Executive Compensation HRMG 725

Running head: COMPENSATING EXECUTIVES
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COMPENSATING EXECUTIVES;
LESSONS LEARNED FROM THE PAST GENERATION
Stephen P. Burgor
Davenport University
HRMG725 Finance of Compensation and Benefits
Dr. Lynn Szostek
October 15, 2015

EXECUTIVE COMPENSATION
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Abstract
The compensation of chief executives in particular those found within the United Sates has found
itself to be under public scrutiny over the past decade or so. An overview of compensations
towards key employees, and the challenges stockholders and executive boards face in hiring and
compensation packages offered to top leaders will be examined. Also the strategies used in hiring,
the key issues involved, and the problems and questions associated with the process of awarding
compensation to top executives will be addressed.

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Executive Compensation; Lessons Learned From the Past Generation
John Burroughs (April 3, 1837 – March 29, 1921), was a naturalist who was involved in
the American conservation movement as a writer in the 1860’s through the 1920’s. Burroughs
(n.d.) once said, “For anything worth having one must pay the price; and the price is always work,
patience, love, self-sacrifice - no paper currency, no promises to pay, but the gold of real service”
(John Burroughs Quotes). If top executives of the early 21st
century would have claimed this as
their motto then national attention with regard to compensation would have been directed to one
of the many more areas of interest and not have taken stage as its primary performer. However, it
is equally important to not simply take an altruistic approach to American capitalism.
Railroad tycoon Cornelius Vanderbuilt (May 27, 1794 – January 4, 1877), who made huge
masses of wealth during the time of great economic expansion in America during roughly the
same time period had this to say: “I have always served the public to the best of my ability. Why?
Because, like every other man, it is to my interest to do so” (Cornelius Vanderbuilt Quotes).
These men were for the most part at opposite ends of the compensation spectrum yet both
believed fiercely in their servant hood. This author will look at the compensation practices of the
early 21st
century in American culture, taking the viewpoint from both ends of the compensation
spectrum. We will examine methods and practices, ask questions that the general public would
ascertain, and examine the answers that compensation teams including human resource directors
would present as solutions.
Key Issues and Problems
It is common knowledge that the general public has been up-in-arms so-to-say, showing
increased frustration and even a feeling of offensiveness at the knowledge of the compensation
packages of top executives. This unpleasantness is currently coming from both shareholders and
the general public alike. There are many players however in this financial game of compensation

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for executives. Compensation teams, boards of directors, human resource professionals, chief
financial and executive officers, and compensation consultants all have their role too. This alone,
the fact that so many different parties have their say in the hiring procedures of executives,
becomes one of the major challenges in the process of executive rewards. The stakeholders want
to see growth of company stocks. The corporate boards and/or CEO’s, the very people that
compensation professionals have to answer to, usually hire compensation teams and consultants,
causing possible conflicts of interest. Boards of directors are the spokespersons of the
shareholders yet in many ways do not take the initiative of sharing details of the competitiveness
in the hiring of executive leadership positions, whether because of time constraints or because of
the complexity of the process.
Other challenges that exists is the fact that top executives of companies typically do not
see the effects of their leadership until years after their hiring no matter if the affects are positive
or negative. Martocchio (2013) emphasizes that; “Executive compensation packages emphasize
long-term or deferred rewards over short-term rewards” (p. 321). A leader’s incentives can be
extravagant but yet only realized long after he/she spearheads successful productivity. Never-the-
less if top administrators do not perform well they can also be substantially rewarded upon their
dismissal. This further exasperates a problem. They are being rewarded for a job not well done,
during a period of decrease in the performance of company stock. In-turn leading to the laying off
of hundreds of employees. Thousands of people in this scenario are negatively affected while the
top executive is heavily rewarded upon their firing. As examples we can look at the following:
When executives at Hewlett-Packard, Bank of New York Mellon, Burger King
and Yahoo were asked to step down this year, they walked away with severance
packages that cost shareholders a combined $60 million. For instance, when Léo

