Is_Executive_Compensation_to_High

Summary Is executive compensation too high' Problem Statement We need to solve issues related to executive compensation and if CEO’s get paid too much. We believe that CEO’s get paid too much in relation to others in the company. They should get paid more than regular employees considering their position but some of the bonuses and compensation are a bit much. However, CEO’s make huge choices on a day to day basis as well and should be compensated for the amount of stress that would be involved in these positions of power. How much really is the right amount to be distributed to executives' Stakeholders When we think about stakeholders many things come to mind. They are shareholders, employees, financial institutions, as well as the chief executive officer himself, and other companies that they do business with, these play and integral role in the company and its operation. Shareholders Shareholders are concerned with executive compensation because they buy shares to invest in the company. When these CEO’s are giving themselves huge salaries and bonuses it is taking away from the shareholders wealth and share price is bound to decrease. They also have a vested interest because they provide much of the capital that the company has. Shareholders have voting rights in the company and should be listened to because it is their money in the company. Employees Employees are stakeholders in the company and are directly connected to executive compensation. They are on the frontlines of the company and are the ones out making the deal, finding new customers and providing the customer service to clients. If the employees were not out working on the frontlines of the company, they would not turn profits. Employees are a large stakeholder because they produce the profits which in turn provide the executive compensation. Financial Institutions Institutions such as Banks would be large stakeholders as well. They provide capital to other banks at overnight rates when needed. This allows FI’s to lend to each other at very cheap rates. FI’s also take deposits which are a liability; they then take this money and lend it to customers and other corporations to make a return on investment. This provides the cash needed for compensation and other expenses. Executives CEO’s are responsible for the whole corporation. They need to make responsible choices that lead to future growth in the company, not just personal need. If a company makes $30 million dollar profit in a year, the CEO should not take a $10 million dollar pay cheque for himself. That looks greedy to many people and can lead to sharp drops in share prices or cause its employees to become disgruntled. The CEO has to walk a fine line when it comes to running a company properly. Other Stakeholders Other companies and people are also stakeholders because they provide the capital to banks in the form of deposits and investments. They then use this cash to earn a profit. Again just like other FI’s this provides to the capital needed to make a return on investments. These profits pay for compensation as well as many other expenses. Stakeholder in FI’s and other companies is virtually everyone because if they did not have the capital required to take on risk, the bank would not be able to make money for its customers as well the employees and other expenses would not be covered and compensation would be hard to pay. Significance and Background Background Executive compensation is meant to pay top executives. This type of compensation includes basic salary, shares, bonuses, stock options and other company benefits. Over the years compensation for top executives has risen dramatically. The Canadian Coalition for Good Governance (CCGG) has put out principles and guidelines for executive compensation. Compensation packages should develop a good relationship with others to accomplish a long term shareholder value. They should also merit those who have performed well, and also be fair to all stakeholders in the company for example employees and shareholders. A poll was done on the CCGG and 40% of directors and 65% of investors surveyed said that compensation is too high. Investors and directors also believe that compensation should be tied to long-term share trends and largely to company performance relative to its competitors.() The CCGG only provides guidelines, compensation is still mostly left up to what is decided when the CEO is elected in and the contracts are signed. Significance The Significance of executive compensation is to reward executives for doing a good job. This is significant because if the company is in a downturn, the top executives should not be getting extravagant bonuses or rewards that are meant for high performance. Although a lot of these bonuses are in part of a contract, they should also be willing to let go of some of the money when the company cannot afford it. This is because the CEO and other high level executives should be looking out for the wellbeing of the corporation and not just their own pockets. We do believe that executive compensation is too high. That is because some executives make more money in one year from salaries and bonus etc. than a lot people make in a lifetime. Executive compensation should be based a lot on how well the CEOs do. If they bring the company down, they shouldn’t be awarded for it. What has Happened* Historically and C*urrently' During WWII compensation grew at an average of 0.8% per year for 30 years. After that starting from 1980 to 2003 compensation increased 6.8% per year, this is a significant increase year over year in compensation which can be good and bad depending on the economy and current supplies and demand. (Frydman) Now a lot of businesses are becoming bankrupt and CEO’s are still taking large compensation packages. It’s unfair to all the employees in the corporation, this is because the CEO’s could reduce the amount of compensation packages and put the money back into the company so they can continue to do business and keep employees happy. In times like these CEO’s should know what to do, but greed has got in the way of the interest in the company and the interest of the CEO. This is partly due to many years of constant growth and this has also made executives stubborn because they haven’t had to change their management style in years due to the bull markets. Financial Institutions such as TD Canada Trust, Canadian Imperial Bank of Commerce, Royal Bank, and Bank of Montreal all reduced their compensation in order to give shareholders confidence in the FI’s. TD was the first company to announce the reduction in compensation, and all the other banks followed suit. BMO had initially stated that they "performed well in challenging times." And said they were going to increase compensation, but after TD announced their reduction in compensation BMO turned around and followed the others as well.