Is ceo compensation justified by performance essay

We are not irrational: By most accounts and my own reading of many of his published works and his memoir, MisbehavingThaler is also quite a nice guy — and rather un-arrogant. A refreshing contrast from most economists. But is he deserving of the Nobel?

Is ceo compensation justified by performance essay

High compensation given to top executives has widened the gap of income inequality between top executives and the average Americans, leading to ethical issue if the pay is better distributed more equally among management levels and agency problem in the firm.

The case of bailed out investment bank giving enormous bonuses to its executives in crisis triggered a strong ethical issue of executive compensation. We conclude such act is unethical given the circumstances and bailed out firms should have paid their debt to government before distributing bonuses to its executives.

We found that investment banks were operating at preconventional level of moral development and operating with productivism approach in doing business. Utilitarianism and universalism view of ethics also contradict the distribution of bonuses for firms receiving government assistance during the financial crisis.

Corporate scandals, which have occurred more often in the last two decades, emphasize the needs to have internal codes of conduct being followed through by Board of Directors and management to maintain the reputation in public eyes, ensure ethically accepted behavior and company integrity.

Aldama,Higgs, The issues of corporate scandals in financial firms such as Anderson and Merrill Lynch have brought up the importance of business ethics in managing corporation and doing daily activities in financial industry. While some failures are due to illegal practices, many are caused by ethical issue such as conflict of interest, irrational pay scheme and inexperienced directors.

We also highlight the use of taxpayer money in bailing- out troubled financial firms in that distributed enormous amount of compensation to its executives. In the first half of this paper we discuss the theoretical framework of governance, executive pay, and firm performance before going further with the cases of failing investment banks in and analyze the cases from ethical point of view.

Mass globalization occurring in the last two decades also caused deterritorialization and less government control over corporation, resulting in greater need for accountability.

The lack of external control over corporation needs to be balanced with internal control from the corporation itself. Stevens, Researches show there is positive impact of having formal code on individual ethical decisions and decrease of illegal activities within corporation.

In that sense, businesses have to earn profit within ethical boundaries. Arjoon, Company with good corporate governance is seen also as having a good CSR implementation and ethical behavior in its activities.

The benefits of tying executive compensation to sustainability | GreenBiz

Researches show that greater numbers of outside directors, women in board, and possession of company shares by directors impacts to more responsibility of company in social settings. One theory we need to understand regarding compensation structure in corporate governance is the agency theory.

In agency theory, shareholders of the company hire management to work and give return to the principal invested. Agency theory models employee, in this case management, as selfish, focus on themselves and are driven by cost-benefit analysis in their action.

Is ceo compensation justified by performance essay

This is what has happened in the last financial crisis, where failing firms are giving huge amount of bonuses to its executives.

The ethical issue worsens when companies receiving bailout using taxpayer money are distributing that money to its executives. To understand why and how such ethical issue arises, first we need to understand the basic formulation of compensation scheme given to top executives and the role of BOD in approving the compensation scheme.

Murphy, Monthly salary among top executives is usually moderate, annual bonus and stock options are usually taking large proportion of total pay. This scheme motivates executive to increase firm performance and take more risks that leads to higher annual bonus and increased option value.

Stock options that are not profitable yet out-of-the- money lead to excessive risk taking by executives, but profitable in-the-money options lead to risk aversion because of executives fear losing the option value.

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Carpenter, In large companies, executive pay levels are higher but pay-performance sensitivities are lower. US pay-performance is higher than other countries, driven mostly by stock options and stock ownership compensation to executives.

The explosion of stock option compensation in the last decade has impacted on higher levels of pay and pay-performance sensitivities. Pay scheme in the form of stocks comprised most of the total compensation plan, however many CEO often focus on accounting bonuses rather than shareholder values because of the lack of understanding how their actions affect shareholder value.

Murphy, In determining executive pay, compensation committee method involves external benchmarking, which is the most significant factor causing the divergence of pay scheme awarded to chief executives and average worker, also to the performance of the company they run. Researches show that senior executive pay schemes are different from one to another, despite top managers function as part of interdependent team.

Hambrick, Pay gap between CEO and the second highest person pay range from percent difference, but could be over percent at certain condition. From ethical view, CEO have fiduciary duty to its shareholder and maximize the value of the firm, by taking excessive pay outside the Minimum Effective Compensation MECthey may have breach the their duty and engage in unethical behavior.

Moriarty, Researches show that large gap between CEO and top executives pay is an indication of excessive CEO vanity and behaviorally divided top executives.

Hambrick, Making alignment using long-term pay scheme and firm-level rewards could alleviate this. However, board of directors at many times fail to monitor management effectively due to culture that prevents growth mindset and creates asymmetry of information between management and board members.

Jensen, This cronyism attitude is related to the BOD pay scheme because their high pay lowers the likelihood to take position against management. CEO who owns a larger part of the firm has interest that is aligned with owners and need less oversight.Taking Sides Issue Is CEO Compensation Justified by Performance YES: Ira t.

Kay from Don;t Mess with CEO Pay, Across the Board ( 06) Explain why you side with this viewpoint; reference 3outside resources that further support the viewpoi - Essay  · Executive Compensation as an Agency Problem appointed, developing a reputation for haggling with the CEO over compensation less sensitive to performance.

The important point is that the market for corporate control fails to impose tight constraints on executive Is Ceo Compensation Justified by Performance Essay whether or not CEOs According to Kevin J Murphy (professor of finance and business economics), CEO compensation is justified because CEOs increase stock prices which, in turn, increases shareholder  · Rouen’s research findings add a layer of understanding to previous studies on the effects of pay disparity on company performance, which produced mixed  · One option that is gathering support in Europe is mandatory shareholder votes on executive compensation packages.

This action does seem to be effective with The below position paper tries to summarize the debate on the topic ‘Is CEO Compensation Justified by Performance?’.

From a legal standpoint, the most discussed statute brought up was Dodd–Frank Wall Street Reform and Consumer Protection Act ()

If the CEO’s High Salary Isn't Justified to Employees, Firm Performance May Suffer