Executive Collaboration
Introduction
Due to recent debate on executive remuneration, companies have been placed under mounting pressure to disclose their executive compensation practices. It has become a quintessential corporate governance issue about which there are many different views and opinions. The debate on executive remuneration can be approached from various angles some argue that aligning pay with performance is the optimal pay structure in order to reduce agency costs; others view it as a regulatory issue with the objective of remedying any system flaws; while some say it is a public policy concern. The following is an attempt to critically analyze the process in which companies determine the reward packages of their most senior executives.
The …show more content…
Context of Reward Management
The main purpose of the rewarding strategy in any firm is to recognize the contribution of the people in the organization by monetary and non-monetary rewards. According to Armstrong (2007) it deals with the design, implementation and maintenance of reward processes and practices that are geared towards the improvement of organizational, team and individual performance. Bloom and Milkovich pointed out that rewards can be broadly defined as a “bundle of returns offered in exchange for a cluster of employee contributions.”
Reward management is based upon the development of pay and grade structures which defines the rate of pay for jobs through its relationship with the job and the jobholder. Organizations determine this on the basis of internal and external relativities. To determine pay, organizations usually use three variables which are the job itself that is determined through a comprehensive job analysis and job evaluation. Job evaluations can be divided into three categories which are analytical, non-analytical and market pricing. The analytical process defines the worth and size of jobs through the use of factual evidence and also to some extent human judgment is exercised. Non-analytical job evaluations seeks to determine where a job falls in comparison to other jobs in an organization and the market pricing process assesses job values externally by market surveys and negotiations with trade unions. However, when evaluating a job it means that only the contents of the job should be considered for example the demands the job will make on the jobholder and not the actual individual in that job. This can be done through a point factor or Hay method. The Hay Guide Chart was designed by the Hay Management Consulting firm in the United States and has subsequently become a universally accepted scheme that allows evaluators to grade jobs within the organization. It uses factors such as problem solving, accountability and knowledge or know how, which gives evaluators a guide to pull apart or analyze the job in an effort to determine its value. In determining how to pay their most senior executives in reference to the job organizations would use factors such as accountabilities, functions performed, financial impact of the job or the size of resources controlled, freedom to decide and act, number of staff supervised, pre-eminence of the position and the influence of the position within the company.
Another way to determine pay is through the value of the person or “personal to holder” which simply means that individuals are paid according to their own ‘market worth.’ When setting rates of pay organizations must take into account what the person brings to the table such as their expertise, experience or proven track record and their potential.
The level of pay in organizations can also be influenced by the contributions made to the organization’s success. This is related to the outputs the jobholder or (executives) are expected to achieve and has achieved and the impact it has on the organization as a whole.
Some organizations also use performance management as a tool to determining pay. The most typical approach is a performance appraisal which generates ratings to make informed contingent pay and various types of incentive pay decisions in order to maintain individual equity. Organizations would use communications, grievance mechanisms, and employee participation in developing the companies pay plan to help ensure that employees view the pay process as transparent and fair. According to Elliot Jaques (1961) cited in Armstrong reward systems should be fair and in accordance with the level of work and the capacity of the individual to do it.
Senior executive pay packages are usually made up of four basic components: salary, annual bonuses, share options and Long Term Incentive Plans (LTIPs). In some instances they are also paid short-term incentives and bonuses depending on the role of the executive. For example in the case of a Sales Director this would be a performance related bonus which may be based on incremental revenue growth turnover whereas a CEO 's could be based on incremental profitability and revenue growth. Whatever the strategy organizations must first be in a position to offer such benefits by determining whether the potential payouts and incentive measures have the ability to maintain the sustainability and long term viability of the company. In essence pay systems must be affordable.
The Role of Executives and why they should be paid what they get.
Senior executives have the most important role in the management of an organization.
