Investigating Excessive Executive Compensation in Organizations - Research Proposal Example

Investigating Excessive Executive Compensation in Organizations: A Case of L-3 Communications (LLL) Student Name: Student ID: Tutor: Date: Table of Contents 1.0 Introduction 3 1.1 Research Objectives 4 1.2 Research Questions 5 1.3 Rationale 6 1.4 Limitations of the Study 7 2.0 Literature Review 7 3.0 Research Methods 12 3.1 Research Design 12 3.2 Data Collection Methods 12 3.3 Sample 13 4.0 Ethical Consideration 13 5.0 Action Plan and Resources 13 References 16 Appendices 18 1.0 Introduction Excessive pay for executives in organizations can be described as paying the top executives of companies rates of remuneration that are excessively higher than what they should get as actual pay for their work as company executives. Whelton (2008, p.15) defines excessive compensation as pay that is 20% or more than the national average of a CEO. Research shows that the top executives of a company are recommended for a salary of at least 20 times higher than the average worker. This was a finding for Peter Drucker who was a management theorist in the 1970’s. Drucker recommended that 20 times higher than the average worker salary pay was an appropriate compensation that hit the upside ceiling for the top executives in organizations. This is a different case of what happens in many of the organizations today. The management of firms are today awarding the top executives more than 200 times a higher salary pay that of an average worker (Miller 2012, p.1). Excessive executive compensation is a major management problem in companies that need to be addressed. In fact, reforms are needed in relation executive compensation in organizations. This research proposal aims at discussing the problem of excessive executive pay as a management issue in organizations with special reference to L-3 Communications (LLL). The L-3 Communications (LLL) The L-3 Communications Company deals with the contracting of aerospace systems as well as national security solutions. The company leads in providing a wide range of communication as well as electronic products and systems that are used by the military and also in commercial platforms (L-3 Communications 2015, p.1). Its headquarters are located in New York. It has four business segments including aerospace systems, electronic systems, communications systems and national security solutions. The company is headed by Michael T. Strianese who is the chief executive officer. The Problem of Excessive Executive Compensation in L-3 Communications Excessive executive compensation in L-3 Communications is a management issue that needs to be addressed. The CEO is not paid based on performance but on discretionary basis. This is opposed to the payment of every worker in an organization to be paid on the basis of achievement of performance targets that have been established before. In the year 2012, the pension of the company CEO in L-3 Communications was increased to more than & $2.7 million. This is twice the base salary of what a CEO in the company should get. It also exceeds the combined based salaries of the other executive officers in the company (Bhasin & Hicken 2012, p.8). When terminated due to a change in control, the CEO at L-3 Communications is also entitled to $ 24 million as compensation. In the year 2014, the CEO got a remuneration of $ 29.07 million (L-3 Communications Holdings 2015, p.1). This is far too high of what the CEO should be getting as their annual pay. 1.1 Research Objectives Main Objective The main objective of the study is to investigate excessive executive remuneration in organizations. In order to meet this aim, the following specific objectives were formulated; Specific Objectives i. To find out the reasons behind excessive executive compensation in organizations ii. To evaluate the effects of excessive executive compensation on employee motivation iii. To find out the effects of excessive executive remuneration on the performance of the organization 1.2 Research Questions i. What are the reasons behind the excessive executive compensation in organizations? ii. To what extend does excessive executive compensation affect employee motivation? iii. How does excessive executive compensation affect the performance of the organization? 1.3 Rationale The reason for choosing the topic of excessive executive remuneration in organizations is because the management in many organizations is seen giving very high remuneration rates for the top executives of the company without the right considerations for that high pay. Whelton (2008, p.15) states that today companies are recruiting and retaining CEOs through pay packages that are extravagant. While others argue that high remuneration rates for the top executives in a company enable to hire the one with the best qualifications and experience, this is not true. Many of the top executives in organizations are not hired based on merit but through recommendations and many years of work. However, this does not guarantee that the selected person for the top position will deliver to the expectations of the company. Others have argued that excessively high remuneration rates to the top executives will improve their morale (Sullivan 2013, p.1). However, the work itself should be the defining source of motivation for any employee of a company. Therefore, companies are on wrong notion of giving their top executive excessive rates of compensation than they should be receiving. It is area of concern because firm’s resources are drained for no good reason. It is also a way of favoring the top executives while leaving others dissatisfied (Miller 2012, p.1). A part from the reasons and effects of excessive executive remuneration in organizations, this is a topic worthy being researched since it addresses a major contemporary management issue in organizations. It is a topic that is of importance to many and its study will contribute to the existing body of knowledge of the area. 1.4 Limitations of the Study During the study, the researcher will encounter various limitations. Time is a significant time when doing this research which should be presented within a short time. To overcome this limitation the researcher will allocate time for all the activities and where necessary ask for assistance from a research assistant. Access of information from participants may be a limitation where some of them may not be willing to participate in the interviews. The researcher will ask for consent from the participants and ensure them confidentiality of the information they will share. The conclusions made for this study may not be generalized because they are specifically for the selected organization. 