Are US CEOs Overpaid - Research Paper Example

?Insert Are US CEOs overpaid? United s’ chief executives officers (CEOs) are believed to be overpaid. As such, what they take as salary has come under public scrutiny in the recent past. The trend has been going on despite the economic weaknesses of the organizations the CEOs lead. It is harder to measure the relative essence of the persons in an occupation, however. Most CEOs are top-notch intellectuals possessing advanced degrees from reputable universities in America and or elsewhere in the world. Besides, they have extensive working experience in busy organizations, where they have slowly built their career of leadership. Even if they did not occupy such positions, people with a firm educational background and effective leadership skills should be paid much more than the rest of the population. The public’s outcry is not entirely misguided; nonetheless, there are facts supporting the high earnings entitled to the CEOs and it remains unclear whether capping CEO salaries will contribute to business success. This paper explores whether US CEOs are overpaid. Statistics According to Kaplan, US CEOs are arguably overpaid (6). According to Walsh, some of the potential triggers of the ‘excessive’ salaries of CEOs include; too much influence, negligent boards of directors, weak compensation consultants, and formulation of salary scales through stock options among others (73). According to Kay and Van Putten, in 1970, the average Chief Executive Officer earned about $700,000 (189). The amount was 25 times the earning of an average production employee. Three decades later, CEO salaries had risen to almost $2.2 million, 90 times more than the salary of an average worker (Kay, and Van Putten, 190). Kaplan argues that with an increase in the value of stocks and other allowance, the average CEO currently earns between 250-500 times the average employee’s salaries (7). According Walsh, latest studies indicate the average CEO earned between $10 million and $15 million in 2005 (74). The amount includes their basic salary, allowances, increases in the value of the stock value, stock grants, and several executive reimbursements and prerequisites. On the other hand, average employees feel underpaid. According to Kaplan the average American employee was paid an estimated $40,000 in 2005 (5). Any employee in the technology industry is aware this average salary would hardly hire a well-educated administrative staff in technology-intensive sectors in the United States. According to Thomas and Hill, current CEOs serve shorter terms compared to CEOs of the late twentieth century, hence the sharp rise in the earnings (19). The high rise in CEO salaries may be attributed to the fact that the officers are uncertain about what would happen next. Capitalism seems to have entered the corporate sector to the level that CEO may see it better to earn as much as they can when in such positions (Kay, and Van Putten 191). According to Walsh, today’s CEOs are virtually carrying out the same duties as their predecessors who earned a much less, but this is not the case with line workers (75). Whereas, the salary gap between a top executive and the average employee calls for a review of the rules to narrow it, Kaplan argues that rectifying the discrepancy may not be achieved (6). Owing to the fact that CEO salaries top the list of salary scales in most organizations, theirs tend to be fodder to the media. Less widely covered is the substantial salary disparity between employees and junior executive remunerations. It differs by sector, but in most firms, the salary discrepancy becomes clear at the immediate CEO subordinates. At this point the analysts move into a lower pay level, but significant disparities in salary still subsist between a senior executive and a CEO (Kay, and Van Putten 122-127). Relating the average worker pay to CEOs For easier understanding of the salary scale of the average employee in the US, it would be appropriate to analyze all aspects of their salary; wage, shift gap, overtime reimbursement, bonuses, incentives, commission, compensation based on stocks, recruiting bonuses, and retention bonuses among others (Kay, and Van Putten, 35-41). Nonetheless, that is not the kind of information employers look for in these analyses. It is impractical to see organizations compare how much manufacturing industry workers earn in relation to the workers of a service industry, for example. Walsh argues that this might imply that many do not believe these comparisons are credible, because different job descriptions with different trainings as prerequisites should have different salary scales (73). According to Walsh, the difficulty in comparing the salaries of average workers across industries raises the delicate challenge of ascertaining that CEOs are indeed overpaid (74-75). Nonetheless, CEOs are receiving numerous forms of inappropriate benefits, which range from ‘unfair’ amount, cause (s) and form(s). Money to the tune of billions of dollars has gone down the pockets of thousands of CEOs who have brought big and profitable organizations to their knees, and as a result ruined the economic lives of workers (Fong, Misangyi, and Tosi 629). There have been cases of executives joining a business organization when the firm is set for a takeover, only to acquire millions of dollars in payments related to the change of ownership. The public should consider such issues so as to establish the discrepancies in pay between a CEO and the average worker in the same