All organizations have specific goals and targets to be met and senior executives are there to ensure that those goals are achieved. They all formulate policies and direct the overall operations of businesses and corporations, public-sector organizations, nonprofit institutions, and other organizations. Top executives oversee budgets and ensure that resources are used properly and that programs are carried out as planned, they encourage business investment, and to some extent promote economic development in their communities by extension their role is to execute capital-raising strategies to support a firm 's expansion, and deal with mergers and acquisitions. The nature of the responsibilities of high-level executives can be so intense with the pressure to succeed that rewarding them with such high salaries and benefits would be a major contributor to attracting and retaining them. To secure top level executives they should be highly paid. It is said that the recent global economic crisis was due to these huge rewards given to executives but top executives compensation did not cause the financial crisis. Instead, the crisis was caused by loose monetary policy, a global capital glut, over-high leverage at investment banks, mandates from the U.S. Congress to provide mortgages to people who could not afford them, not the executives’ level. Consistent with this, the financial crisis has spread to other institutions in other countries with very different pay practices. The risk involved at the level of senior executives can be so high that providing the incentives to attract the best in their respective fields is absolutely necessary. Senior executives for the most part assume and are liable to many risks and tend to lose large amounts of wealth and even their jobs when their companies perform poorly so on the basis of such risk these executives are worth what they are paid. These risks
can be reflected by the possible gains and losses or the outcomes achieved from the decisions made by executives. Thus decision makers would normally have to be compensated for variability in possible outcomes; and the greater the return on investment that is observed in a situation, the greater the rewards should be. It is risk taking and the decisions that are made by these executives that often earn these companies large amounts of money, so the question is why they should not be paid for it. Often times it is the board of directors that that set the criteria and determine what the executives pay should be, which usually results in huge salaries and bonuses because they expect them to do well and for fear that a competitor will lure them away with even a bigger paycheck. Somebody offers these executives the contract and they sign it. Don 't blame the people who accept the contracts, blame the people who offer it to them and don 't write the clauses based on performance and any other variable. Therefore these ‘fat cat’ rewards definitely acts as a general reinforcer to motivating these executives. Herzberg’s hygiene factors imply that with the absence of fair payment systems one can become demotivated. However Adams Equity Theory suggests the most highly motivated employee is the one who perceives his rewards are equal to his contributions. The basic idea behind the Equity Theory is that workers, in an attempt to balance what they put in to their jobs and what they get from them, will unconsciously assign values to each of his various contributions.
With respect to compensation, managers should address four forms of equity: external, internal, individual, and procedural. External equity refers to how a jobs pay rate in one company compares to the job pay rate in other companies. Internal equity refers to how fair the jobs pay rate is, when compared to other jobs within the same company (for instance, is the sales manager’s pay fair, when compared to what the production manager is earning). Individual equity refers to the fairness of an individual’s pay as compared with what his or her co-workers are earning for the same or very similar jobs within the company. Procedural equity refers to the perceived fairness of the processes and procedures used to make decisions regarding the allocation of pay.
In addition to their time, executives contribute their experience, qualifications, and their capabilities in addition to their personal strengths such as acumen, ability to communicate clearly and persuasively, self-confidence and leadership skills. So therefore there is no doubt that high salaries would be a dominant factor for executives to consider staying with an organization. Therefore to achieve the highest standards of performance and total commitment from there executives’ organizations need to ensure that rewards and recognition programs are consistent, realistic and reflected in their overall strategy. Money, of course, is the primary motivating outcome for an employee, but it is not the only, and in some cases not even the most important, factor. Power and status are also prime motivators, as are variety and flexible perquisites.
Why Executives should not be paid so highly!
