This document discusses executive compensation at financial institutions. It provides context on the structure of executive compensation packages generally and how they have changed over time. While compensation structures are similar across industries, the document argues executive compensation at financial institutions should better account for risks to stakeholders beyond shareholders, as excessive risk-taking contributed to the global financial crisis. The crisis has spotlighted compensation at financial firms and led to reductions, especially for CEOs, though broader reform is still needed.
Discusses Major Compensation Issues regarding Executive Compensation. Provides Justification for Unreasonable Executive Compensation and Outlines measures for Executive Accountability
Executive Compensation Checklist for New and Experienced Board Members (Credi...NAFCU Services Corporation
Looking for an Executive Compensation Checklist for your Credit Union? This presentation serves as a valuable tool for new and experienced board members in pinning down the latest information on new regulations and compensation philosophies associated with creating a successful executive compensation plan. For more info, visit: www.nafcu.org/bfb
Take this opportunity to learn about identifying and comparing to your competitors, building commitment and employee engagement and developing a total strategy that supports your organization’s mission and strategic plan.
Our webinar is structured to provide not only education but also useful strategies for addressing the many pressures on executive compensation, wages and salaries. Nonprofits are being scrutinized by the IRS, and executive compensation is a staple of all audits. Nonprofit managers and trustees must prepare for public, media, Form 990, IRS and State scrutiny. Wage and salary programs face a difficult economy as they struggle to attract and retain the best talent with scarce dollars.
This document discusses effective compensation management from GE's perspective. It outlines different types of compensation systems and notes strengths like flexibility but also weaknesses like inequities. It profiles former GE CEO Jack Welch and current CEO Jeffrey Immelt's compensation. It examines the board of director's role in aligning pay with performance and shareholder interests. It also profiles Whole Foods CEO John Mackey and his policy of limiting executive pay to 14 times the average employee. In conclusion, it questions whether CEOs deserve the high levels of pay they receive.
This document discusses trends in CEO compensation for nonprofit hospitals. It summarizes recent media reports that found CEO pay is linked more to factors like hospital size, technology use, and patient satisfaction rather than quality metrics. It then outlines a preliminary study that found a strong correlation between hospital and health system performance on balanced scorecards and CEO compensation. Higher performance was associated with an average 1.1-1.5% rise in direct pay. The document concludes that boards appropriately incentivized cost-cutting in 2012 and acted responsibly to ensure organizational survival during healthcare reform implementation. It provides best practices for compensation committees to establish a rebuttable presumption of reasonableness and protect against executive pay excess.
The document discusses executive compensation at United Bank Limited (UBL) in Pakistan. It provides details on the compensation packages of UBL's highest paid executives. The President and CEO receives an annual remuneration of approximately Rs. 246.5 million, including a monthly salary of Rs. 20 million. The document also reviews UBL's SWOT analysis and concludes that executive compensation is an important tool for organizations to attract, retain, and motivate top managers.
The document discusses CEO remuneration in India and internationally. It notes that average CEO salary in India is Rs. 3.3 million per year, while in the US it is $748,805. The highest paid CEOs in India make over Rs. 50 crore annually. CEO pay includes salary, bonuses, stock options, and other compensation. Boards of directors are responsible for setting CEO pay but there are debates around whether CEOs are overpaid and if high pay is linked to company and stock performance. Transparent reporting of CEO compensation is important for good corporate governance.
This document discusses executive compensation, including its meaning, features, and common components. Executive compensation packages typically include a base salary, allowances, incentives, and perquisites. Companies determine compensation based on external competition, internal equity, and pay for performance. Packages may include salary, bonuses, equity compensation, and benefits like healthcare. Public sector executive pay is often lower than comparable private sector roles.
Discusses Major Compensation Issues regarding Executive Compensation. Provides Justification for Unreasonable Executive Compensation and Outlines measures for Executive Accountability
Executive Compensation Checklist for New and Experienced Board Members (Credi...NAFCU Services Corporation
Looking for an Executive Compensation Checklist for your Credit Union? This presentation serves as a valuable tool for new and experienced board members in pinning down the latest information on new regulations and compensation philosophies associated with creating a successful executive compensation plan. For more info, visit: www.nafcu.org/bfb
Take this opportunity to learn about identifying and comparing to your competitors, building commitment and employee engagement and developing a total strategy that supports your organization’s mission and strategic plan.
Our webinar is structured to provide not only education but also useful strategies for addressing the many pressures on executive compensation, wages and salaries. Nonprofits are being scrutinized by the IRS, and executive compensation is a staple of all audits. Nonprofit managers and trustees must prepare for public, media, Form 990, IRS and State scrutiny. Wage and salary programs face a difficult economy as they struggle to attract and retain the best talent with scarce dollars.
This document discusses effective compensation management from GE's perspective. It outlines different types of compensation systems and notes strengths like flexibility but also weaknesses like inequities. It profiles former GE CEO Jack Welch and current CEO Jeffrey Immelt's compensation. It examines the board of director's role in aligning pay with performance and shareholder interests. It also profiles Whole Foods CEO John Mackey and his policy of limiting executive pay to 14 times the average employee. In conclusion, it questions whether CEOs deserve the high levels of pay they receive.
This document discusses trends in CEO compensation for nonprofit hospitals. It summarizes recent media reports that found CEO pay is linked more to factors like hospital size, technology use, and patient satisfaction rather than quality metrics. It then outlines a preliminary study that found a strong correlation between hospital and health system performance on balanced scorecards and CEO compensation. Higher performance was associated with an average 1.1-1.5% rise in direct pay. The document concludes that boards appropriately incentivized cost-cutting in 2012 and acted responsibly to ensure organizational survival during healthcare reform implementation. It provides best practices for compensation committees to establish a rebuttable presumption of reasonableness and protect against executive pay excess.
The document discusses executive compensation at United Bank Limited (UBL) in Pakistan. It provides details on the compensation packages of UBL's highest paid executives. The President and CEO receives an annual remuneration of approximately Rs. 246.5 million, including a monthly salary of Rs. 20 million. The document also reviews UBL's SWOT analysis and concludes that executive compensation is an important tool for organizations to attract, retain, and motivate top managers.
The document discusses CEO remuneration in India and internationally. It notes that average CEO salary in India is Rs. 3.3 million per year, while in the US it is $748,805. The highest paid CEOs in India make over Rs. 50 crore annually. CEO pay includes salary, bonuses, stock options, and other compensation. Boards of directors are responsible for setting CEO pay but there are debates around whether CEOs are overpaid and if high pay is linked to company and stock performance. Transparent reporting of CEO compensation is important for good corporate governance.
This document discusses executive compensation, including its meaning, features, and common components. Executive compensation packages typically include a base salary, allowances, incentives, and perquisites. Companies determine compensation based on external competition, internal equity, and pay for performance. Packages may include salary, bonuses, equity compensation, and benefits like healthcare. Public sector executive pay is often lower than comparable private sector roles.
This document summarizes an analysis of executive compensation through various ethical frameworks and a case study on AIG. It discusses how executive pay has increased over time compared to average workers. While compensation is meant to incentivize performance, studies show pay is often not linked to returns. The document analyzes stakeholder perspectives and applies utilitarianism, justice theories, and ethics of care. It examines the AIG bonus scandal where executives received large payouts despite losses, and the public outrage this caused. Recommendations include linking pay to long-term performance and increasing shareholder say on compensation.
