Free

Alternative Approaches to Executive Compensation - Essay Example

Comments (0) Cite this document
Summary
Alternative Approaches to Executive Compensation Shareholders have no control in some publicly traded companies. This gives the managers a lot of substantial power…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER94.4% of users find it useful
Alternative Approaches to Executive Compensation
Read TextPreview

Extract of sample "Alternative Approaches to Executive Compensation"

Summary Affiliation Alternative Approaches to Executive Compensation Shareholders have no control in some publicly traded companies.
This gives the managers a lot of substantial power
Managers may use this power to serve their interests
There are two ways of linking executive competition and agency problem, which include the optimal contracting approach and the managerial power approach.
Limitations of Optimal Contracting
Agency problem experienced by managers
CEO can influence the nomination process for the board directors
The directors may never challenge the CEO’s pay, as they may want to please the CEO.
Market forces are not strong enough to assure optimal contracting outcomes
Failure of maximizing the shareholder value
Directors’ interest in the firm is nominal and therefore may not be serious with the company management.
Some agreements of the directors may be affected by market forces especially those affecting capital.
Managerial power approach
The Managerial power approach gives managers an opportunity to camouflage especially when extracting rent,
The approach may lead to the use of structures unfavorable to the firm performance and managerial incentives.
The compensation arrangement design depends on the perception of the outsiders
The managerial power approach may influence the relationship between power and pay without considering performance
The CEO’s compensation may be influenced by transparency and salience disclosure.
Power and Camouflage at Work
Practices explained by power camouflage include
Power Pay Relationship
Pay is higher in if managers have higher power
The board is ineffective
There is a small outside shareholder
Fewer institutional shareholders
Managers are protected by antitakeover arrangements
Managers with antitakeover policy compensate themselves more
Compensation consultants
Employed to provide advice on executive compensation
May increase their incentive to please the CEO
Used to justify executive pay instead of optimizing it
Provides compensation data, which favors the CEO
Stealth Compensation
This is where a firm may use camouflaging practices to enable them to pay the executives large sums of money.
Payments include deferred compensation
Loan forgiveness and consultation contracts
Use of executive loans with favorable interest rates
Golden goodbyes
A practice in which the board pays the outgoing CEO gratuity or benefits not counted as compensation contracts
Given even hen executives depart due to low performance
The gratuities are influenced by the management
Suboptimal Pay Structures
Suboptimal Pay Structures include
The pay without performance
Executives receive huge pay to increase the value of shareholders
Increased equity-based compensation
May involve very large amounts of compensation to executives
Option Plans, that fail to Filter Out Windfalls
Stock option plans fail to filter out stock price rises
Reduced windfall option plans may filter out some stock price increase.
Using the market-wide index and vesting may help in filtering
At-the Money Options
Another Sub optimal pay structure in which the executive is paid with the current market price without considering other factors such as inflation and their length of contract.
The exercise price is above the current market price
Are the most favorable to managers
Managers’ freedom to unwind Equity Incentives
Another challenge of the optimal contracting approach where managers sell their shares
The action may force the company to give them new incentives.
Unwinding weakens the managers’ incentives
Managers have the freedom of determining when to unwind
The Perceived Cost Explanation
Directors perceive conventional options to be or to grant or cheap
Directors may overlook the costs of options to shareholders
Inadequate information is one cause of misperceptions

Cost to Shareholders
The excess amount that the executive receive to compensate their power increases the costs on the firm’s shareholders.
The executive is only interested in the compensation schemes, which can camouflage their extraction of rent.
Conclusion
The power of management and extraction of rent influences the compensation of the executives.
The executive compensation design is always influenced by the managerial power especially in the firms in which control and ownership are separate.
References
Bebchuk, L. A., & Fried, J. M. (2004). Executive compensation as an agency problem. Journal of Economics Perspectives, 117(2). Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Alternative Approaches to Executive Compensation Essay”, n.d.)
Alternative Approaches to Executive Compensation Essay. Retrieved from https://studentshare.org/finance-accounting/1701087-alternative-approaches-to-executive-compensation
(Alternative Approaches to Executive Compensation Essay)
Alternative Approaches to Executive Compensation Essay. https://studentshare.org/finance-accounting/1701087-alternative-approaches-to-executive-compensation.
“Alternative Approaches to Executive Compensation Essay”, n.d. https://studentshare.org/finance-accounting/1701087-alternative-approaches-to-executive-compensation.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Alternative Approaches to Executive Compensation

Alternative Approaches to Discipline

...?Alternative Approaches to Discipline Affiliation with more information about affiliation, research grants, conflict of interest and how to contact Alternative Approaches to Discipline Discipline is an indispensable element for a human being to lead an orderly and harmonious life. Polland B contents that the aim of discipline is to also attain self-discipline and not to punish oneself (Polland, n.d.). Being at peace with oneself and others is also crucial for a hassle-free life (Rosenberg & Gandhi, 2003). Besides, according to Rosenberg, being at peace with oneself and others is also crucial for a hassle-free life. In a world fraught with strife and violence, Non Violent...
3 Pages(750 words)Essay