On the other hand some advocate that for executives to be drawing down such large salaries is unconscionable and unpatriotic and that the practice must be curbed by legislation, through taxation and publicity. For the so called risk enthusiast these risks is necessary and exciting but is this sustained more by personal incentives or by what is generally good for the organization. The argument is that these high salaries and bonuses are necessary in order to keep the employees from leaving. Based on their performance and their unwillingness to tie future pay to genuine measures of sustainable growth why not just let them leave, and break the ‘rewards of failure culture.’ The very principal-agent theory suggest that its aligning the executives interests with that of the Shareholders and the best way to do this is to provide the them with huge pay packages. However these executives behavior is driven by their self serving interest in maximizing their own pay and hardly ever seek the interest of shareholders. This is so because anyone who is in it just for the money is not in it for the long term and would leave as soon as a better offer comes along. The concern here is the relationship of proper corporate governance and performance. The aim of which is to align as nearly as possible the interests of individuals, corporations and the society. Organizations should create performance related elements to align the interests of shareholders with that of the executives. Pay should not just be about recruitment and retention. It is also a form of communication about a company 's culture and values, which can impact a company 's relationship with its employees, its brand reputation, and ultimately its share value. Companies need to create a culture of leadership that reinforces a true pay for results orientation, for example pay goes up with positive results and down when the company does poorly. It is important that organizations investigate the influence of organizational citizenship behavior (OCBs) on their executives performance, for it is important to attach these behaviors to performance with the ultimate goal of determining whether there are any relatedness because if they are only then shall organizations reciprocate. Organizational citizenship behavior (OCB) can be defined as behavior that (a) goes beyond the basic requirements of the job, (b) is to a large extent discretionary, and (c) is of benefit to the organization Lambert, S.J. (2006). Although these behaviors are not critical to the job they tend to facilitate the better functioning of the organization. Some of these OCBs include conscientiousness, altruism, sportsmanship, civic virtue and loyalty to name a few.
The claim is that intelligence and advanced degrees is an excuse for executives to be paid more but really who is doing most of the work in the organization. While these executives take five and six even more trips a year, are out playing golf or on a yacht somewhere it’s the average, underpaid worker that does all the work.
The argument could also be made that executives get paid based on market relativities but that is not so in reality because usually compensation issues are approved by the board of directors and guess who are usually on these boards? The CEO 's buddies from the golf course who are, frequently executives themselves and this CEO may be sitting on their board approving their future pay packages. One hand washes the other. It 's a very corrupt system.
It is of the belief that proper regulations be put in place that will guarantee transparency and equity when determining executive remuneration. This can be done by the insistence of independent non-executive setting of compensation through an independent remuneration committee with the attempt to have pay packages set at arms ' length from the executives who are getting paid. Disclosure of salaries so that company stakeholders can know and decide whether or not they think remuneration is fair. Taxation is a more general strategy that affects executive compensation, as well as other highly paid people, executive compensation could be checked by taxing more heavily the highest earners.
Conclusion
If there is an executive remuneration problem disclosure and publicity of pay would allow for the identification of the situation where the necessary measures can be applied to fix them by setting reasonable parameters that would minimize the effects on the company. Whether or not executives are receiving exorbitant salaries and bonuses with proper managing and justification to ensure that there actions are in no way to inhibit the growth and sustainability of the organization by making sharp distinctions between taking risks and gambling it is of the view that they be rewarded for their efforts and extensively by the nature of their responsibilities.
Bibliography
Armstrong, M., 2007. A Handbook of Employee Reward Management And Practice. Philadelphia: Kogan Page.
Floersch. R.R., 2009. The Right Way to Determine Executive Pay: Compensation is about more than just recruitment and retention. The Wall Street Journal Opinion Journal. [Online] 5 Mar., pA15.
Available at: http://online.wsj.com/article/NA_WSJ_PUB:SB123621179473834577.html
[Cited 22 August 2010].
European Corporate Governance Institute. Executive Remuneration. [Online]. European Corporate Governance Institute.
Available from: http://www.ecgi.org/remuneration/index.phd
[Cited 16 August 2010]
Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, 2010-11 Edition, Top Executives. (Updated 17 December 2009).
Available from: http://www.bls.gov/oco/ocos012.htm
[Cited 20 August 2010]
Mercer., 2010. Executive remuneration governance: best practices for remuneration committee. (Updated 8 June 2010).
Available from: http://www.mercer.com/referencecontent.htm?idContent=1251445
[Cited 16 August 2010]
Whittlesey. F., 2006. Perspective: The Great Overpaid CEO Debate. Cnet News.
