To what extent does executive pay influence company performance
Topic: “To what extent does executive pay influence company performance?”
1 Introduction
Recently, there has been a good deal of argument discussing about the impact of executive pay influence over company performance. It is often taken for granted that a company is able to have a better performance when the C-Suite is paid more. Nevertheless, the issue can be unexpectedly complicated in some cases and go way beyond a “more or less” question. Several empirical evidences reveal that an unwise form of payment could easily backfire and lead the company to be derailed, even if the compensation is appear to be highly tempting. In this article, based on the current pay system, the correlation between executive compensation and company performance will be studied, suggesting that although the two subjects are positively correlated from a theoretical perspective, restraints and loopholes indeed exist in the current context of economy.
2 The Current Pay System
In the beginning of 1990s, a high level of executive compensation has already been regarded as an effective measure to solve the principal-agent problem within a company, that is, to align the benefit of shareholders and executive managers. It’s believed that the rise in executive pay serves as strong incentives, and conceivably, it could be stronger with a larger sum of money (Jenson, M and Murphy, K). Derived from the previous viewpoints and experiences alike, the current executive compensation usually comprises base salary, performance-based bonus and long-term incentives. The system is supposed to furnish executives not only with a large amount of money, but also some equity-based compensation such as stock options and restricted shares (Bebchuk, L. A. and Fried, J. M. (2006), for the purpose of minimizing the interest conflicts and mitigating agency problem.
3 The loopholes of the current system
Unfortunately, under the current context of economy, several loopholes are exposed and revealed by a great deal
1 Introduction
Recently, there has been a good deal of argument discussing about the impact of executive pay influence over company performance. It is often taken for granted that a company is able to have a better performance when the C-Suite is paid more. Nevertheless, the issue can be unexpectedly complicated in some cases and go way beyond a “more or less” question. Several empirical evidences reveal that an unwise form of payment could easily backfire and lead the company to be derailed, even if the compensation is appear to be highly tempting. In this article, based on the current pay system, the correlation between executive compensation and company performance will be studied, suggesting that although the two subjects are positively correlated from a theoretical perspective, restraints and loopholes indeed exist in the current context of economy.
2 The Current Pay System
In the beginning of 1990s, a high level of executive compensation has already been regarded as an effective measure to solve the principal-agent problem within a company, that is, to align the benefit of shareholders and executive managers. It’s believed that the rise in executive pay serves as strong incentives, and conceivably, it could be stronger with a larger sum of money (Jenson, M and Murphy, K). Derived from the previous viewpoints and experiences alike, the current executive compensation usually comprises base salary, performance-based bonus and long-term incentives. The system is supposed to furnish executives not only with a large amount of money, but also some equity-based compensation such as stock options and restricted shares (Bebchuk, L. A. and Fried, J. M. (2006), for the purpose of minimizing the interest conflicts and mitigating agency problem.
3 The loopholes of the current system
Unfortunately, under the current context of economy, several loopholes are exposed and revealed by a great deal