level people are needed”, “reassessing recruitment itself”, “focus on the job evaluation process, emphasizing performance instead of salary-grade assignments”, “basing all salaries on longevity”, “giving first-line supervisors and other managers the authority to recommend equity adjustments for incumbents who have been unfairly victimized by pay compression”, or “limiting the hiring of new employees seeking excessive salaries”.