The document discusses executive compensation, including its purposes and typical elements. It aims to attract, retain, and motivate executives. Compensation usually includes salary, bonuses, stock options, and benefits. Critics argue CEO pay has increased much more than average workers' pay, with CEOs now earning 263 times a typical worker versus only 8 times in the 1950s. Questions are raised around using peer benchmarks and whether the government should regulate compensation. Performance-based pay may better motivate executives if tied closely to firm performance.
The document discusses the controversy around CEO compensation. It notes that while CEOs make strategic decisions that impact company performance, very high compensation can create issues like lack of team performance and loyalty when there is a large gap compared to lower level employees. It suggests that CEO pay should be tied to company performance and layoffs, and that independent committees should set compensation to address these issues. Overall performance depends on both CEO leadership and external factors, so stock price alone can't determine a CEO's contribution. Uniform compensation across industries is impractical given varying company sizes and CEO roles.
Equity theory proposes that individuals judge the fairness of their outcomes and inputs relative to the outcomes and inputs of others. When individuals perceive inequity, they may feel distressed and be motivated to restore equity.
The case study examines issues with executive compensation at a large bank. Equity theory suggests executives likely compared their compensation to others inside and outside the company. However, the board failed to properly consider all relevant referents when setting pay. This likely led to perceptions of inequity.
Procedural justice principles also were not fully followed in determining compensation. To promote motivation and fairness, organizations should structure executive pay to link it to firm performance while avoiding a focus only on short-term gains. Government intervention in compensation risks
Executive compensation consists of four main elements: salary, bonus, long-term incentives, and perquisites. Salary makes up 40-60% of compensation but is not very significant on its own. Bonuses are based on company or individual performance. Long-term incentives include stock options that increase in value as share prices rise. Perquisites provide benefits like cars, club memberships, and other special privileges. Companies design compensation packages to attract, retain, and motivate top executive talent through salaries and various performance-based incentives.
This document discusses executive remuneration, which refers to the financial payments and benefits provided to high-level managers in exchange for their work. It notes that executive remuneration includes salary, bonuses, incentives, and perquisites. Some key components are discussed, including salary, profit-sharing bonuses, long-term stock incentives, and perks such as medical benefits and transportation. Examples are given of famous CEOs in India and their high annual salaries, such as the CEO of Tata Consultancy Services with a salary of Rs. 11.6 crore.
The document discusses trends in executive benefits, including trends in cash and incentive compensation, retirement plans, and equity programs. It provides examples of different types of non-qualified deferred compensation plans, cash bonus plans, long-term incentive plans, and retirement plans that employers can offer executives. The summaries highlight advantages and disadvantages for both employers and executives of these various executive benefit plan types.
Hrd 24-mathis-12e-ch13-sh-variable pay and executive compensationjamalikuka
This document discusses variable pay and executive compensation. It covers topics such as developing successful pay-for-performance plans, individual and group/team incentives, profit sharing plans, employee stock ownership plans, sales compensation plans, and executive compensation. Key factors in developing successful variable pay plans include ensuring the plan fits the organization, rewards the appropriate actions, and is administered properly.
1) The document discusses management compensation, comparing managerial compensation to executive compensation. It provides examples of compensation components like base pay, bonuses, stock options, and benefits.
2) It also discusses how firms can mitigate principal-agent problems in compensation, such as tying pay to long-term performance, cutting cash pay for distressed firms, and replacing top managers.
3) The Chevron example shows how compensation committees establish executive pay, with goals of setting incentive plans and producing compensation reports.
Executive compensation has received attention due to high visibility, perceived unfairness, and importance. A good corporate governance rating signals that the board prioritizes shareholders over the CEO. Executive pay packages can motivate strategic decisions that benefit shareholders or reinforce the wrong choices. Recent environmental changes like shareholder activism, Sarbanes-Oxley, and SEC disclosures are affecting CEO risk and compensation. Managing risk involves stock options, pay-for-performance, and golden parachute provisions. The risk environment should influence executive contract design.
This Data Spotlight provides data and statistics on the level and structure of CEO compensation in the United States. This data supplements in the issues introduced in the Quick Guides “CEO Compensation” and “Equity Ownership.”
The document discusses executive compensation at Pharmaxis Ltd and Sigma Pharmaceuticals Ltd. It outlines the components of executive remuneration at Pharmaxis, including base salary, superannuation, variable cash incentives, and equity remuneration. It also analyzes the relationship between executive remuneration and company performance for both companies. Regulatory disclosure requirements for executive compensation are also reviewed.
Executive Compensation Strategies Bearing Capital Partnersjamielist
This document discusses executive compensation strategies for negotiating tax-efficient rewards. It provides an overview and assumptions, then covers topics like negotiated vs contingent compensation, quick planning solutions, entitlements, equity plans like stock options and SARs, US employment considerations, negotiating benefits, exit strategies, dealing with severance, and more. The overall message is that executives have opportunities to structure compensation to maximize wealth in a tax-efficient manner through various negotiated arrangements.
The document discusses executive compensation practices at banks and financial institutions. It covers issues like pay freezes, incentive pay, performance metrics, restrictions on TARP recipients, calls for increased transparency and shareholder votes on compensation. It provides advice on selecting appropriate performance measures and ensuring compensation is tied to achieving goals.
Executive compensation consists of salary, bonus, long-term incentives, and perquisites. Salary makes up 40-60% of compensation but is subject to taxes, while bonuses and stock options are incentives. Perquisites include benefits like cars, clubs, and first-class travel. Compensation also includes retirement benefits, health insurance, and vacations. Unique features of executive pay include secrecy, varying amounts between executives, and tying pay to organizational performance. Companies use various strategies like cost-to-company packages, performance-linked payments, and flexible benefits to motivate and retain executives.
This document discusses different types of compensation and reward plans. It covers intrinsic and extrinsic rewards, financial and non-financial rewards, and performance-based and membership-based rewards. It also discusses incentive compensation plans including individual, group, and plant-wide incentives. Executive compensation programs and international compensation approaches are also summarized.
This document discusses CEO remuneration in India. It provides an overview of corporate governance and compensation components. It then lists the highest and lowest paid CEOs in India in 2013-2014. On average, CEOs in India earn 3.3 million rupees per year. The document discusses factors that influence CEO pay such as experience, location, and related job salaries. It also discusses issues around pay inequity, pay for performance, and efforts to reform compensation.
This document summarizes research on the relationship between executive compensation and firm performance. The key points are:
1. Executive compensation has increased dramatically over the last 3 decades, far outpacing worker pay growth. However, research studies have found little to no correlation between high executive pay and stronger firm performance.
2. While companies argue that incentive-based pay motivates executives, some studies show executive pay is often not closely tied to performance metrics and stock price movements.
3. Alternative views of "performance" beyond short-term profits, such as investment, innovation, and workforce development, are rarely considered in executive compensation.
4. To strengthen the link between pay and performance, companies increasingly use long-
A company offer a competitive compensation arrangement in order to attract, retain, and motivate a qualified CEO to manage the organization.
This Quick Guide examines the elements of executive compensation and the process by which the compensation committee establishes pay packages.
It examines the questions:
• What is the purpose of a compensation program?
• How do boards structure pay?
• What is the difference between expected, earned, and realized pay?
• How much do CEOs make?
• Are CEOs paid the “right” amount?
For an expanded discussion, see Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences (Second Edition) by David Larcker and Brian Tayan (2015): http://www.gsb.stanford.edu/faculty-research/books/corporate-governance-matters-closer-look-organizational-choices
Buy This Book: http://www.ftpress.com/store/corporate-governance-matters-a-closer-look-at-organizational-9780134031569
For permissions to use this material, please contact: E: corpgovernance@gsb.stanford.edu
Copyright 2015 by David F. Larcker and Brian Tayan. All rights reserved.
