The Compensation, Benefits, and Pension for Bank CEOs in Canada - Research Paper Example

Pay trends for CEOs al Affiliation Pay tends for CEOs Introduction Organisations are duty bound to fulfill the aspirations demanded by shareholders through increasing the efficiency of production and profitability. The chief executive officers have high managerial powers to steer the organisation to success and as such, the compensation, benefits, and pension for the CEOs continue to decline due to the pressure from shareholders calling for the reduction of total pay for chief executive officers. The rationale for this new trend premises on the assumption that chief executive officers should not earn more than the average working citizens as both of them take part in the production process. Since the early 1990s, most banks in Canada adopted austerity measures as a way of reducing the ballooning wage bill, which cuts down the annual dividends for shareholders. In the words of Gregory-Smith, Thompson and Wright (2014), organisations such as banks prefer to hire consultancy services from reputable firms to enable them plan for the unprecedented pressure on benefits plan, employee compensation, and pension. Thus, the contemporary trend for CEO compensation is premised on the stakeholder theory, which assumes that the chief executive officer of an organisation must respond to all stakeholders of the organisation who include shareholders, customers, owners, society, and employees. In addition, the current trend for bank CEO compensation encompasses the improvement of the bank’s financial position, improved labor relations, and high levels of customer satisfaction. This research paper will make use of the compensation, benefits, and pension for bank CEOs in Canada (Mangen & Magnan, 2012). Research Process The research process will utilise secondary sources of data by making use of the recent peer-reviewed articles. The articles will form the basis of the argument, as they will give a scholarly viewpoint on the changing trends in compensation, benefits, and pension for the chief executive officers. As such, the study will seek to add knowledge to the existing literature concerning the compensation packages for high-ranking organisational employees. In addition, the analysis of literature from the latest peer-reviewed articles will provide a much-needed framework for appraisal of the reasons why CEOs earn more than what the average employees take home as salaries. Therefore, the study will make use of five peer-reviewed articles as a means of drawing a scholarly attention to the topic. The articles will make it possible for the researcher to draw relevant literature, review it and thus be able to make valid conclusions based on the appraised literature. Research Findings Organisations respond to the changes in the economy by altering the packages paid to the workforce regarding salaries, compensation, benefits, and pension. The high-ranking officials of an organisation receive bigger salaries as compared to junior officers and, therefore, the need for shareholders to put more pressure on the chief executive officers to cut their salaries and lower the executive pay. For instance, the bank chief executive officers in Canada earn less salary when juxtaposed to their predecessors (Gregory-Smith, Thompson & Wright, 2014). In essence, the pay for CEOs continues to take a new twist because shareholders of organisations such as banks, schools, hospitals, and general manufacturing industries are against higher pay for the heads of such organisations because they draw higher salaries as compared to what the owners of the said organisations receive. For example, research conducted by McDowall Associates showed that the salaries for CEOs for Toronto-Dominion Bank and Canadian Imperial Bank decreased by 33% juxtaposed with the salaries earned by outgoing chief executive officers. Further to the above, the total direct compensation of bank chief executive officers continues to decrease. The total direct compensation encompasses stock options and grants of share units. For instance, the chief executive officer for Scotiabank received a total direct compensation of $8 million in 2014 as compared to $10.7 million earned by his predecessor in 2013. However, experts project that the decreased pay is not permanent as it could rise again given that the chief executive officers will be ready to spend more time at their places of work and improve the banks’ performance. Moreover, the pay for the bank chief executive is subject to decrease in the long-term because of the current pay practices, which provides for the reduction of pay earned in stock options. As such, a difference exists in pay between a newly hired chief executive officer and the one on long tenure ((Mangen & Magnan, 2012). Similarly, the compensation for bank CEOs is arguably the best when compared to firms in other sectors. However, the decline in benefits and pension is increasingly evident. For instance, the chief executive officer of Toronto-Dominion Bank received a departing pension of $2.5 million in a year and on the other hand, his successor will receive $1.35 million as a maximum pension. Therefore, the trends in payment for chief executive officers for banks continue to decrease, and experts warn that with the increased world financial meltdown, the maximum possible compensation will continue to decline (Callan & Thomas, 2014). In light of the above, the changing trends for the compensation of chief executive officers is majorly attributed to reform pension plans, whereby there is a need to fill the gap in terms of the benefits paid to employees and CEOs. Moreover, shareholders and stakeholders continue to put pressure on the banks to uphold ideals of good governance by creating frameworks that allow for equal pay and opportunities as the CEOs do not produce the results on their own. Fundamentally, the salaries and remuneration earned by chief executive officers continues to draw public outcry, as most people would only dream of receiving such benefits. One of the reasons that have led to the decreased compensation and benefits for chief executive officers is the need to increase the pay for average citizens. Against this backdrop, most organisations are lobbying for the decreased executive pay because the compensation for high-ranking positions has gone too high while the pay for average working citizens remains the same(Gregory-Smith, Thompson & Wright, 2014). The argument is that most organisations put so much emphasis on the wellbeing of the managers, departmental heads, and supervisors at the expense of the workers who are involved in the day-to-day production activities. The postulation is that, the trend has changed from the 1990s, whereby senior managed received huge salaries while the workers at the bottom of the hierarchy took home meager salaries (Palomino & Peyrache, 2013). The management of today’s organisations requires that the said organisations must have a functional board of directors that determines the terms of services for the chief executive officers. As such, the board must listen to the opinions of the shareholders who continue to exert a lot of pressure for the reduction of CEOs benefits and compensation. For instance, in the recent years the top five banks in Canada significantly reduced the compensation packages (benefits and pension) granted to the chief executive officers (Pandher & Currie, 2013). Moreover, the previous trend provided for social persuasion and formal frameworks tactics that made it possible for the CEOs to increase their benefits and the overall compensation. Today’s trend of compensation provides that a chief executive officer’s pay be pegged on an organisation’s ability to generate enough income. In addition, a manager’s compensation and benefits package will depend on the level of interactions between alliance partners, employees, and suppliers. In essence, the current trends postulate that the chief executive officer only enjoys a higher managerial rank and as such, he or she should not enjoy a higher pay compared to the rest of the workforce. Therefore, it means that the compensation package paid to the CEO depends on the performance of the company that the said chief executive officer heads. For instance, a manager with low powers heading a huge company may receive a higher pay compared to a manager with high powers but heading a company with low resource advantage. With the introduction of the public corporation, the pay earned by chief executive officers has instigated much argument among the academics and public alike (Callan & Thomas, 2014). Since the chief executive officer (CEO) of an organisation is highest paid employee, the focus has inclined to focus on CEO compensation, benefits and pension. The debate on CEO benefits and pension largely takes one of two forms. One form is the agency conflict, which allows the chief executive officers to increase their compensation compared to increasing shareholder value. Therefore, the long term trends provides that companies must introduce incentives to the CEOs as a means of aligning the company interests to those of the organisation. For instance, from the 1990s the banking sector continues to witness an essential trend, whereby the board of directors and the overall management of banks have introduced critical ownership interests to the compensation packages for CEOs. However, the debate on the efficiency of compensation contracts in lowering agency bottlenecks continues (Mangen & Magnan, 2012). The debate concerning the compensation of the banks’ chief executive continues to unfold, as it is argued that the compensation packages for the CEOs remains the cause of disagreement for scholars because there is inadequate empirical evidence to document that the execution of agency recommendations in chief executive officer benefits plans and corporate authority has led to enhanced company profitability. In addition, the increased pay for chief executive officers is attributed majorly to the latter is executive pay-setting framework and the influence and control of the management and the board of directors (Palomino & Peyrache, 2013). Similarly, the compensation for the chief executive officer should be line with the provisions of the social aspects of corporate governance, which performs an essential role on the composition and size of CEO compensation, benefits, and profits. Therefore, organisations are taking new dimensions by moving away from paying managers more than what they can contribute to the organisation. However, chief executive officers and managers make use of social influence and structural sources of corporate power to influence the organisations interests as well as their interests positively. In the previous years, banks used to decide how much to pay their chief executive officers annually and then split the projected compensation package evenly between grants of share units and grants of stock options. However, in the year 2014, share units represented 80% of the new equity grants, while the stock options only represented a 20% of the sum equity grants (Callan & Thomas, 2014). Following the financial meltdown of 2008, banks faced pressure from shareholders to lower their stock options, as the shareholders believed that high stock options made it easy for the CEOs to increase the banks’ share price, thus earn huge salaries from quickly exercising options. As such, banks should make use of share units as they are less risky compared to the stock options (Callan & Thomas, 2014). Therefore, banks are changing the trend by making use of share units as they have the capacity to track the bank’s shares, besides being less risk due to their provisions to be for the long term, thus making it possible for long-term growth (Palomino & Peyrache, 2013). Conclusion It is imperative to note that the debate on the CEO pay and general compensation continues to unfold, as most scholars believe that organisational success circumvents all the stakeholders and not only managers and chief executive officers. Ideally, financial experts argue that the impact of stock options for the last few decades affects wealth accumulation, and this continues to affect the total value equity received by chief executive officers (Gregory-Smith, Thompson & Wright, 2014). As such, it is important for firms to carry out work evaluation and performance as a means of determining the compensation package for employees. In essence, the long-term pay trends provide that the compensation for CEOs will depend on an organisation’s ability to overcome risks and grow. References Callan, S. J., & Thomas, J. M. (2014). Relating CEO Compensation to Social Performance and Financial Performance: Does the Measure of Compensation Matter?. Corporate Social Responsibility & Environmental Management, 21(4), 202-227. doi:10.1002/csr.1307 Gregory-Smith, I., Thompson, S., & Wright, P. W. (2014). CEO Pay and Voting Dissent Before and After the Crisis. Economic Journal, 124(574), F22-F39. doi:10.1111/ecoj.12108 Mangen, C., & Magnan, M. (2012). "Say on Pay": A Wolf in Sheeps Clothing?. Academy Of Management Perspectives, 26(2), 86-104. Palomino, F., & Peyrache, E. (2013). Internal vs external CEO choice and the structure of compensation contracts. Journal Of Financial & Quantitative Analysis, 48(4), 1301- 1331. doi:10.1017/S0022109013000434 Pandher, G., & Currie, R. (2013). CEO compensation: A resource advantage and stakeholder- bargaining perspective. Strategic Management Journal, 34(1), 22-41. doi:10.1002/smj.1995 Read More