(Good) This is relevant to finance students because there is many aspects of business that must be learnt before becoming successful in a career after post secondary. It is also important to realize that executives in some circumstances are intelligent and willing to lower their pay because the company still needs the profits in order to keep the organization running smoothly. *Terms and Legislation of Executive C*ompensation Legislation in Canada for executive compensation is not very strong. It is left mostly up to the board of directors and advisory votes as well as contracts. However it does have some regulation from the Canadian Securities Commission, and it is also regulated provincially.() Stockholders- One who owns a share or shares of stock in a company. Also called stockowner. Analyze 4 Relevant Arguments In this argument versus having or not having executive compensation, we believe that there has to be a change especially given the current economy and its downturn. Maybe there could be a ratio designed that equates earnings to a certain percentage for compensation of CEO’s. This would force CEO’s to also put their money back into the companies when they aren’t doing so well. This can be seen in financial institutions right now. The big 6 bank CEO’s are currently taking less when it comes to compensation. Although we are sure they were reluctant they understand the way of business. There are a few relevant arguments when we think about executive compensation and if it is too high or not. Athletes vs. Executives CEO’s deserve the large compensation because they are the ones that run the corporation. They make bigger choices than any NBA or NHL player that receives comparable salaries for skating around or bouncing a ball. Executives of corporations make huge choices on a daily basis, and should be compensated for doing so. Hockey players get paid huge sums of money for their performance and ability to pass a black piece of hard rubber around the ice. At the same time NBA players are getting huge sums of money for bouncing a ball up and down a basketball court as well. These athletes get many millions of dollars each year to do things that don’t require much intelligence. Whereas executives spend huge amounts of time in their offices trying to think of new way to keep the company a well oil machine and produce profits for everyone in the company. Executives are the ones with the brains of the business and should be compensated well for their hard work and making a corporation work properly as well generate the revenues needed for all their business activities, while still being able to pay all the employees and executives for their hard work. Employees vs. Executives In terms of business, if you were to take out more cash than the company earned, it would eventually have to claim bankruptcy and the first cuts are in the form of job losses to employees because cash isn’t available to pay its workers. Executives should look at this when paying themselves. Would it not be more efficient if chief executives took a wage decrease instead of layingoff all of those employees' This would allow for employees to keep their jobs and be able to continue working because their boss isn’t getting ludicrous bonuses and other forms of compensation especially when the business is in a spiralling economy. What point does structural organization serve to this purpose' Instead of laying off the staff of the corporations they should be thinking about the executives and if their pay is in line with the current performance of the company. If it is not, it should be reduced or increased depending on the situations of the economy and revenues of a corporation. The best example is AIG because they have filed for chapter 11 in the United States, but because of contractual agreements they are still taking their huge compensation packages yet they are not even making money. They are just taking their bailout package and spending it on the high level staff for vacations and other things not related to business.() Again this just takes away from money for staff that could otherwise be helping the company get back on its feet. Employees are the frontline of the company, and if there is no money in the company to pay them because the executives take their bonus, even in the event of bankruptcy it is not an economically viable way for the company to continue business. In this event it would make more sense to keep bonuses and compensation at a reasonable level and continue to employ staff that actually generates the funds to begin with. This would allow AIG to get back into the black on their income statements and get out of the bumpy road ahead much quicker. The big six banks in Canada have all lowered their executive compensation to compensate for the recession.() Responsibility and Executive Pay Executive compensation is high for a reason. There are many responsibilities involved in being a successful CEO. A CEO is responsible for the direction of the company, the marketing strategy, who they will compete against, as well as being profit minded to name a few.() CEO’s take huge risks to make profits for the company especially in the start-up phase when making the deals with clients is essential. Most are very bright individuals who have dedicated huge amounts of time to the corporation and have steered the company in the right direction to earn its profits. This means that executives are not over compensated with stock options or cash bonuses. These men and woman have worked very hard to get to where they are and thus proving that these bonuses are incentive to continue to work hard and provide direction for the company and everyone in it. Most CEO’s also have many years of experience as well as schooling to be able to make these large decisions. They also have to deal with all the stress of making sure upper management is good at funnelling down the information and the directives of the corporation. All this responsibility is easily justified with large compensation with all the hard work and stress involved in making the company run correctly, at the same time still being able to find new business interests and satisfying shareholders. Shareholders and Executive Pay Shareholders are a large portion of a company’s capital. This should also give the shareholders a large say in a company’s future growth and the most important aspect the CEO compensation. This is because if the CEO is doing a good job he deserves his large pay for his ability to drive the company in the right direction. But when plans are not set in place correctly or profits are decreasing because of bad choices or just a downturn of the economy it should also be reflected in executive bonuses. CEO’s should recognize this and reduce their pay themselves and if not shareholder should be able to call a vote that is binding in order to satisfy all the investors needs. In the Netherlands shareholder votes are binding, whereas in Canada these shareholder votes are only advisory and do not need to be followed.