Executive Compensation: Exploring Models and Considerations in Corporate Remu...assignmentcafe1
Welcome to our comprehensive SlideShare presentation on executive compensation, where we delve into the intricate world of corporate remuneration models and considerations. Join us as we explore the various approaches, challenges, and ethical considerations surrounding executive compensation in today's corporate landscape.
In this enlightening presentation, we aim to provide a nuanced understanding of the complexities involved in determining executive compensation packages. We examine different models and frameworks, including performance-based pay, equity-based incentives, and bonus structures, and assess their effectiveness in aligning executive incentives with organizational goals.
Through a careful analysis of industry practices, regulatory frameworks, and shareholder perspectives, we explore the considerations that shape executive compensation decisions. We delve into the challenges of balancing competitive market forces, ensuring fairness and transparency, and addressing concerns related to income inequality and excessive executive pay.
Furthermore, we examine the impact of executive compensation on corporate governance, organizational culture, and long-term value creation. We discuss the influence of compensation structures on risk-taking behavior, strategic decision-making, and the attraction and retention of top talent within the company.
Our presentation goes beyond theoretical discussions by incorporating real-world examples and case studies. By exploring notable instances of successful and controversial executive compensation practices, we aim to provide practical insights and lessons for organizations navigating this complex landscape.
Through this exploration, we encourage reflection and dialogue on the ethical dimensions of executive compensation. We consider the perspectives of various stakeholders, including shareholders, employees, and society at large, and discuss the importance of designing compensation packages that align with broader social and organizational values.
Join us as we delve into the multifaceted world of executive compensation, analyzing different models, considerations, and ethical implications. Together, let us gain a deeper understanding of the intricacies surrounding corporate remuneration and explore ways to promote fairness, accountability, and long-term sustainable growth.
This document summarizes an analysis of executive compensation through various ethical frameworks and a case study on AIG. It discusses how executive pay has increased over time compared to average workers. While compensation is meant to incentivize performance, studies show pay is often not linked to returns. The document analyzes stakeholder perspectives and applies utilitarianism, justice theories, and ethics of care. It examines the AIG bonus scandal where executives received large payouts despite losses, and the public outrage this caused. Recommendations include linking pay to long-term performance and increasing shareholder say on compensation.
The document discusses executive compensation, including its purposes and typical elements. It aims to attract, retain, and motivate executives. Compensation usually includes salary, bonuses, stock options, and benefits. Critics argue CEO pay has increased much more than average workers' pay, with CEOs now earning 263 times a typical worker versus only 8 times in the 1950s. Questions are raised around using peer benchmarks and whether the government should regulate compensation. Performance-based pay may better motivate executives if tied closely to firm performance.
The document discusses the controversy around CEO compensation. It notes that while CEOs make strategic decisions that impact company performance, very high compensation can create issues like lack of team performance and loyalty when there is a large gap compared to lower level employees. It suggests that CEO pay should be tied to company performance and layoffs, and that independent committees should set compensation to address these issues. Overall performance depends on both CEO leadership and external factors, so stock price alone can't determine a CEO's contribution. Uniform compensation across industries is impractical given varying company sizes and CEO roles.
Equity theory proposes that individuals judge the fairness of their outcomes and inputs relative to the outcomes and inputs of others. When individuals perceive inequity, they may feel distressed and be motivated to restore equity.
The case study examines issues with executive compensation at a large bank. Equity theory suggests executives likely compared their compensation to others inside and outside the company. However, the board failed to properly consider all relevant referents when setting pay. This likely led to perceptions of inequity.
Procedural justice principles also were not fully followed in determining compensation. To promote motivation and fairness, organizations should structure executive pay to link it to firm performance while avoiding a focus only on short-term gains. Government intervention in compensation risks
Executive compensation consists of four main elements: salary, bonus, long-term incentives, and perquisites. Salary makes up 40-60% of compensation but is not very significant on its own. Bonuses are based on company or individual performance. Long-term incentives include stock options that increase in value as share prices rise. Perquisites provide benefits like cars, club memberships, and other special privileges. Companies design compensation packages to attract, retain, and motivate top executive talent through salaries and various performance-based incentives.
This document discusses executive remuneration, which refers to the financial payments and benefits provided to high-level managers in exchange for their work. It notes that executive remuneration includes salary, bonuses, incentives, and perquisites. Some key components are discussed, including salary, profit-sharing bonuses, long-term stock incentives, and perks such as medical benefits and transportation. Examples are given of famous CEOs in India and their high annual salaries, such as the CEO of Tata Consultancy Services with a salary of Rs. 11.6 crore.
The document discusses trends in executive benefits, including trends in cash and incentive compensation, retirement plans, and equity programs. It provides examples of different types of non-qualified deferred compensation plans, cash bonus plans, long-term incentive plans, and retirement plans that employers can offer executives. The summaries highlight advantages and disadvantages for both employers and executives of these various executive benefit plan types.
Hrd 24-mathis-12e-ch13-sh-variable pay and executive compensationjamalikuka
This document discusses variable pay and executive compensation. It covers topics such as developing successful pay-for-performance plans, individual and group/team incentives, profit sharing plans, employee stock ownership plans, sales compensation plans, and executive compensation. Key factors in developing successful variable pay plans include ensuring the plan fits the organization, rewards the appropriate actions, and is administered properly.
1) The document discusses management compensation, comparing managerial compensation to executive compensation. It provides examples of compensation components like base pay, bonuses, stock options, and benefits.
2) It also discusses how firms can mitigate principal-agent problems in compensation, such as tying pay to long-term performance, cutting cash pay for distressed firms, and replacing top managers.
3) The Chevron example shows how compensation committees establish executive pay, with goals of setting incentive plans and producing compensation reports.
Executive compensation has received attention due to high visibility, perceived unfairness, and importance. A good corporate governance rating signals that the board prioritizes shareholders over the CEO. Executive pay packages can motivate strategic decisions that benefit shareholders or reinforce the wrong choices. Recent environmental changes like shareholder activism, Sarbanes-Oxley, and SEC disclosures are affecting CEO risk and compensation. Managing risk involves stock options, pay-for-performance, and golden parachute provisions. The risk environment should influence executive contract design.
This Data Spotlight provides data and statistics on the level and structure of CEO compensation in the United States. This data supplements in the issues introduced in the Quick Guides “CEO Compensation” and “Equity Ownership.”
The document discusses executive compensation at Pharmaxis Ltd and Sigma Pharmaceuticals Ltd. It outlines the components of executive remuneration at Pharmaxis, including base salary, superannuation, variable cash incentives, and equity remuneration. It also analyzes the relationship between executive remuneration and company performance for both companies. Regulatory disclosure requirements for executive compensation are also reviewed.
Executive Compensation Strategies Bearing Capital Partnersjamielist
This document discusses executive compensation strategies for negotiating tax-efficient rewards. It provides an overview and assumptions, then covers topics like negotiated vs contingent compensation, quick planning solutions, entitlements, equity plans like stock options and SARs, US employment considerations, negotiating benefits, exit strategies, dealing with severance, and more. The overall message is that executives have opportunities to structure compensation to maximize wealth in a tax-efficient manner through various negotiated arrangements.