Available from:
Due to recent debate on executive remuneration, companies have been placed under mounting pressure to disclose their executive compensation practices. It has become a quintessential corporate governance issue about which there are many different views and opinions. The debate on executive remuneration can be approached from various angles some argue that aligning pay with performance is the optimal pay structure in order to reduce agency costs; others view it as a regulatory issue with the objective of remedying any system flaws; while some say it is a public policy concern. The following is an attempt to critically analyze the process in which companies determine the reward packages of their most senior executives.
The …show more content…
Context of Reward Management
The main purpose of the rewarding strategy in any firm is to recognize the contribution of the people in the organization by monetary and non-monetary rewards. According to Armstrong (2007) it deals with the design, implementation and maintenance of reward processes and practices that are geared towards the improvement of organizational, team and individual performance. Bloom and Milkovich pointed out that rewards can be broadly defined as a “bundle of returns offered in exchange for a cluster of employee contributions.”
Reward management is based upon the development of pay and grade structures which defines the rate of pay for jobs through its relationship with the job and the jobholder. Organizations determine this on the basis of internal and external relativities. To determine pay, organizations usually use three variables which are the job itself that is determined through a comprehensive job analysis and job evaluation. Job evaluations can be divided into three categories which are analytical, non-analytical and market pricing. The analytical process defines the worth and size of jobs through the use of factual evidence and also to some extent human judgment is exercised. Non-analytical job evaluations seeks to determine where a job falls in comparison to other jobs in an organization and the market pricing process assesses job values externally by market surveys and negotiations with trade unions. However, when evaluating a job it means that only the contents of the job should be considered for example the demands the job will make on the jobholder and not the actual individual in that job. This can be done through a point factor or Hay method. The Hay Guide Chart was designed by the Hay Management Consulting firm in the United States and has subsequently become a universally accepted scheme that allows evaluators to grade jobs within the organization. It uses factors such as problem solving, accountability and knowledge or know how, which gives evaluators a guide to pull apart or analyze the job in an effort to determine its value. In determining how to pay their most senior executives in reference to the job organizations would use factors such as accountabilities, functions performed, financial impact of the job or the size of resources controlled, freedom to decide and act, number of staff supervised, pre-eminence of the position and the influence of the position within the company.
Another way to determine pay is through the value of the person or “personal to holder” which simply means that individuals are paid according to their own ‘market worth.’ When setting rates of pay organizations must take into account what the person brings to the table such as their expertise, experience or proven track record and their potential.
The level of pay in organizations can also be influenced by the contributions made to the organization’s success. This is related to the outputs the jobholder or (executives) are expected to achieve and has achieved and the impact it has on the organization as a whole.
Some organizations also use performance management as a tool to determining pay. The most typical approach is a performance appraisal which generates ratings to make informed contingent pay and various types of incentive pay decisions in order to maintain individual equity. Organizations would use communications, grievance mechanisms, and employee participation in developing the companies pay plan to help ensure that employees view the pay process as transparent and fair. According to Elliot Jaques (1961) cited in Armstrong reward systems should be fair and in accordance with the level of work and the capacity of the individual to do it.
Senior executive pay packages are usually made up of four basic components: salary, annual bonuses, share options and Long Term Incentive Plans (LTIPs). In some instances they are also paid short-term incentives and bonuses depending on the role of the executive. For example in the case of a Sales Director this would be a performance related bonus which may be based on incremental revenue growth turnover whereas a CEO 's could be based on incremental profitability and revenue growth. Whatever the strategy organizations must first be in a position to offer such benefits by determining whether the potential payouts and incentive measures have the ability to maintain the sustainability and long term viability of the company. In essence pay systems must be affordable.
The Role of Executives and why they should be paid what they get.
Senior executives have the most important role in the management of an organization.
