Alternative Approaches to Executive Compensation - Essay Example

Download file to see previous pages •  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 ...Download file to see next pagesRead More