company. Why CEOs are overpaid? Despite the fact that CEOs of major corporate organizations are seen to be earning more than they should under normal circumstances, Walsh has argued that some CEOs deserve the sky-high pay (73). The value of a top-notch executive is believed to be very high because they make significant contributions to not only the company by the economy in general (Fong, Misangyi, and Tosi 634). The executives create job opportunities; and are credited with enhancing the tax base which propels the whole economy of the United States to greater heights. The top-level executives give America a competitive advantage over other countries in the global markets (Thomas and Hill 34-41). According to Ertimur, Ferri, and Muslu, those who complain about the excessively high amount of CEO pay, usually fail to understand that the officials make tremendous economic successes to the country and bear the brunt of excessive pressure from the executive boards and the government (551). Competition within the corporate industry is also to blame for the high CEO salaries. To retain a performer as CEO, the organization must be prepared to offer competitive salaries lest they are wooed by rival companies (Fong, Misangyi, and Tosi 633). The end result may be a collapse of the organization from where a performer was poached. Despite the big salary gap between CEOs and the average employee, researchers carried out in the recent past have established that the disparities have slightly reduced in the twenty-first century (Kaplan 5-7). The bad news is that contrary to the expectations of the public, the salary divide between CEO salaries, junior executive salaries, and the common worker salary will remain remarkably and clearly distinct (Walsh 75). Impacts of hefty CEO Salaries on the average worker Although, it is fairly infrequent, every year there are cases of CEOs who earn hefty salaries while their organization assets are dilapidated and workers’ stomachs left to go bananas. This can result in irreversible impairment to employee spirits on the job. If an organization is experiencing a reduction in the market share but the top executive continues to reap heavy bonuses, Kaplan notes that perceptions of dissatisfaction and frustration are bound to happen (18). When the number of workers who are dissatisfied with the way an organization is run, especially in terms of compensation policies, everyone is set to be less productive, and it will soon take the toll on the company’s profits. Whereas most business organizations are abusing the reimbursement program without comparing what a CEO earns with the average worker’s earnings, in most cases, CEOs salaries are logical and justified (Fong, Misangyi, and Tosi 647). Capping CEO Compensation There are several approaches to the handling the tremendous rise in executive pay. Making the information public is the initial step. In an organization, Fong, Misangyi, and Tosi suggest that this enables various stakeholders to be aware of the executive pay, initiate discussions and make a decision on whether or not the amount is justified (642-643). Due to the significance of transparency, the United States Securities and Exchange Commission (SEC) has asked all publicly traded corporate organizations to reveal more information elaborating how their executives' remuneration amounts are calculated (Kay, and Van Putten, 56-65). The organization has also made public compensation amounts of top CEOs to ease public scrutiny of the issue. Secondly, regulating the pay is also a proven way to reducing the salary gap. This can be achieved by placing the issue on an informal vote by members of general the meeting. The meeting can then approve executive pay packages. Although, some researchers have advocated a binding vote for huge amounts exceeding $5 million, Kaplan concurs that currently the approach is of less significance in determining the salaries of US CEOs (13). The primary objective is that by tabling the issue for a vote, the board could be persuaded to not increase executive pay beyond acceptable levels. The general meeting is usually comprised of the company’s shareholders in the United States. In some cases though, with bicameral board structures, an administrative board will take the position of the workforce and shareholders as well. According to Walsh, it is this board charged with supervisory responsibilities that decides on executive pay (75). Thirdly, the bonus-malus mechanism, where CEOs are left to enjoy up-side benefits and remain affected by down-side risks can also be employed to check executive pay. Fourthly, Kaplan suggests that the levying of progressive taxes is also a more all-encompassing approach that impacts on executive pay, as well as other overpaid employees (11). In the recent past, the United States has imposed more taxes on CEOs running companies funded by tax payers, as a way of reining in their ‘overpay.’ According to Fong, Misangyi, and Tosi, executive pay could be maintained at a reasonable amount by placing more taxes on the highest paid workers, for instance by placing a heavy percentage on income over $500,000 per month (631). Fifthly, capping CEO pay to a certain amount has also worked in the United States. In the country, maximum pay policy has been in force for three years now. Under the system, the salaries of the executives should be capped at $500,000 annually for organizations who benefit from the public funds (Kaplan 16). The idea is to impose a regulation on the sum that any individual may legally take. The policy works in the same way as the regulations imposing the minimum wage so that workers cannot be paid negligible amounts. Sixth, Debt Like Compensation can also be used to bridge the income gap. Under the strategy the motivation based on risk taking for CEOs is offered with respect to equity rewards and risky debt (Fong, Misangyi, and Tosi 629-651). The consideration of debt like instrument as a significant part of the compensation taken by the executives may limit the risk of preventing the executive benefits. Therefore, in the recent past, there are numerous proposals to prompt financial institutions to enforce debt like pay. Finally, Indexing Operating Performance enables an organization to place bonus targets beyond manipulations. According to Kay, and Van Putten, indexed bonus targets depend on the stage of organization in the business cycle and are considered fairer and practical for long-term management of CEOs salaries (99-101). Economic inequality is real In an effort to reduce the income gap between a CEO and the average worker, the public should understand that economic disparities exist (Fong, Misangyi, and Tosi 645). Generally, everybody would like to be paid more money, but it is impractical for organizations to pay the average worker millions of dollars or reduce the CEO salaries to tens of thousands of dollars in a year. According to Kay and Van Putten it is common knowledge to believe that certain individuals are worth higher price than others in the corporate world (68). CEOs deserve more money because they have skills that are lacking in the population. That is the reason why exorbitant CEO compensation will remain the American culture. Top corporate CEOs are working at the pinnacle of industry in the same way that top sportsmen compete in the top-most competitions in their relevant fields. So there should be no difference in the corporate world in regard to executive compensation because the average worker in this case is like an ordinary citizen. Although, the outcomes of research on executive pay have been conflicting, they tend to favor overpay for CEOs. Whereas, some indicate that ‘overpaid’ CEOs improve profitability in the company compared to executives taking less for the same jobs, others suggest that highly paid CEOs are more probable to behave in a pessimistic way and therefore exhibit tendencies of unprincipled performance on the job (Kaplan 5-20). Regardless, high executive pay promotes the idea of liberal markets, which is the backbone of the US economy. Many people may be easily frustrated when they examine the disparities between CEO salaries and their own salaries; however, responding to the condition with more set of laws aimed at capping the executive pay may erode the culture of free markets in the economy. According to Kaplan, rather than being preoccupied with the millions of dollars in CEO compensation, investors should ensure that CEO pay is performance-based (18). This implies creating performance appraisals to ensure that only the CEOs who create shareholder value get the ultimate prize (Fong, Misangyi, and Tosi 644-647). Public frustration is premised upon the disparity between CEO compensation and that of the average employee. This has led to modest achievements in regard to public pay: for instance, under Dodd-Frank, organizations are now obligated by the law to reveal the ratio of the average salary of ordinary employees to that of the top executive. Presumably, the concept behind the regulation was that organizations would be at pains to keep CEOs salaries on the rise while the average worker languishes in poverty. However, the attempts have not yielded any tangible outcomes. Conclusion The idea that CEOs are overpaid has been in the American public domain for quite some time. Underlying the uproar over pay disparities the idea that workers should earn somewhat similar amounts of salary for same jobs. Nonetheless, such a perception oversimplifies how labor markets operate. The job of a CEO offers the holder of the office a free hand in operating the whole company. Most workers will essentially impact a small area of the company while the executive’s decisions can shape the operation of the whole organization. Due to the fact that many public organizations in the United States have asset value in the tens or hundreds of billions of dollars, a slight change in the value of the organization could have a big impact. In light of this, most companies are prompted to enlist a qualified CEO and ‘overpay’ him to create value for the corporation. Works Cited Ertimur, Yonca, Ferri, Fabrizio, and Muslu, Volkan. Shareholder Activism and CEO Pay. Review of Financial Studies, 24.2 (2011): 535-592. Fong, Eric A., Misangyi, Vilmos F., and Tosi, Henry L. The effect of CEO pay deviations on CEO withdrawal, firm size, and firm profits. Strategic Management Journal, 31.6 (2010): 629-651. Kaplan, Steven N. Are CEOs Really Overpaid? Corporate Board, 28.167 (2007): 8-12. Kaplan, Steven N. Are U.S. CEOs Overpaid? Academy of Management Perspectives, 22.2 (2008): 5-20. Kaplan, Steven N. Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts, and Challenges. NBER Reporter, 1.3 (2012): 1-6. Kay, Ira, and Van Putten, Steven. Myths and Realities of Executive Pay. New York: Cambridge University Press, 2007. Thomas, S. Randal, and Hill, Jennifer. Research Handbook on Executive Pay. Toronto: Columbia University Press, 2009. Walsh, James P. Are U.S. CEOs Overpaid? A Partial Response to Kaplan. Academy of Management Perspectives, 23.1 (2009): 73-75. Read More