The document discusses executive compensation practices at banks and financial institutions. It covers issues like pay freezes, incentive pay, performance metrics, restrictions on TARP recipients, calls for increased transparency and shareholder votes on compensation. It provides advice on selecting appropriate performance measures and ensuring compensation is tied to achieving goals.
Executive compensation consists of salary, bonus, long-term incentives, and perquisites. Salary makes up 40-60% of compensation but is subject to taxes, while bonuses and stock options are incentives. Perquisites include benefits like cars, clubs, and first-class travel. Compensation also includes retirement benefits, health insurance, and vacations. Unique features of executive pay include secrecy, varying amounts between executives, and tying pay to organizational performance. Companies use various strategies like cost-to-company packages, performance-linked payments, and flexible benefits to motivate and retain executives.
This document discusses different types of compensation and reward plans. It covers intrinsic and extrinsic rewards, financial and non-financial rewards, and performance-based and membership-based rewards. It also discusses incentive compensation plans including individual, group, and plant-wide incentives. Executive compensation programs and international compensation approaches are also summarized.
This document discusses CEO remuneration in India. It provides an overview of corporate governance and compensation components. It then lists the highest and lowest paid CEOs in India in 2013-2014. On average, CEOs in India earn 3.3 million rupees per year. The document discusses factors that influence CEO pay such as experience, location, and related job salaries. It also discusses issues around pay inequity, pay for performance, and efforts to reform compensation.
This document summarizes research on the relationship between executive compensation and firm performance. The key points are:
1. Executive compensation has increased dramatically over the last 3 decades, far outpacing worker pay growth. However, research studies have found little to no correlation between high executive pay and stronger firm performance.
2. While companies argue that incentive-based pay motivates executives, some studies show executive pay is often not closely tied to performance metrics and stock price movements.
3. Alternative views of "performance" beyond short-term profits, such as investment, innovation, and workforce development, are rarely considered in executive compensation.
4. To strengthen the link between pay and performance, companies increasingly use long-
A company offer a competitive compensation arrangement in order to attract, retain, and motivate a qualified CEO to manage the organization.
This Quick Guide examines the elements of executive compensation and the process by which the compensation committee establishes pay packages.
It examines the questions:
• What is the purpose of a compensation program?
• How do boards structure pay?
• What is the difference between expected, earned, and realized pay?
• How much do CEOs make?
• Are CEOs paid the “right” amount?
For an expanded discussion, see Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences (Second Edition) by David Larcker and Brian Tayan (2015): http://www.gsb.stanford.edu/faculty-research/books/corporate-governance-matters-closer-look-organizational-choices
Buy This Book: http://www.ftpress.com/store/corporate-governance-matters-a-closer-look-at-organizational-9780134031569
For permissions to use this material, please contact: E: corpgovernance@gsb.stanford.edu
Copyright 2015 by David F. Larcker and Brian Tayan. All rights reserved.
Executive Compensation: Exploring Models and Considerations in Corporate Remu...assignmentcafe1
Welcome to our comprehensive SlideShare presentation on executive compensation, where we delve into the intricate world of corporate remuneration models and considerations. Join us as we explore the various approaches, challenges, and ethical considerations surrounding executive compensation in today's corporate landscape.
In this enlightening presentation, we aim to provide a nuanced understanding of the complexities involved in determining executive compensation packages. We examine different models and frameworks, including performance-based pay, equity-based incentives, and bonus structures, and assess their effectiveness in aligning executive incentives with organizational goals.
Through a careful analysis of industry practices, regulatory frameworks, and shareholder perspectives, we explore the considerations that shape executive compensation decisions. We delve into the challenges of balancing competitive market forces, ensuring fairness and transparency, and addressing concerns related to income inequality and excessive executive pay.
Furthermore, we examine the impact of executive compensation on corporate governance, organizational culture, and long-term value creation. We discuss the influence of compensation structures on risk-taking behavior, strategic decision-making, and the attraction and retention of top talent within the company.
Our presentation goes beyond theoretical discussions by incorporating real-world examples and case studies. By exploring notable instances of successful and controversial executive compensation practices, we aim to provide practical insights and lessons for organizations navigating this complex landscape.
Through this exploration, we encourage reflection and dialogue on the ethical dimensions of executive compensation. We consider the perspectives of various stakeholders, including shareholders, employees, and society at large, and discuss the importance of designing compensation packages that align with broader social and organizational values.
Join us as we delve into the multifaceted world of executive compensation, analyzing different models, considerations, and ethical implications. Together, let us gain a deeper understanding of the intricacies surrounding corporate remuneration and explore ways to promote fairness, accountability, and long-term sustainable growth.
Executive compensation consists of salary, bonus, long-term incentives, and perquisites. Salary makes up 40-60% of compensation but is subject to taxes, while bonuses and stock options are incentives. Perquisites include benefits like cars, clubs, and first-class travel. Compensation also includes retirement benefits, health insurance, and vacations. Unique features of executive pay include secrecy, varying amounts between executives, and tying pay to organizational performance. Companies use various strategies like cost-to-company packages, performance-linked payments, and flexible benefits to motivate and retain executives.
Executive compensation consists of salary, bonus, long-term incentives, and perquisites. Salary makes up 40-60% of compensation but is subject to taxes, while bonuses and stock options are meant to motivate and incentivize. Perquisites include benefits like cars, club memberships, and first-class travel. Compensation packages also include retirement benefits, health insurance, and vacations. Public sector executive pay is much lower than private sector. Companies determine pay based on job complexity, their ability to pay, and the executive's human capital.
Executive compensation consists of salary, bonuses, stock options, and other benefits provided to executives in exchange for their services to an organization. It aims to attract, retain, and motivate skilled executives through sufficient pay that takes into account performance, government regulations, and tax law. Compensation typically includes short-term pay like salary and bonuses as well as long-term pay like stock options and restricted stock to align executive interests with shareholders and company performance over time. Common forms of compensation include cash, deferred compensation, retirement packages, and perks.
Week One Discussion 500 Word Min.This weeks discussion covers .docxhelzerpatrina
Week One Discussion: 500 Word Min.
This week's discussion covers HRD Skill requirements for managers.
Before entering the discussion board, please review pages 16 - 19 in the course text. (Pictures Below)
Question:“What are the core competencies or skills an HRD manager must have, and how are they acquired? “
Week One
Discussion
:
500 Word Min.
This week's discussion covers HRD Skill requirements for managers.
Before entering the discussion board, please review pages 16
-
19 in the course text
.
(Pictures Below)
Question:
“What
are the core competencies or skills an HRD manager must have, and how are they acquired
?
“
Week One Discussion: 500 Word Min.
This week's discussion covers HRD Skill requirements for managers.
Before entering the discussion board, please review pages 16 - 19 in the course text. (Pictures Below)
Question: “What are the core competencies or skills an HRD manager must have, and how are they acquired? “
MHR 6901, Compensation Management 1
Course Learning Outcomes for Unit VI
Upon completion of this unit, students should be able to:
5. Explain workers’ compensation.
5.1 Convince others that executive compensation is too high or is just right.
5.2 Identify compensation rules that apply to the flexible workforce.
Course/Unit
Learning Outcomes
Learning Activity
5.1 Unit VI Essay
5.2 Unit VI Quiz
Reading Assignment
Chapter 11: Compensating Executives
Chapter 12: Compensating the Flexible Workforce: Contingent Employees and Flexible Work Schedules
Unit Lesson
So far in this course, we have talked about how compensation is used and the components of a
compensation system. Let us review these a bit before we move into compensating executives.