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Apotheker stepped down as CEO at Hewlett-Packard, he walked away with $13.2
million in cash and stock severance. (Flannery, 2011, para. 3)
One must ask the question how exactly do these top executives specifically receive so
much reward, particularly in regard to showing negative results? The answer lies in the types of
rewards that top executives receive, many of them different than what most others in the company
would not even dream of entertaining. The list of benefits are long but the author will concentrate
more in this writing on benefits that are either deferred or presented later in the executive’s
career. Deferred compensation is payments given to the executive at a future date. The reasoning
is that this type of compensation acts as an incentive, striving to create a sense of ownership in the
growth of the company. If the executive receives these at a later date then usually there is a lesser
tax rate involved since he/she would receive these presumably after retirement (Martoccio, 2013).
Incentive stock options allow the executive to purchase stocks for the future but at a
predetermined price. This hopefully will be at a discounted price since the stock under their
leadership will increase (p. 325). Nonstatutory stock options are also beneficial for future return
because gains are usually greater as the company grows (p. 325). Phantom stock is still another
benefit based on long term return. Usually the executive receives these at the time of retirement
from the company (p. 326).
Another long-term benefit is stock appreciation rights. This benefit also is usually utilized
at the point of retirement for the executive. CEO’s can also receive benefits after a termination
due to change of ownership or corporate takeover. These benefits are called golden parachutes
and are usually a part of an executive’s compensation package. These are actually even
advantageous for the company by reducing the company’s tax liability (p. 326). Platinum
parachutes “are lucrative awards that compensate departing executives with severance pay,

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continuation of company benefits, and even stock options” (p. 326). Again this author wants to
point out that almost all of these benefits are ones received based upon delayed compensation.
The most challenging issue with regard to how top executives are paid though is not necessarily
how much they are paid but the fact that such a large percentage of what they are paid is not
based on performance.
One of the most famous events that caused a huge amount of turmoil was that of the
American International Group (AIG) in 2009. The New York times reported that AIG “received
more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, [and]
plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that
brought the company to the brink of collapse last year” (Andrews, 2009, para. 1).
Key Insights and Changing the Trend
An article in the Harvard review, written by Jensen and Murphy (1990) mentions that, “In
most publicly held companies, the compensation of top executives is virtually independent of
performance” (Jensen & Murphy, 1990, para. 2). Through their study of over 2500 CEO’s from
1974-1998 they came to the conclusion that:
a). top executives are not receiving record salaries and bonuses, b). Annual
changes in executive compensation do not reflect changes in corporate
performance, c). Compensation for CEOs is no more variable than compensation
for hourly and salaried employees, and d). With respect to pay for performance,
CEO compensation is getting worse rather than better. (para. 5-8)
It seems that the public tumult over top executive compensation has changed some trends
in the business marketplace. The Dodd-Frank act of 2010 made provisions for shareholders to

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have the right to vote on executive’s pay packages. Richard Feloni (2014) in a more recent
article in Business Insider, feels that the attention is a bit misguided. Feloni states the following:
“Companies' boards have responded to this regulation, and there has been a trend toward basing
CEO compensation on how well a company is doing in the market relative to its competition”
(para. 9). After all, it is the shareholders that want to have the best executive available in order
for the stocks to climb and give the best return. The focus should be rather that the rewards of
executives be based on performance. In an article written just before the Dodd-Frank act was
passed attorney Jay Rothman stated that, legislation was already in place in the United
Kingdom with regard to a more uniform compensation for executives. And also that during the
time of our nation’s outcry there was debate as to try to allow states to experiment with different
proposals but that for the most part states simply ignored the topic of out of the ordinary
executive pay (Rothman, 2013).
The passing of the Dodd-Frank in July of 2010 provided shareholders, “with a say on pay
and corporate affairs with a non-binding vote on executive compensation and golden parachutes”
(Public Files Overview, 2010). Other provisions by the passing of this law included protection
from deceptive practices and hidden fees by corporations, advanced warning systems of risks
posed by complex companies, more transparency in asset-backed securities, non-binding votes on
executive compensation, and strengthening regulators to pursue financial fraud (Public Files,
2010). With the passage of the Dodd-Frank Act it appears that the outcry from the general public
made the federal government of the United States take action. The taking of this action by
congress then forced a trend in the marketplace by the provisions within the act. “Companies'
boards have responded to this regulation, and there has been a trend toward basing CEO
compensation on how well a company is doing in the market relative to its competition” (Feloni,
2014).