2.0 Literature Review Different researchers have studied the topic of excessive executive compensation and came up with different conclusions. There are also different theories behind compensation. The literature review will discuss literature of what other researcher found out about the topic and the various theories of compensation. Theories of Compensation Equity Theory This theory suggests that employees usually perceive their compensation to be equal to their contribution in the organization. The theory also asserts that employee perceive their return contribution ration to compare to other employees in and outside the organization (Gerhart & Olsen 1995, p.5). This is how employees determine the employment relationship to be fair. When inequity in compensation occurs, employees are prompted to take actions for restoring equity and this may be detrimental to the organization. Greenberg (1990) carried out a study to examine the influence of organization communication on pay cuts to its employees as well as its effects on rates of theft and perceived equity to employees. The study revealed that there were increases of theft from employees as a result of the pay cut communication. Those who receive the pay cut were found to increase theft. These findings confirm that inequality in compensation among employees have a negative effect of their attitudes and behaviors. The perceived equity by employees affects their effort too. Reinforcement Theory This theory states that responses that are followed by rewards have a high possibility of recurring in future. This is what management of compensation implies whereby, high employee performance that is followed by rewards in monetary form has a likeliness of improving the performance of the employee in the future and the vice versa is true. The reinforcement theory is one that emphasizes on the importance of providing reward to employees or people after their work. The experience of rewards changes the performance of employees. Expectancy Theory This theory also focuses on the link between rewards and behaviors just like the reinforcement theory. The expected rewards determined the effort and performance of an employee in the organization. The expectancy theory says that the motivation of people comes from intrinsic as well as extrinsic outcomes they anticipate. Therefore, employees will be motivated when there is a possibility and contingency of the outcome expected. Agency Theory This theory is concerned with aligning the interests of company stakeholders with the employee compensation. Company stakeholders are found to align their interests and goals with the compensation of employees so as to gain the expected outcomes in their organizations. This theory most applies in managerial positions compensations whereby companies are taking risk of paying high rates of compensation for managers and emphasize less on incentives. Costs minimization is the basis for the agency theory. The compensation strategy for workers must aim at minimizing the agency costs to the minimum. Reasons for Excessive Executive Compensation Sullivan (2013, p.1) says that the management of businesses tend to use excessive high remunerations for top executive positions so as to attract the best talent for the top position in the company. However, this argument seems to be flawed because little evidence for massive provision of financial incentives for top executives in an organization is available. Decisions to pay executives high compensation rates are made based on risk taking by the management of an organization. Jurow, Romana, Deasy, Haddick, Napierala, & Cale (2012, p.1) described that the management in many organizations make remuneration decisions based on systems outsized risk taking. The management decision is made on the assumption that company shareholders must take the risk of highly paying executive officers as a form of motivation. Elaurant (2008, p.35) adds that the reason as to why the management of organizations make excessive executive compensation is their search for economic efficiency. In such an argument, the high compensation for the executives is usually justified by them being given an incentive that serves as their motivation to high performance. As they try to earn these incentives, CEOs will achieve improvements in productivity for the organization. However, this argument has very little weight when we consider economic efficiency. A company cannot be economic efficient when its money is being drained through payment of excessive salaries to top executives in the company. Effect on Employee motivation A study carried out by Cowherd & Levine (1992) revealed that the different pay between the top management and the lower level employees have impact on their productivity. The researchers stated that employees usually compare their pay to that of higher people in the organization. When they feel treated unequally in terms of compensation their effort is reduced. Their quality of work, service to customers declines due to demonization. The employee citizenship behaviors are not exercised when pay differentials is very large when compared to that of top managerial employees. Therefore, the management in organizations out to be very careful not to forget the possibility of adverse motivational consequences that may occur to lower level employees as a result of giving to executives excessive compensation. Miller (2012, p.2) stated that the increasing disparities between the executive compensation as well as the average worker compensation has a consequence of lower morale. The employees usually feel a disconnection from the CEO and don’t have a willingness of sharing with the management any important information that can improve the performance of the organization. Additionally, these disparities also have an impact on the top executives too who may end up becoming disconnected and cannot understand what the lower employees goes through or even what customers may experience from employees who lack motivation from unfair pay. Effects on the Performance of the Organization High pay to executives in an organization is harmful to the productivity and financial performance of the organization. Financial incentives are sometimes unnecessary and are also they can be counterproductive. They fill the entire thinking space of the top executives and prevent them from focusing on ideas that may move the performance of the organization forward (Sullivan 2013, p.3). Additionally, excessive pay for top executives is bad for business since it imposes costs that are spiraling on the business. Pay structures that are perverse tend to promote the making of wrong decisions that may lead to reducing the performance of the organization. Hargreaves (2013) says that when used as the only form of incentive in managing people, money can be bad to the management. Ineffective management is a major cause of failure and poor performance of organizations. 