Typically, compensation is used to recruit and retain highly qualified employees. The organization’s business
strategy (lead, lag, or match strategy) determines how the organization recruits and retains employees. A
good compensation system also increases morale or at least maintains employee satisfaction. As mentioned
earlier in the course, compensation systems include wages and benefits. A good compensation system is one
that evaluates the employees’ needs and makes adjustments, where possible, to meet those needs.
Employees who have their needs satisfied are more likely to be productive and loyal to the organization,
which, in turn, reduces costs for the organization. This is great for the average worker, but what about the
organization’s executives? Executive compensation is a challenge for most organizations and is a highly
controversial subject, especially after the government bailouts in 2008 and 2009.
Executive compensation is different than that for most salary or hourly employees and can consist of a variety
of options. It is generally focused on generating profits and long-term growth and is considered contingent
compensation, which means that the pay is structured to reward or pay based on th ...
The document discusses compensation and benefits strategies for Landslide Limousine, a small business in Austin, Texas. It summarizes the results of a market evaluation conducted by Atwood and Allen Consulting, which found the average salary for limousine drivers to be higher than what LL can afford to pay. The consulting firm recommends positioning LL to pay drivers $2/hour less than average while offering additional benefits and incentives. It also suggests paying management 5% more to maintain pay balance and focusing compensation on incentives to help control fixed labor costs.
This document discusses executive compensation. It begins by defining executive compensation and outlining two main approaches to determining compensation - the optimal contracting approach and managerial power/rent extraction approach. It then describes some common executive compensation structures and limitations of the optimal contracting approach. Key points include that executive compensation aims to align executive and shareholder interests but managers can also influence their own pay.
Compensation management involves designing total compensation packages to attract, motivate and retain employees. It includes direct monetary compensation like salary and incentives, as well as indirect compensation like benefits. Compensation objectives are to recruit and retain talent, boost morale and performance, and ensure legal and internal pay equity. Various factors like an employee's role, skills, market pay and organizational budget affect compensation. Common components of compensation include salary, bonuses, statutory benefits, and stock ownership plans.
Running head CASE STUDY 31CASE STUDY 31AbstractThe hu.docxhealdkathaleen
Running head: CASE STUDY 3 1
CASE STUDY 3 1
Abstract
The human resource manager, Don, is tasked with analyzing the compensation package of the CEO and ensuring fair pay to all employees. The factors that outline this pay structure are all vital importance when determining the compensation structure. The staff seen on the front lines are important to the organization but retaining the CEO is a great determining factor in the success of an organization. The CEO has a higher chance of remailing with the company if they are offered a competitive compensation package.
There are numerous segments that make up the director of human resources responsibilities. For this company, these responsibilities lie on Don, who must create the executive pay structure and condense each component. Don needs to gather further information to correctly determine the effective pay rate for the company’s CEO. The best solution for Don is to use the three best hypotheses to depict the procedures identified with setting official remuneration: office hypothesis, competition hypothesis, and processes used in creating executive compensation. These three theories are described by author Marticchio (2017) as the agency theory, tournament theory, and social comparison theory.
If Don were to utilize the agency theory, he would consider pressuring the COE’s proprietorship within the company. If Don chose to make the pay package through the social comparison theory gathering details on the market rates for similar industries is a must. With this theory, Don can also determine any parts of the CEO’s salary that is performance based and use those numbers to show how the CEO is adding success to the company. Though the company may be in a financial bind, this information can give detail into how the CEO is leading the company to a better future.
As the head of HR, Don must steer between implementing the best practices for the CEO's compensation plans or tweaking the compensation to line up with the objectives to of the investors (Hou, Priem, and Goranova). It is normal that Don will come across bothersome instances regarding the CEO’s pay structure and whether it is the more fair or logical decision. This HR executive has the best chance to create an excellent compensation package that all parties would agree on by detailing the pay contrasts directly to the Oakwood workers and featuring the connection that the pay structure has based on the CEO’s performance. By explaining the abilities, skills, and knowledge the COE must bring into his role, it will be better understood that his higher pay is justified. This pay structure works so well because the CEO only benefits when the company grows and gains in profits (Brisker, Colak, and Peterson, 2014). Offering the employees some examples of commitments and achievements the CEo has performed will provide background into how the CEO will further the company and create opportunities for everyone.
Don’s main goal is to ...
This document discusses alternative methods that some companies use to disclose executive compensation beyond what is required by SEC regulations. Specifically, it examines "pro forma compensation" disclosures like realized compensation and realizable compensation. Realized compensation looks at pay actually received by the CEO in a given year, while realizable compensation includes pay earned, even if not yet received. The document analyzes examples of companies that disclose these alternative metrics and discusses whether the goal is to provide more useful information to investors or to present compensation in a more favorable light. It also considers calls for the SEC to standardize these alternative disclosure requirements.
The document discusses executive performance measures and compensation. It outlines the objectives of management compensation as motivating managers, incentivizing decisions aligned with company goals, and fairly rewarding performance. Compensation typically includes a mix of salary, bonuses, and long-term incentives like stock options. Bonus plans are based on performance measures, compensation pools, and payment options like cash, stock, or deferred compensation. Effective plans balance short and long-term incentives and individual vs company-wide goals.
This document discusses how corporations determine the size of annual equity awards without considering past stock price performance, leading to a disconnect between long-term incentive pay and performance ("equity award amnesia"). It proposes a "dynamic award methodology" that factors in historical stock price changes when setting award sizes. Doing so would improve various compensation metrics and better align executive pay with shareholder experience by providing larger awards after price increases and smaller awards after decreases. The document argues this approach makes more sense given equity awards are intended to reward long-term performance and shareholder interests.
Executive compensation consists of four main elements: salary, bonus, long-term incentives, and perquisites. Salary makes up 40-60% of compensation but is not very significant on its own. Bonuses are based on company or individual performance. Long-term incentives include stock options that increase in value as share prices rise. Perquisites provide benefits like cars, club memberships, and other special privileges. Companies design compensation packages to attract, retain, and motivate top executive talent through salaries and various performance-based incentives.
Executive Compensation and IncentivesMartin J. ConyonEx.docxcravennichole326
Executive Compensation and Incentives
Martin J. Conyon*
Executive Overview
The objective of a properly designed executive compensation package is to attract, retain, and motivate
CEOs and senior management. The standard economic approach for understanding executive pay is the
principal-agent model. This paper documents the changes in executive pay and incentives in U.S. firms
between 1993 and 2003. We consider reasons for these transformations, including agency theory, changes
in the managerial labor markets, shifts in firm strategy, and theories concerning managerial power. We show that
boards and compensation committees have become more independent over time. In addition, we demonstrate
that compensation committees containing affiliated directors do not set greater pay or fewer incentives.
Introduction
E
xecutive compensation is a complex and con-
troversial subject. For many years, academics,
policymakers, and the media have drawn atten-
tion to the high levels of pay awarded to U.S.
chief executive officers (CEOs), questioning
whether they are consistent with shareholder in-
terests.1 Some academics have further argued that
flaws in CEO pay arrangements and deviations
from shareholders’ interests are widespread and
considerable.2 For example, Lucian Bebchuk and
Jesse Fried provide a lucid account of the mana-
gerial power view and accompanying evidence.3
Marianne Bertrand and Sendhil Mullainathan too
provide an analysis of the ‘skimming view’ of CEO
pay.4 In contrast, John Core et al. present an
economic contracting approach to executive pay
and incentives, assessing whether CEOs receive
inefficient pay without performance.5 In this pa-
per, we show what has happened to CEO pay in
the United States. We do not claim to distinguish
between the contracting and managerial power
views of executive pay. Instead, we document the
pattern of executive pay and incentives in the
United States, investigating whether this pattern
is consistent with economic theory.