() The shareholders play a huge role in company’s because if they did not contribute the capital, these company’s especially the FI’s would be effected because they need the capital to be able to make their own investments. Sure, they still have the other cash in the form of deposits but shareholders are putting cash in with the expectation of return because they have faith in the company and its ability to do business. Thus, shareholders should have the say required to lead a company in the right direction and when the CEO is not performing as expected he will have the fear of being voted out or taking a reduction in pay to meet others financial needs as well. Advantages and Disadvantages The advantages and disadvantages of executive compensation and if it should be high or low is all a matter of perspective although executives should recognize these issues need to be addressed in both circumstances. The advantages of high compensation are that the CEO will likely try harder to do their job. They are also the ones that lead the company and tell the upper management what they want for the company. They have to make huge decisions of a day to day basis in order to keep the company from making bad decisions and provide marketing strategies to its marketing teams. They have to set up new business ventures in order to keep employees as well as shareholders happy. This huge pay is justified with the amount of time and stress management that is required to hold a company together at the same time keep everyone else happy as well. There are a couple disadvantages of executive compensation being too high as well. Executives tend to have contracts for the duration of their tenure. This makes it difficult to lower pay. This is noticed in such cases as AIG. The executives still took huge bonuses even after the company had claimed bankruptcy. Shareholder are the ones that suffer when in situations like this because confidence is effected and share price falls because everyone pulls out their money, and shareholders rarely exercise their right to vote on such matters as well; Not to mention only having an advisory voting right leads to nothing happening when issues are brought to the table anyway. The advantages of the compensation is a great motivator to the CEO to get the job done, but the disadvantages of the over inflated compensation is that shareholder carry the burden when the company is not doing so well and their contracts must still be paid. Not to mention the shareholders only get an advisory vote that provides advice, no binding agreement. Recommendations We recommend that executive pay be based more on performance than actual position. These executives have to deal with a great deal and should be compensated for their efforts, but there is a point where the compensation just becomes greed. But shareholders should also play a larger role when voting for where the money is being spent. This is the case when whole corporations are falling apart and high level executives are not willing to reduce their bonuses. Considering the word bonus means something that is given in addition to what is expected or usual. It should also be given if performance is better than expected since a bonus is not necessarily mandatory. When put into perspective of the current state of the economy especially in the FI’s where they are paying huge bonuses to executives, but are producing little to no profits is not really looking out for the corporation and its shareholders. We believe that shareholders should also have more say when it comes to the pay that executives receive as well as the directives of the company since shareholder put much of their own wealth into the company with confidence that they will produce profitable results with the capital that is provided. We also think shareholders advisory vote should become a binding vote. This would further deter executive taking unfair incentives. If compensation was based more on performance and shareholder say, there would be less arguments between executives and all its stakeholders of the corporation. Conclusions The major arguments in these issues are that executive compensation is too high. We believe that it is still relative to the economy and the kind of results a CEO can produce within the company. Athletes in the NHL or NBA get paid large salaries and they don’t even have to go to the same lengths as a CEO so why can’t an executive get paid large salaries and bonuses to look after a corporation. There is a lot of responsibility that goes along with being an executive for a company and involves a lot of patience and hard work. At the same time, some CEO’s are compensating themselves so heavily that it is causing problems with the operation of the organization. But most companies are noticing this now and following its competitors so they do not anger shareholders considering declining profits. CEO’s are starting to realize that compensation is too high in the current state of the economy and is being reduced accordingly. This is justified because profits are falling so rapidly those executives could not possibly continue to pay themselves as much or it would not only cause losses in profits but many others confidence as well. Works Cited Frydman, Carola, and Raven E. Saks. "Historical Trends in Executive Compensation." 16 Sep. 2006. Economic History Association. 19 Mar. 2009 http://2006.ehameeting.com/schedule/pdfs/session_2c_frydman_and_saks.pdf. "Good Governance Guidelines for Principled Executive Compensation." CCGG. June 2006. 20 Mar. 2009 http://www.ccgg.ca/media/files/guidelines-and-policies/guidelines/CCGG%20Principled%20Executive%20Compensation%20%28FINAL%20Version%20-%20June%202006%29.pdf. http://crooksandliars.com/susie-madrak/aig-will-still-pay-out-millions-bonus http://www.ccgg.ca/media/files/guidelines-and-policies/guidelines/CCGG%20Principled%20Executive%20Compensation%20%28FINAL%20Version%20-%20June%202006%29.pdf http://www.tsn.ca/nhl/story/'id=240324 http://www.steverrobbins.com/articles/ceojob.htm http://www.nationalpost.com/opinion/columnists/story.html'id=54cbcfdf-9576-450f-9511-405330157fad&k=16049 CCGG http://www.ccgg.ca/media/files/guidelines-and-policies/guidelines/CCGG%20Principled%20Executive%20Compensation%20%28FINAL%20Version%20%2D%20June%202006%29.pdf compensation. 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