Executive Compensation Plan

...Executive Compensation Plan Executive compensation in McDonald's is defined as how the company's top executives are paid, which includes presidents, vice presidents, managing directors and general managers. Its purpose is to motivate leaders for their strategic requirements in increasing profitability and shareholder returns as well as compete for managerial talent and retain them in the company. The executive compensation program supports McDonald's business strategy dubbed as "The Plan to Win." The corporate strategy of winning focuses on people, product, place, price and promotion which would drive system wide sales...
4 Pages(1000 words)Term Paper

Executive Compensation

...Executive Compensation Introduction It is the objective of the to critically analyze and evaluate three articles that have been published on the subject of executive compensation in recent years, compare and contrast the ideas put forth in the articles and finally to draw a conclusion based on the convergent or divergent opinions of the authors and researchers. The author has chosen the following three articles for evaluation in this document; they are "Big time pay in a big time economy" by J. Manzi, published in the National Review in 2007, "Do motivation and equity ownership matter in board of directors' evaluation of CEO Performance" by P. Silva, published in the Journal of Managerial Issues in 2005 and "The corporate scandals... and...
4 Pages(1000 words)Book Report/Review

Chief Executive Officers Compensation

...Supervisor Chief Executive Officer's Compensation. Some Puzzling Questions. By: October, 2007 Table of Contents 1.0 Introduction 1.1.1 Do you think the fact that most American CEOs are paid so much more than rank-and-file employees, suggests CEOs are overpaid Explain 1.1.2 Japanese CEOs generally received much lower levels of compensation than CEOs in the United States. Does this imply that US CEOs are overpaid 1.1.3 Is it obvious that, $10.57 per thousand is too low of an incentive pay for CEOs Explain 1.1.4 Does the observation that, the stock price increases when firms increase incentive pay for CEOs suggest that most CEOs do not receive enough incentive compensation...
8 Pages(2000 words)Essay

Executive Compensation Schemes

...with the operations of large corporations and the exectuives. In the 21st century, President Obama, the Senate and the Congress are actively interfering in corporate decisions and have limited the levels of executive compensation. The collapse of many corporations and investment banks underscore the importance of strict regulation and monitoring of large private companies. Hermalin and Wallace (1997 ) used an alternative specification that revealed that in the savings and loan industry there is a strong pay performance relationship accounting for the inter-firm heterogeneity. John and Narayanan (1997) revealed that the disclosure regulations of SEC create incentives for...
12 Pages(3000 words)Essay

Executive Compensation

...salaries, more lucrative stock options, bonuses and other benefits, therefore, justifying this kind of thinking. The firm seeks the best manager it could find. Hence, both sides of the bargain, the corporation and executive, wrote Kolb, merely exercise their basic freedoms as economic actors in a free market and reach an agreement on that basis. (p. 4) Check and Balance Regulation for executive compensation – the current favorite alternative of critics – is a sound solution for the problem but this is in the short term. Capping the executive remuneration package is tantamount to limiting the rewards for excellence, good work, productivity and incentives...
7 Pages(1750 words)Essay

Executive Compensation

... Executive Compensation Introduction According to Mercer (2009), the business environment has witnessed various transformations and one of them has been the heightened competition to gain a considerable market share. Moreover, globalization has heightened the competition level, which has been further propelled by the fact that cost of switching to another product or service is considerably lower and hence, organizations have been forced to exploit other avenues through which they can gain competitive advantage. Graham et al. (2008) stated that among the most exploited sources of competitive advantage include the integration of information technology into the business processes to improve efficiency and the recruitment... and...
3 Pages(750 words)Research Paper

Determining Executive Pay

...for them to easily switch their employers. The perspective of opportunity cost argues that in order to retain or hire a qualified executive, the salary level has to be at least equal to the level that would have been paid to his the next best available alternative. The superstar theory does not address the implications of this theory regarding to the prevailing skewness that is seen in the income distribution. The seen skewness in the distribution of executive pay could be explained by the available disproportionate premium levels that companies are often willing to for executives’ capabilities or talents for which there are not available any other suitable substitutes...
8 Pages(2000 words)Term Paper

Executive Compensation and WorldCom

.... Recommendations An alternative and solution to this dilemma would involve dissociating executive compensation from company performance (Neokleous, 2013). Therefore, executives should be hired on contractual terms and an agreement on basic remuneration arrived upon, basing on qualification, experience and industry. This is not to mean that bonuses should be abolished since they agreeably, serve as motivation for the CEOs to perform better. However, their remuneration should not be anchored mainly on the benefits they make when the company performs well rather than their qualifications and experience. Conclusion WorldCom has been shown to have been a telecommunication...
4 Pages(1000 words)Essay

Executive Pay Compensation

...in encouraging them to remain committed to the business and assist them in their operations Executive Pay Compensation So far, research has indicated that people are the most important resources that businesses require in creating their competitive strategies. This stems from the fact that people have the capability to understand the business environment and ways of creating their success. In having a competent staff, one of the approaches used is ensuring that people get the best pay for their work they do in the business. Some business owners believe that having a competent staff is the key to having effective and efficient work. While it may be true, the...
9 Pages(2250 words)Research Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Alternative Approaches to Executive Compensation for FREE!

Contact Us