The Context: Who Sets Executive Pay?
B
efore examining the empirical evidence pre-
sented in this paper, it is important to consider
the pay-setting process and who sets executive
pay. The standard economic theory of executive
compensation is the principal-agent model.6 The
theory maintains that firms seek to design the most
efficient compensation packages possible in order to
attract, retain, and motivate CEOs, executives, and
managers.7 In the agency model, shareholders set
pay. In practice, however, the compensation com-
mittee of the board determines pay on behalf of
shareholders. A principal (shareholder) designs a
contract and makes an offer to an agent (CEO/
manager). Executive compensation ameliorates a
moral hazard problem (i.e., manager opportunism)
arising from low firm ownership. By using stock
options, restricted stock, and long-term contracts,
shareholders motivate the CEO to maximize firm
value. In other words, shareholders try to design
optimal compensation packages .
Compensation management involves designing and implementing a total compensation package to provide monetary value to employees in exchange for work. It is an important part of human resource management that helps attract, retain, and motivate talent. Compensation includes direct pay like salary as well as indirect benefits and incentives that can achieve business and employee goals. Factors like an employee's skills, market rates, and organizational affordability influence compensation structure, which is also governed by employment laws.
1. Executive Compensation at Financial Institutions
Executive compensation at U.S. companies has become dramatically disproportionate relative to the average
workers at those companies over the past 25 years. Now, the current global financial crisis is putting a harsh
spotlight on executive compensation at financial institutions in particular. This report looks at the basic nature
of executive compensation packages and the issues or concerns that have been raised about them. That
information provides a context for looking specifically at financial institutions: what makes their executive
compensation programs different and how the current financial crisis is going to affect those programs.
Executive compensation refers to the mechanism that corporations use to pay their senior executives. Publicly
traded companies are required by the Securities and Exchange Commission (SEC) to report and explain
compensation paid to these senior executives. Senior executives usually include the CEO, CFO, and three other
highest-paid employees identified in a company's financial reports. These executives are the primary operational
agents for shareholders hired by the Board of Directors and employed to lead the firm.
Companies attempt to structure their executive compensation packages to recognize the special role played by
their CEOs and other executives as the public leaders of the companies. Executives act as operational agents for
shareholders of a company, so executive compensation is structured to offset a potential agency problem. In
essence, this agency concept refers to the supposition that senior executive officers of companies with numerous
stakeholders will act in their own best interests to maximize personal gains before the interests of the many
other stakeholders of the firm, in the absence of proper controls.
To address this agency problem with company executives, executive compensation plans rely heavily on
bonuses and incentives that are tied to how well those executives lead the company to generate greater
shareholder wealth. However, executive compensation has exploded since 1980 both in absolute dollars and in
relationship to compensation of other company employees. Publicity about extreme cases has triggered anger
and potential legislation to change how executive compensation works and constrain how much executives are
paid. There is heightened sensitivity now to apparent excessive executive compensation at financial institutions,
focusing on ones being bailed out of trouble with taxpayer dollars. As a result, the U.S. federal government is
actively changing executive compensation at financial institutions.
A compensation package is put together to address multiple objectives: attract talented employees, retain
employees who perform well, and focus employees on contributing to the success of the company. Especially in
the case of executive compensation packages, those packages must recognize the special public leadership role
provided by executives and must ensure that the company and executive interests are aligned. Executives are
agents for the owners of the firm and to avoid any agency problem of conflicted interests their compensation
packages are carefully crafted, trying to induce and reward high performance and success for the firm. High
performance is usually associated with generating shareholder wealth.
Base salary is the fixed portion of executive compensation usually determined by using salary surveys and
analyzing pay at market peer companies. Variations relate to previous experience and demonstrated skills. For
corporate executives base salary is defined in an employment contract and thus not tied to performance.
Because salary is fixed, other components of a compensation package often are expressed as a function of base
salary. For example, a target annual bonus may be set at some percentage of base salary.
An annual bonus provides a variable payment to the executive that is only paid when specified performance
measures reach pre-defined thresholds. The bonus payment is usually cash and the performance measures
reflect important aspects of corporate performance, although sometimes measures relate to individual
performance. No payment is made unless the performance measure reaches a minimum threshold at which point
1
2. a minimum percentage of the target bonus is paid. The bonus payment can increase up to some maximum
payment corresponding to the performance measure reaching some cap or maximum level.
An example bonus plan might be to pay a target bonus of 30% of base salary if the firm achieves earnings per
share of a set amount. The minimum performance threshold might be 85% of the performance target and pay at
85% of the target bonus. Similarly, the maximum threshold and payment might be set at 110%. The Board of
Directors' choice of performance measures and target results expresses the corporate goals the executive agent
should be trying to achieve for the company's shareholders.
Long-term incentives award an executive with corporate equity in the form of stock options and/or restricted
stock. Stock options vest over multiple years (usually 3 to 5 years), with incremental percentages of the stock
becoming exercisable (tradable) over the years. Stock options are only valuable if the stock price rises over
time. Restricted stock is granted (given to the executive without paying for them) with constraints such as
requiring them to be forfeited if the executive leaves the company within a certain time period (at least 3 years).
In both cases, the executive is encouraged to stay with the company and to ensure that the company sustains
good performance. Long-term incentives in the compensation package directly tie the interests of the executive
to the interests of shareholders by making the executive a significant shareholder as well.
Perquisites (often referred to as perks) are benefits provided to the executive. These perks include standard
employee benefits plus extra fringe benefits such as extra insurance, memberships in special clubs, and special
transportation privileges. This is usually a small portion of the compensation package, 2% to 3%. Perks are
intended to expedite the executives work efforts such as using club memberships to entertain customers or fly
on a company jet to reduce total time away from the office.
Severance agreements are a common component of an executive compensation package, especially when an
employment agreement is in place. A severance agreement spells out payments to be made to the executive
upon leaving the company involuntarily without cause such as when a company is sold or merged and changes
control of the firm. This type of agreement is often referred to as a "golden parachute" and typically consists of
payments of two to three times annual base salary and bonuses plus certain benefits. A severance agreement
intends to encourage executives to be objective during takeover or merger situations.
The SEC has had regulations in place for many years that require executive compensation to be presented in a
firm's annual report and proxy statement, plus Form 10-K filings. These rules try to limit asymmetric
information problems by having all publicly traded companies uniformly and consistently report the
compensation of senior executive officers. The rules have expanded over the years in an attempt to make
compensation more transparent and clear to investors and shareholders. Historically, the Board of Directors sets
executive compensation often with the help of paid compensation consultants and initial recommendations from
corporate management. The SEC requires that the outside board members (not firm employees) vote to approve
executive compensation.
Executive compensation is a concern of shareholders specifically and of the public in general. Shareholders rely
on the firm's executives as the shareholders' key operational agents running the company, plus shareholders pay
the firm's executives out of funds that otherwise would become profits. The general public has been especially
concerned about executive compensation since 1976 when modern financial analysis began looking at
managerial power as an agency problem.
Apparent excesses in executive compensation and dramatic growth since 1980 combine with publicized abuses
to draw ever more attention to executive compensation amounts and practices. In 1980 the ratio of CEO total
compensation to average pay for hourly workers was 42 to 1. By 2008 that ratio dramatically rose to 344 to 1.
The bull market of the 1990's coupled with heavy use of stock options for long-term incentives to drive up this
ratio. Changes in executive compensation have tracked the S&P 500 index (representing changes in stock
2
3. prices), but does not track closely with corporate profits. This phenomenon matches recent research findings of
Gabaix and Landier, whose model of CEO pay shows that the dramatic growth in CEO pay from 1980 to 2003
is fully attributable to the growth in market capitalization of large companies for that period.
The dramatic difference between CEO compensation and pay for normal workers is very hard for those normal
workers to understand or accept. A survey of 2701 companies in 2007 found that the median total compensation
for CEOs was $2.5 million, but CEO total compensation for the 30 highest paid CEOs in 2007 was between $40
million and $322 million per year. And, in 2008, the average compensation of CEOs for the 500 firms in the
Standard and Poor's 500 (S&P 500) was $10.5 million per year. These huge numbers generate public anger,
especially among normal workers facing job losses and financial hardships. When companies do not perform
well for shareholders, then an agency problem is exposed suggesting that executives are not pursuing the
interests of the firm's owners as strongly as they pursue their own interests.
There are flaws in implementation for each component of executive compensation, at least in select cases. Many
companies have performed reasonably well over the years and pay their executives between 1% and 2% of
annual returns to shareholders - an acceptable amount. However, excessive or extreme situations are easy to
establish and generate negative publicity for underperforming companies during the current financial crisis.
Setting base salary can be problematic given that the SEC requires public disclosure for executive pay.
Competitive executives use the public information to negotiate higher salaries. This is further exacerbated by
published salary surveys that are used by companies and compensation consultants. This situation implies that
the SEC's efforts to limit asymmetric information have led to salary escalation.
Bonus payments have shown no significant correlation to executive performance. Relatively short-term annual
bonuses tied to accounting measures can be easily manipulated for short-term effect. Stock options as a long-
term incentive showed their flaws with the windfalls for executives that resulted in the 1990's when stock prices
rose dramatically due to industry and market trends, unrelated to executive performance. This windfall effect is
not filtered out to ensure a true reward for good performance by the executive. Perks have little to do with
executive performance and instead serve to separate and potentially isolate top managers from the rest of the
employees. A December 2008 survey by Watson Wyatt found that 21% of firms polled are reducing or
eliminating perks.
Severance agreements are useful to keep executives open to appropriate merger and acquisition opportunities,
but extreme versions are golden parachutes drawing negative attention to this component of compensation. In
2007 CEO severance packages at the top 200 publicly traded companies averaged $38.4 million. One extreme
case in 2007 occurred when Home Depot's CEO, Robert Nardelli, was fired and left the company with $210
million. The situation with Nardelli at Home Depot also highlights a flaw in severance packages that are
triggered even with the executive is asked to leave even when there is no change of control due to acquisition or
merger.
Abuses in executive compensation increase both shareholder and general public concern with what
compensation packages pay out, how they are established, and how they are implemented. The U.S. House of
Representatives undertook a study in December 2007 to evaluate the conflict of interest involved when
compensation consultants advise firms and their Boards of Directors. The study found that out of the 250 largest
publicly traded companies in the U.S., 113 firms received compensation advice from consultants that generated
significant revenue from these firms for other consulting services. The conflict of interest was pervasive and the
resulting level of CEO pay at the companies using conflicted consultants was 67% higher than the median
compensation at the other firms.
Another abuse of the compensation system for executives is highlighted by the 2006 stock options scandal
where over 100 corporations were investigated by the SEC for back-dating stock options for their executives.
Back-dating involves changing the date used to set a lower exercise price of stock included in the option. The
3
4. payout for executives comes at the expense of shareholders. Stock options are intended to align executives with
the interests of shareholders, but in this case the executives were acting in their own interests.
Executive compensation at financial institutions is roughly the same as in other industries. The 2007 study by
the Wall Street Journal and the Hay Group compared industries for how compensation is split up within a
package. The average split over all business categories was 18% salary, 24% bonus, and 58% long-term
incentives. For financial institutions the split was only slightly different: 14% salary, 29% bonus, and 57% long-
term incentives. There were 55 financial firms included in the study out of 417 companies overall. The main
difference is in the heavier use of variable pay through bonuses. Earnings are the significantly predominant
performance measure used to determine bonuses in financial firms. This is the predominant performance
measure used in other business categories.
Although executive compensation is implemented similarly at financial institutions as it is at other businesses,
the special nature of banks and other financial institutions should be reflected in a variation in their
compensation plans. In recent testimony before the U.S. House of Representatives Committee on Financial
Services, Lucian Bebchuk identified an important distinction in executive compensation at financial institutions.
His point was that the financing structure of these firms and their compensation packages lead to excessive risk-
taking. Specifically, Bebchuk suggests that incentives are tied to "a highly leveraged bet on banks' assets."
Bebchuk argues that tying executive compensation heavily to bonuses and long-term incentives that relate
predominantly to accounting measures (such as earnings) reflects the interests of common shareholders and
ignores the interests of other important stakeholders of financial institutions: preferred shareholders,
bondholders, and depositors. A broader set of metrics to drive appropriate incentives for bank executives are
needed. Using bonuses and incentives to prevent any agency problems with executives at financial institutions
is flawed by concentrating only on common shareholders and stock price.
Executives at financial institutions are not the highest paid executives relative to other U.S. businesses and
financial firms are not the only ones with compensation packages that anger employees, shareholders, and the
general public. However, the current financial crisis has put a spotlight on these executives, especially the ones
receiving funds from the U.S. government. Examples from 2007 of extreme compensation amounts within the
financial firms included Goldman Sachs CEO Lloyd Blanfein getting $54 million per year and J.P. Morgan
Chase CEO James Dimon getting $30 million per year. In comparison to these packages, Countrywide
Financial CEO Angelo Mozilo received $102 million in 2007 before that company was acquired by Bank of
America and Mozilo was charged by the SEC with insider trading and securities fraud.
One result of the current financial crisis is lower total compensation for CEOs; CEO compensation dropped by
15% in 2007 and 11% in 2008 (IOMA, 2009). Much of the drop in pay is due to lower performance (lower
profits) by the CEOs' firms which affects bonuses and stock option (or restricted stock) valuations. In 2008
financial institutions' CEOs experienced a 43% drop in pay - significantly more than the average overall.
According to the National Bureau of Economic Research (NBER), the current U.S. recession began in
December 2007. One of the drivers of this situation was losses and write-downs that banks and other financial
institutions incurred by holding asset-backed securities (ABS) - in particular, non-prime mortgage-related ABS.
The prices of ABS of this nature dropped significantly following a rise in mortgage defaults and foreclosures,
which was a result of falling house prices and a weakening economy.
There has been a high level of complexity in the events surrounding this recession, but the majority of the focus
has been on the financial sector. Due to the significant losses on ABS such as those that were created from
pools of subprime - now seen as "toxic" - loans, bank failures were on the rise. The investment banking
business essentially ceased to exist in the U.S., at least in its current form, as companies like Bear Stearns and
Lehman Brothers filed for bankruptcy, Merrill Lynch was acquired by Bank of America, and Goldman Sachs
4
5. and Morgan Stanley became bank holding companies. Exacerbating the economic downturn was the industry-
wide decision of bank lenders to limit the credit supply. The plunge in-house prices was coupled with a 52
percent drop in the S&P 500 stock price index from October 9, 2007 to November 20, 2008, and an oil price
shock.