3.0 Research Methods 3.1 Research Design The research will use qualitative research design. This will be important for the purpose of collecting and analyzing both primary and secondary data. According to Harwell (2010, p.148), qualitative research helps in discovering as well as understanding the thoughts, perspectives and experiences of the participants. It will be important for this study to explore the meaning, purpose and reality of the research. 3.2 Data Collection Methods Primary data will be collected using unstructured interviews. Interviews are the most suitable data collected method for this research for the purpose of getting a more in depth view of the problem. The views and opinions of the respondents will provide the required answers by the researcher. This will be important to help in generalizing the views and opinions from the selected sample (Creswell 2003, p.14). 3.3 Sample The researcher will interview employees and managers from the selected organizations. Three managers and five employees will be interviewed from the organization. The researcher will book for an appointment with the respondents in the organization to carry out the interviews at selected dates. Managers and employees in the organization have been selected as the suitable sample for this research to ensure the responses from the participants are not biased. A variety of opinions from managers and employees will provide reliable information for the research. 4.0 Ethical Consideration The researcher may experience various ethical issues when collecting data. The researcher will first seek consent from the participants by requesting them to sign a consent form. The respondents may not be willing to answer some sensitive information due to confidentiality and that it may be personal. The researcher will assure them that the information will only be used for that study and not for other purposes. Participants will also be assured that their names will not be disclosed in the provided information. 5.0 Action Plan and Resources Action Plan Schedule for Completion of the Project (Gantt chart) ACTIONS WEEK 1 WEEK 2 WEEK 3 WEEK 4 WEEK 5 WEEK 6 WEEK 7 Write Proposal Write Introduction Methodology Data Collection Data Analysis Findings, Presentation, interpretation and conclusions Final Submission Resources: Budget Requirements Budget or resources (where applicable) Ms-Excel Software Transport $300 Research Assistant $1,000 Materials (computer and tablet) $1,000 Communication $200 Total $2,500 References Bhasin, K., & Hicken, M, 2012, 10 Companies with Huge Management Red Flags, Business Insider. Available at: < http://www.businessinsider.com/10-companies-with-huge-management-red-flags-2012-2?op=1> Cowherd, D., & Levine, D, 1992, Product quality and pay equity between lower-level employees and top management: An investigation of distributive justice theory. Administrative Science Quarterly, Vol.37, pp.302-320. Creswell, J, 2003, Research Design: Qualitative, Quantitative and Mixed Methods Approaches, 2nd Edition, Sage Publications. Elaurant, S, 2008, Corporate Executive Salaries – The Argument from Economic Efficiency, Electronic Journal of Business Ethics and Organization Studies, Vol. 13, Iss.2, pp.35-42. Gerhart, B., Minkoff, H., & Olsen, R, 1995, Employee compensation: Theory, practice, and evidence, CAHRS Working Paper #95-04. Ithaca, NY: Cornell University, School of Industrial and Labor Relations, Center for Advanced Human Resource Studies Greenberg, J, 1990, Employee theft as a reaction to underpayment of inequity: The hidden cost of pay cuts, Journal of Applied Psychology, Vol.75, pp.561-568. Hargreaves, D, 2013, When money is used as the only incentive to manage people, it is not good management, An independent think Tank, High Pay Center. Harwell, M, 2010, Chapter 10: Research Design in Qualitative/Quantitative/ Mixed Methods, Section III:  Opportunities and Challenges in Designing and Conducting Inquiry. University of Minessota, Sage Publications. Available from: Jurow, D., Romana, S., Deasy, J., Haddick, W., Napierala, N., & Cale, T, 2012, Executive Compensation: How does pay influence decisions and governance?, Columbia Business School. Available from: < http://www8.gsb.columbia.edu/leadership/sites/leadership/files/bernstein-exec-comp-whitepaper.pdf > L-3 Communications Holdings, 2015, Total Executive Compensation, Morning Star, Available from: < http://insiders.morningstar.com/trading/executive-compensation.action?t=> L-3 Communications, 2015, Company Profile, About L-3. Available from: < http://www.l-3com.com/about-l-3/company-profile.html> Miller, S, 2012, Executive Pay: How Much Is Too Much? Strategic Human Resource Management. Available at: < http://www.shrm.org/hrdisciplines/compensation/articles/pages/executive-pay-how-much.aspx> Sullivan, R, 2013, Excessive executive pay ‘bad for business, Compensation. Available at: < http://www.theglobeandmail.com/report-on-business/careers/excessive-executive-pay-bad-for-business/article12029730/> Whelton, R, 2008, Effects of Excessive CEO Pay on U.S. Society, College of Business and Management. Appendices Appendix 1: Interview Questions 1. Excessive executive pay is one of the management problems in your organization. Why do you think this occurs in this organization? 2. How do you compare the executive compensation to that of average employees? 3. Has the management done anything to deal with the situation of excessive executive compensation? 4. How has high payment to executives in this organization affected other employees? 5. Are there differences that are notable on employee performance when they realize inequality in compensation when considering the excessive executive compensation? 6. How have employees reacted to the excessive executive compensation in your organization? 7. Has excessive executive compensation affected the performance of the organization? 8. What do you think can be done to deal with this management issue in the organization? Read More