All organizations have specific goals and targets to be met and senior executives are there to ensure that those goals are achieved. They all formulate policies and direct the overall operations of businesses and corporations, public-sector organizations, nonprofit institutions, and other organizations. Top executives oversee budgets and ensure that resources are used properly and that programs are carried out as planned, they encourage business investment, and to some extent promote economic development in their communities by extension their role is to execute capital-raising strategies to support a firm 's expansion, and deal with mergers and acquisitions. The nature of the responsibilities of high-level executives can be so intense with the pressure to succeed that rewarding them with such high salaries and benefits would be a major contributor to attracting and retaining them. To secure top level executives they should be highly paid. It is said that the recent global economic crisis was due to these huge rewards given to executives but top executives compensation did not cause the financial crisis. Instead, the crisis was caused by loose monetary policy, a global capital glut, over-high leverage at investment banks, mandates from the U.S. Congress to provide mortgages to people who could not afford them, not the executives’ level. Consistent with this, the financial crisis has spread to other institutions in other countries with very different pay practices. The risk involved at the level of senior executives can be so high that providing the incentives to attract the best in their respective fields is absolutely necessary. Senior executives for the most part assume and are liable to many risks and tend to lose large amounts of wealth and even their jobs when their companies perform poorly so on the basis of such risk these executives are worth what they are paid. These risks
can be reflected by the possible gains and losses or the outcomes achieved from the decisions made by executives. Thus decision makers would normally have to be compensated for variability in possible outcomes; and the greater the return on investment that is observed in a situation, the greater the rewards should be. It is risk taking and the decisions that are made by these executives that often earn these companies large amounts of money, so the question is why they should not be paid for it. Often times it is the board of directors that that set the criteria and determine what the executives pay should be, which usually results in huge salaries and bonuses because they expect them to do well and for fear that a competitor will lure them away with even a bigger paycheck. Somebody offers these executives the contract and they sign it. Don 't blame the people who accept the contracts, blame the people who offer it to them and don 't write the clauses based on performance and any other variable. Therefore these ‘fat cat’ rewards definitely acts as a general reinforcer to motivating these executives. Herzberg’s hygiene factors imply that with the absence of fair payment systems one can become demotivated. However Adams Equity Theory suggests the most highly motivated employee is the one who perceives his rewards are equal to his contributions. The basic idea behind the Equity Theory is that workers, in an attempt to balance what they put in to their jobs and what they get from them, will unconsciously assign values to each of his various contributions.
With respect to compensation, managers should address four forms of equity: external, internal, individual, and procedural. External equity refers to how a jobs pay rate in one company compares to the job pay rate in other companies. Internal equity refers to how fair the jobs pay rate is, when compared to other jobs within the same company (for instance, is the sales manager’s pay fair, when compared to what the production manager is earning). Individual equity refers to the fairness of an individual’s pay as compared with what his or her co-workers are earning for the same or very similar jobs within the company. Procedural equity refers to the perceived fairness of the processes and procedures used to make decisions regarding the allocation of pay.
In addition to their time, executives contribute their experience, qualifications, and their capabilities in addition to their personal strengths such as acumen, ability to communicate clearly and persuasively, self-confidence and leadership skills. So therefore there is no doubt that high salaries would be a dominant factor for executives to consider staying with an organization. Therefore to achieve the highest standards of performance and total commitment from there executives’ organizations need to ensure that rewards and recognition programs are consistent, realistic and reflected in their overall strategy. Money, of course, is the primary motivating outcome for an employee, but it is not the only, and in some cases not even the most important, factor. Power and status are also prime motivators, as are variety and flexible perquisites.
Why Executives should not be paid so highly!