Such shocks also slowed the demand for credit as a result of weaker future growth of income and profits.
Unemployment has also reached dizzying heights for the U.S. Since December 2007, 2.6 million workers have
been left jobless. Typically, the U.S. has an unemployment rate that is approximately half of that of its
European counterparts. Now, the unemployment rate in the U.S. is nearly touching on low double digits.
In the current global business environment, markets and economies around the world have become much more
interconnected. From an economic perspective, one could accurately assess this situation as strong positive
correlations among such nations. This tying together of the world's economies is linked to global markets and
international trade.
The U.S. recession has also had negative ramifications on its trading partners: according to the Economic Cycle
Research Institute (ECRI) six of the world's seven major developed countries that make up the G7 are now
experiencing a recession. Global gross domestic product (GDP), according to the International Monetary Fund,
is expected to decline by at least one-half basis points - the first annual decline in world GPD in 60 years.
The simultaneous slowing in economic growth in most of the world's largest economies also had a negative
impact on the U.S. economy as exports were a key source of U.S. economic growth in 2004-07. The "credit
crunch," as media outfits described the current situation, has global implications because international investors
are involved. There was a distribution of ABS composed of risky mortgages packaged and sold to banks,
investors, and pension funds around the globe. These repackaged debt securities became much more
sophisticated, as it was unclear how to define who owned the property, and the crisis really developed from the
mis-pricing of the risk of these products.
The government response to this economic crisis was to provide about $1.1 trillion in new liquidity, as well as
hundreds of billions of dollars in new capital for flailing institutions. The idea in Washington, D.C. was that
declining house prices triggered a financial crisis that could be alleviated only through government action (Hall
& Woodward, 2009). Both the Federal Reserve Bank (Fed) and the federal government supported a stimulus to
help restore full employment and offset the recession by lifting house prices and the condition of institutions
that are holding mortgages.
The U.S. Treasury Department (Treasury), under the guidance of former Treasury Secretary Henry Paulson,
created the Troubled Asset Relief Program (TARP) to recapitalize a range of financial institutions through a
series of quasi-permanent loans. It has invested in banks, AIG, and even one non-financial company, General
Motors. TARP has been designed to add capital to the firms which receive a TARP injection because these
firms do not have to pay it back until convenient. This program has been thought of as an important means of
providing liquidity in the financial markets, as the added capital makes banks more willing to lend by reducing
their fears of becoming insolvent due to an inability to meet their obligations should asset prices decline. Up to
now, banks have hoarded liquidity to cover any losses they might experience on their own books.
Furthermore, the Obama administration has collaborated with Congress to create a fiscal stimulus program - the
American Recovery and Reinvestment Act of 2009 (ARRA). The stimulus is well-diversified across the U.S.
and has been distributed in the form of spending increases and tax cuts. The purpose of the tax cuts is primarily
to reduce the cost of labor or improve incentives to work. Removing sales taxes and gradually bringing them
back in effect has been an idea proposed in this legislation and would stimulate immediate consumption
spending.
5
6. On June 10, 2009, the Treasury issued an Interim Final Rule (IFR) in regards to executive compensation and
corporate governance provisions of the Emergency Stabilization Act of 2008 (EESA), later amended by the
ARRA. The IFR applies to firms that received or will receive financial assistance under the TARP and
consolidates or overrides previous Treasury rulings on executive compensation. However, there are exemptions
from certain provisions for TARP recipients that do not have outstanding obligations to the government.
Firms with outstanding TARP obligations are prohibited from paying or accruing any bonus, retention award, or
incentive compensation to certain employees. Depending on the size of the TARP financial assistance, this may
apply only to the single most highly paid employee. Larger firms have restrictions that apply to a greater
number of employees. For instance, the highest paid employee is the only individual bound by this provision in
firms receiving less than $25 million in financial assistance. The rule applies to the five most highly
compensated employees of a TARP recipient receiving between $25 million to less than $250 million in
financial assistance. Restrictions apply to a greater number of employees for TARP recipients receiving higher
amounts of assistance.
Golden parachutes for senior executive officers of firms receiving TARP assistance are now prohibited; these
senior executives typically include the principal executive officer, principal financial officer, and the three most
highly compensated executives. Furthermore, a provision in the IFR allows firms to seek a recovery or
"clawback" of any bonus, retention award, or incentive compensation paid or accrued to a senior executive or
one of the next 20 highly compensated employees when payments or accruals were based on materially
inaccurate financial statements or any other materially inaccurate performance metric criteria.
A compensation committee composed of independent members of the Board of Directors of TARP recipients
must be established by September 14, 2009, if not already in existence. The IFR states three main purposes for
the creation of this committee. The compensation committee must discuss, evaluate, and review executive
compensation plans to ensure that there are no incentives to encourage taking unnecessary and excessive risks
that could threaten the value of the TARP recipient. Secondly, a similar discussion, evaluation and review with
senior executives will be made to prevent compensation plans from encouraging a focus on short-term results
rather than long-term creation. Lastly, this process will be implemented in order to discourage the manipulation
of reported earnings to enhance compensation. All three provisions protect the stakeholders of a firm, whether
publicly traded or privately owned. In addition, Boards of Directors are required to offer "say on pay", a
nonbinding shareholder vote on executive compensation.
Another important development in the IFR relating to executive compensation is a requirement for TARP
recipients to develop an excessive or luxury expenditure policy. Such expenditures include: entertainment or
events; office or facility renovations; aviation or other transportation services; or any other similar perks or
events that are not reasonable for staff development, performance incentives, or other similar expenditures
incurred in the normal course of business. This provision is implemented to prevent situations such as the
executive officers of the Big Three carmakers who chartered private jets to Washington, D.C. to seek financial
assistance from the government. Such spending excesses will be eradicated with the implementation of this IFR
guideline.
The issue regarding executive compensation in industry has been an ongoing concern at least since the 1980s, as
the pay differential between senior executive officers and those of "rank-and-file" workers continues to spread
significantly, much to the dismay of the public at large. This paper looks specifically at this topic as it relates to
the financial industry, paying special attention to the recent events leading to the current recession in the U.S.
While many financial firms - and certainly all of the "bulge bracket" firms - have acted in aggregate in a similar
manner to other businesses, more scrutiny is placed on this industry due to its direct involvement in the credit
crunch and subsequent recession both domestically and in many partnering nations abroad.
6
7. Executive compensation practices are undergoing significant reform driven by legislation and regulation
changes directed at financial institutions. One of the main objectives of reform in executive compensation in the
financial industry is to significantly improve on how compensation packages address the agency problem. To
curtail this dilemma, federal legislation was enacted in June 2009 to closely regulate executive compensation in
financial institutions, and others, who received funds from the federal government through the TARP. Specific
rules differ based on the size of TARP assistance received. There is ongoing discussion of how best to adjust
bonus and incentive compensation components to be more effective at aligning executive interests with all
stakeholder interests, given the special nature of financial institutions. Every aspect of executive compensation
is being addressed, including the elimination of golden parachutes (excessive severance packages) and
excessive expenditures on perks.
New regulations and legislation, as yet unproven, have come into place predominantly to more effectively
mitigate the agency problem in both the financial industry and other industries in general. Furthermore, these
changes have developed as a political response to the outcry from the public. It remains to be seen how the
financial industry will react to the changes, but the issue of executive compensation is likely to be highlighted in
popular press as well as academic studies for the foreseeable future.
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