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Key Questions to Ask
There remain a few points of discussion in the debate on executive rewards and benefits
and this involves the comparison between the executive and non-executives within the company.
Is the compensation gap between executives and nonexecutives justifiable? Initially because of the
vast differences in pay practically everyone would immediately say no, they are not justifiable.
However that might not necessarily be the case. Apparently there are those that believe that the
top executive’s pay is now about where it should be. What is surprising is that some of these
people are employees and shareholders. According to Feloni (2014), “There has been rising
shareholder approval of their companies' executive pay packages, according to the Wall Street
Journal. For example, in early April, 93% of companies in the Russell 3000 index approved of
their CEO's pay” (para. 16). Feloni further goes on to quote Steven Neil Kaplan who has written
extensively on compensation pay. Kaplan says,
CEO pay should be compared with the salaries of other high-earning professionals:
If you look at CEO pay compared to the average pay of people in the top 0.1%,
it's about where it was 20 years ago — in line with [that of] lawyers and private-
company executives. (para. 12)
Additionally, Jannice Koors (2013) the managing partner of Pearl, Meyer & Partners, a successful
executive management and compensation company with numerous locations throughout large
metropolitan areas of the country, had this to say:
I think most companies are on the right track with their pay programs. Yes, CEO
pay increased this year (2013) because average company profits and share prices
grew. Compensation is more closely tied to performance than ever before, which is
exactly what shareholders have been pushing for. (Koors, 2013, para. 5).

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It appears that the passing of the Dodd-Frank Act has corrected the wrongs of overcompensating
executives. Was this however the only reasoning for its correction? Let us continue on with a few
more pertinent questions.
Should executive compensation be given upon a person’s exit from the company or should
his/her pay be solely based upon performance? Perhaps even moving towards the point of no
reward unless stocks show significant gains? Since most of a CEO’s pay is deferred for long
periods of time it is highly unlikely that any executive would take a position that was solely based
upon straight pay-for-performance. It would also be very difficult to lure top leaders away from
other companies without at least matching their current compensation. As this author has
mentioned quite a bit of their long-term compensation is based actually already upon performance
with it being tied up in the performance of the company’s public performance of stock options
and stock appreciation. While it might look like an effective option it is not one that would have
much if any legitimacy.
Could the great recession of the U.S. economy, caused by the collapse of the housing
industry, bank and automobile manufacturer bailouts, be the reasons for so much public focus on
executive over-compensation? There might be some legitimacy here with the timing of the
recession and the public focus on over compensated executive pay. At a time when foreclosures
and unemployment were high, mixed in with the underperformance of the stock market greater
emphasis in the public’s eye was placed on the differences between average worker pay and heads
of companies. The automobile bailout came at a least opportune time through the scope of pay
along with the bank bailouts as already mentioned with AIG and others. This author is not stating
that the public outcry towards executive compensation was not legitimate just mentioning that
greater emphasis was placed on it because of other factors in the economy. Surprisingly the real

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numbers show that a fairly large percentage of CEO compensation between the years 2006-2009
went down not up. Sarah Stodola mentions this in her article in The Fiscal Times, “almost 47
percent of CEOs saw their compensation fall between 2008 and 2009” (Stodola, 2011, para. 1).
She further goes on to say, “Over the three years from 2006-2009, 43 percent of CEOs saw no
increase in pay” (para. 2). Therefore there does seem to be the possibility of a greater emphasis
being placed on compensation of CEOs due to the fact that the overall economy at the time was
having major concerns.
Could pay for performances actually have caused a company to under-perform? Yes, it is
possible. Let’s briefly look at this. There is a belief by analysts that because of an over emphasis
on pay-for-performance compensation of CEOs, greater risks were taken in order to attain these
larger rewards. These greater risks in-turn became greater failures. Steve Brooks (2010) in his
article in Texas Enterprise quoting two business professors at the McCombs School of Business
states the following:
The structure of CEO pay might have helped to bring on the Great Recession.
Both see a link between the lure of big bonuses and the making of chancy business
decisions, particularly at financial services firms. The central problem, they say, is a
misalignment between pay and performance. (para. 3).
It is possible, because of an over-emphasis on pay-for-performance, that CEOs will take bigger
risks. With bigger risks there is the potential for bigger gains. Yet this of course could lead to a
larger chance of failure, putting the employees and stock-holders in a more perilous position,
causing an opposite affect than what is intended with a pay-for-performance compensation plan.
Conclusion
John Burroughs (n.d.), our naturalist from the late 1800’s also said, “A man can fail many
times, but he isn't a failure until he begins to blame somebody else” (John Burroughs Quotes).