On the other hand some advocate that for executives to be drawing down such large salaries is unconscionable and unpatriotic and that the practice must be curbed by legislation, through taxation and publicity. For the so called risk enthusiast these risks is necessary and exciting but is this sustained more by personal incentives or by what is generally good for the organization. The argument is that these high salaries and bonuses are necessary in order to keep the employees from leaving. Based on their performance and their unwillingness to tie future pay to genuine measures of sustainable growth why not just let them leave, and break the ‘rewards of failure culture.’ The very principal-agent theory suggest that its aligning the executives interests with that of the Shareholders and the best way to do this is to provide the them with huge pay packages. However these executives behavior is driven by their self serving interest in maximizing their own pay and hardly ever seek the interest of shareholders. This is so because anyone who is in it just for the money is not in it for the long term and would leave as soon as a better offer comes along. The concern here is the relationship of proper corporate governance and performance. The aim of which is to align as nearly as possible the interests of individuals, corporations and the society. Organizations should create performance related elements to align the interests of shareholders with that of the executives. Pay should not just be about recruitment and retention. It is also a form of communication about a company 's culture and values, which can impact a company 's relationship with its employees, its brand reputation, and ultimately its share value. Companies need to create a culture of leadership that reinforces a true pay for results orientation, for example pay goes up with positive results and down when the company does poorly. It is important that organizations investigate the influence of organizational citizenship behavior (OCBs) on their executives performance, for it is important to attach these behaviors to performance with the ultimate goal of determining whether there are any relatedness because if they are only then shall organizations reciprocate. Organizational citizenship behavior (OCB) can be defined as behavior that (a) goes beyond the basic requirements of the job, (b) is to a large extent discretionary, and (c) is of benefit to the organization Lambert, S.J. (2006). Although these behaviors are not critical to the job they tend to facilitate the better functioning of the organization. Some of these OCBs include conscientiousness, altruism, sportsmanship, civic virtue and loyalty to name a few.
The claim is that intelligence and advanced degrees is an excuse for executives to be paid more but really who is doing most of the work in the organization. While these executives take five and six even more trips a year, are out playing golf or on a yacht somewhere it’s the average, underpaid worker that does all the work.
The argument could also be made that executives get paid based on market relativities but that is not so in reality because usually compensation issues are approved by the board of directors and guess who are usually on these boards? The CEO 's buddies from the golf course who are, frequently executives themselves and this CEO may be sitting on their board approving their future pay packages. One hand washes the other. It 's a very corrupt system.
It is of the belief that proper regulations be put in place that will guarantee transparency and equity when determining executive remuneration. This can be done by the insistence of independent non-executive setting of compensation through an independent remuneration committee with the attempt to have pay packages set at arms ' length from the executives who are getting paid. Disclosure of salaries so that company stakeholders can know and decide whether or not they think remuneration is fair. Taxation is a more general strategy that affects executive compensation, as well as other highly paid people, executive compensation could be checked by taxing more heavily the highest earners.
Conclusion
If there is an executive remuneration problem disclosure and publicity of pay would allow for the identification of the situation where the necessary measures can be applied to fix them by setting reasonable parameters that would minimize the effects on the company. Whether or not executives are receiving exorbitant salaries and bonuses with proper managing and justification to ensure that there actions are in no way to inhibit the growth and sustainability of the organization by making sharp distinctions between taking risks and gambling it is of the view that they be rewarded for their efforts and extensively by the nature of their responsibilities.
Bibliography
Armstrong, M., 2007. A Handbook of Employee Reward Management And Practice. Philadelphia: Kogan Page.
Floersch. R.R., 2009. The Right Way to Determine Executive Pay: Compensation is about more than just recruitment and retention. The Wall Street Journal Opinion Journal. [Online] 5 Mar., pA15.
Available at: http://online.wsj.com/article/NA_WSJ_PUB:SB123621179473834577.html
[Cited 22 August 2010].
European Corporate Governance Institute. Executive Remuneration. [Online]. European Corporate Governance Institute.
Available from: http://www.ecgi.org/remuneration/index.phd
[Cited 16 August 2010]
Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, 2010-11 Edition, Top Executives. (Updated 17 December 2009).
Available from: http://www.bls.gov/oco/ocos012.htm
[Cited 20 August 2010]
Mercer., 2010. Executive remuneration governance: best practices for remuneration committee. (Updated 8 June 2010).
Available from: http://www.mercer.com/referencecontent.htm?idContent=1251445
[Cited 16 August 2010]
Whittlesey. F., 2006. Perspective: The Great Overpaid CEO Debate. Cnet News.
Available from: