Commissions of Productivity - Essay Example

The increase in executive compensation irrespective of the manner the organization has worked is an area of concern which needs to be addressed. Executive compensation have witnessed a spurge from 1990’s to 2007 despite poor performance of organization creating doubts whether compensation is linked to organizational performance. This is an area of investigation and linking different economic theories to the manner in which executive compensation is determined will help to understand the scenario better. This paper thereby looks at evaluating the manner in which executive compensation has increased by drawings finding from 3 articles and analyzing the same from the economic perspective. This will help to provide useful inputs and help to understand the manner in which steps need to be taken to safeguard from those. The manner in which executive compensation is determined should have its linkage with firm’s performance. It is true that the last few decades have witnessed a spurge and growth in the executive compensation in comparison to the manner in which organizational performance has grown. This is in addition to the other perks and benefits like rewards, stock options, benefits which the executive receives. The long run shows high evidence that executive compensation has resulted in the wealth of the managers to grow which is in turn tied to organizational performance and aligns with the shareholder’s interest. This clearly specifies that executive compensation should be linked to performance and should look at wellbeing of the shareholders by having agencies which look to protect the interest of the shareholders. The article titled “Performance Pay & Top Management Incentives” by Jensen & Murphy (1990) clearly highlights that wealth of CEO has increased over the years as the wealth of CEO’s increase $3.25 for every $1000 increase in the wealth of shareholders. A large part of the wealth and pay which executives receive thereby remains in the form of stockholdings, options and dismissals. This has thereby impacted the overall level of wealth that executives possess and the growth in the option and stockholdings outweigh the different perks and benefits. This is contrast to the fact that stockholdings and perks have increased continuously despite the performance creating doubts on the linkage between pay and performance. It clearly brings forward the fact that much of the CEO’s wealth works in revelation with regard to the stockholding and options in contrast to the actual pay. This is in contrast to the fact that the fractional equity holding remains low and is an area of monitoring to identify the manner in which different needs are met and ascertained. Another article titled “Are CEO’s rewarded for Luck? The Ones without Principles are” by Bertrand & Mullainathan (2001) states that CEO’s are paid so that the agency problem which shareholders faces will be reduced and decisions will be taken based on actual ground realities and not on luck. This states that CEO’s need to look at the better interest of the shareholders and their decisions should be guided by increasing the wealth of the shareholders. This confirms the fact that the compensation which the executives receive should be linked to performance and no other measure other than it should be used to determine the payments. This thereby raises doubt whether the executive compensation has helped to solve the problem of agency or has aggravated it as the last two decades have witnessed a continuous growth in executive compensation despite poor performance by organizations. Another article titled “Executive Compensation & Board Governance in US Firms” by Conyon (2014) states that executive compensation is linked to performance of the organization as the actual pay which the executive receives is based on performance. In addition to it the executives receives payments in other form like stockholdings and options which are determined by independent committees and the creating of laws in favour of executives has helped them to garner voting rights. These voting rights are used while determining the compensation package as few resolutions fail has resulted in executives being paid high irrespective of firm performance. This package are not an increase in the actual pay which the executives receives but are indirectly provided to the executives through the use of other medium and process like stockholding and options. This creates doubt on the manner in which performance and rewards are linked in case of executives and create doubts regarding the compensation which is provided to executives. The three article denotes that executive compensation have increased over years and irrespective of the performance more and more rewards and perks are being provided. This has given rise to a debate regarding the manner in which executive compensation is determined. The high level of pay which the executives receive is seen as people as a process where executives have been able to determine their own package and receive rent for managing the business. It is also seen by some as an efficient outcome of the labour market which has helped firm to work in an optimal manner and compete with the different managerial talent. The rent extraction view states that weak corporate governance and board allows executives to determine the compensation package based on their needs and requirements which is generally high and has no relation to the performance of the organization. Most of the rent observable pay which the executives receives are in the form of stock options, perquisites, pensions, and severance pay and less is paid through actual pay. The inefficient manner in which rent extraction has impacted the compensation package has further resulted in the creation of market inequilibrium as performance is not linked to pay. The rent theory further states that in case executives are replaced then further rent has to be paid to find out a suitable person which has thereby made organizations not look into the matter seriously and has thereby impacted the wealth of the shareholders. This is in addition to manner in which corporate governance is being achieved in organizations. A low degree of corporate governance has resulted in the creation of negative externality which has induced inefficient level of pay for executives which is extremely high. This has thereby made governance an aspect which has provided the impetus for high pay. The scarcity model of economic choice also substantiates that executives are paid high due to scarcity of executives. All organizations are searching for proper human resource which is capable of handling the different responsibilities and resources efficiently. The scarcity of executives to be able to deliver on the highest level has resulted in executives dominating and determining the compensation package according to their needs and requirements. This thereby has a little or no relation with the performance of organization as the different form of stock options, perquisites, pensions, and severance pay outweighs the actual pay which the executives receive. This is in relation to the fact that firm’s characteristics, technology and product market has increased the effect of executive’s effort on firm value and effort which has thereby resulted in an increase in the pay for executives. The manner in which growth and competition has intensified has increased the degree of pressure on executives to be able to compete with those. This has led towards an increase in the executive pay so that the executives can stay with the organization. This is irrespective of the performance and as the three articles highlight that executive compensation has increased is denoted. It is also seen that there is a change in the requirements of business as firm-specific skills are being demanded by firms. This has helped to increase the bargaining power of executives and has provided the platform through which they are able to bargain more and ensure that the compensation which they receive is high. The high influential power and the ability to transform and make changes in the manner business decisions are taken has helped them to create the urge and demand for executives which has thereby helped to ensure better compensation and pay in different forms. An important understanding from the three articles is also that executive compensation which is the actual pay has not increased as proportionately as an increase in other form of pay. This clearly highlights that different form and process has been found by executives to determine the amount they will receive and has a bearing on the manner in which organizational performance is evaluated. This has raised issues of moral hazards as executives instead of looking towards increasing the wealth of the shareholders become more focused on increasing their personal wealth. This has created agency problems and is an area which needs to be monitored and looked at so that policies which are aimed towards maximizing the wealth of the shareholders can be ensured. The different economic theory also brings forward the same and shows the manner in which organizational performance has no linkage to the pay which executives receives and needs to address different process and mechanism so that a linkage between the same can be ensured. References Bertrand, M.and Mullainathan, S. (2001). The Quarterly Journal of Economics 116 (3), 901-932 Conyon, M. (2014). Executive Compensation and Board Governance in US Firms. The Economic Journal, 124 (574), 60-89 Jensen, M. & Murphy, K (1990). Performance Pay & Top Management Incentive. Journal of Political Economy, 98 (2), 225-264 Read More