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There has been a lot of finger pointing on numerous sides of the CEO compensation issue over
the past ten years yet seemingly the issue did not materialize until most recently over the past five
to ten years. It went practically unnoticed until recent history. The reasonable public outcry and
media publicity led to changes in federal tax laws and policies with the passing of the Dodd-Frank
Act. This coincided with the major recession, bank and automobile bailouts, unemployment, stock
market plunge, and fraudulent housing industry. In most recent times however there is less media
play in the general public. Is this because the United States is currently seeing economic growth?
Are stockholders more satisfied? Is unemployment on the downswing? Is upturn in the auto
industry putting blinders on the general public in terms of CEO compensation? There are many
sides to the CEO compensation issue. There seems to be less finger pointing very recently as the
general public is also profiting far more than it had during the great recession of 2007-2009. In
some ways the problems still exist, perhaps the greater emphasis on the problems has been lost
though because of the U.S. pulling out of the most recent recession. It is this author’s opinion that
when the next recession comes, and market corrections/recessions always come, the public finger
pointing so to say, will move again to the forefront of focus in the business world and general
public.

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References
Andrews, E. L. (Yea2009r, March 14). A.I.G. planning huge bonuses after $170 billion bailout.
New York Times. Retrieved from
http://www.nytimes.com/2009/03/15/business/15AIG.html?_r=0
Brooks, S. (2010). Texas Enterprise. Retrieved from
http://www.texasenterprise.utexas.edu/2010/12/10/finance/greed-top-ceo-pay-and-great-
recession
Burroughs, J. (n.d.). Brainy Quotes. Retrieved from
http://www.brainyquote.com/search_results.html?q=pay
Burroughs, J. (n.d.) Brainy Quotes. Retrieved from
http://www.brainyquote.com/quotes/quotes/j/johnburrou121353.html
Koors, J. (2013, August). Is CEO pay too high?. Crain's Chicago Buisness, (), .
Retrieved from http://www.chicagobusiness.com/article/20130820/NEWS01/130819903/
is-ceo-pay-too-high
Feloni, R. (2014, June). The reason CEO pay is so high right now has little to do with
greed. Business Insider, (), . Retrieved from http://www.businessinsider.com/rise-in-ceo-
pay-is-not-a-bad-thing-2014-6
Flannery, N. P. (2011, October). Paying for failure: the costs of firing America's top
CEOs. Forbes, (), .
Retrieved from http://www.forbes.com/sites/nathanielparishflannery/2011/10/04/paying-
for-failure-the-costs-of-firing-americas-top-ceos/
Jensen, M., & Murphy, K. J. (1990, May-June). CEO incentives—it’s not how much you pay,
but how. Harvard Business Review, (), . Retrieved from https://hbr.org/1990/05/ceo-
incentives-its-not-how-much-you-pay-but-how

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Martocchio, Joseph J. (2013). Strategic compensation (7th ed.). New Delhi, : Pearson Education.
Public Files. (2010). Retrieved from
http://www.banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_
comprehensive_summary_Final.pdf
Rothman, J. (2007, March 8). Executive and board compensation trends. . Retrieved from
http://www.foley.com/files/Publication/1fd38abc-cddb-47f1-900b-
bb0d8de16105/Presentation/PublicationAttachment/5b51508a-92b5-4c42-b93e-
bef6db92274d/ExecutiveBoardCompensationTrends.pdf
Stodola, S. (2011, April). . The Fiscal Times.
Retrieved from http://www.thefiscaltimes.com/Articles/2011/04/21/CEO-Pay-Survey-
Big-Payouts-in-Spite-of-Recession
Vanderbuilt, C. (n.d.) Brainy Quotes. Retrieved from
http://www.brainyquote.com/quotes/quotes/c/corneliusv618009.html

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