Justification of High Salaries for Chief Executive Officers - Essay Example

The High Salaries Paid to Chief Executive Officers are not Justified: To What Extent do you agree with this ment? Every organization exists to achieve a purpose. In order to attain organizational goals, a set of policies and strategies are defined and developed by management. Policies and strategic management are responsibilities of the chief executive officer (CEO). A major task under these responsibilities is corporate governance which is simply defined as “controlling, restraining and directing the making and administration of these policies” (Webster 1997). Concurrent with the great responsibilities, accountabilities, and expectations accorded to CEOs, the salary structure allotted for them have increased correlatively. In this regard, this essay is written with the objective of addressing the statement: the high salaries paid to Chief Executive Officers are not justified. The extent one is in conformity to the abovementioned statement would hereby be discussed. Duties and Responsibilities of the CEO One must closely examine the scope of the job responsibilities of CEOs in order to effectively gauge the pay structure given them. According to Kokiri (2002, par. 1) the basic responsibilities of CEOs encompass governance through provision of leadership, guidance and direction to coordinate relevant endeavors in the organization in compliance with the achievement of organizational goals. The key accountabilities include the planning, developing and reporting of corporate strategies, the management of various relationships with stakeholders, and the management of overall operations of the organization, among others. These accountabilities could be effectively delivered by assuming these expected competencies: leadership, problem solving skills, formulation of strategies, exemplary communication skills, comprehensive understanding of institutional agencies, distinctly strong personality style, and knowledge of governance and management. With great responsibilities come great expected remuneration and highly structured compensation scheme. Average Pay of CEOs Barclays indicated the average salary for CEOs in the UK as £76415 for the year 2009. This figure was actually substantially lower that the average pay for CEOs recorded for the year 2008 which was £208759, or 173% lower (Barclays, 2009). High Salaries Justified or Not Adrian Wooldridge (2009) presented arguments for and against the contention that CEOs high salaries are justified. The person defending the statement is Steven N. Kaplan, a professor at the University Of Chicago Booth School Of Business. On the other hand, Nell Minow, editor and co-founder of The Corporate Library argues against high salaries of CEOs. Kaplan averred that the high salaries of CEOs are justified due to the following reasons: (1) the pay structure of CEOs are driven by performance and market forces; (2) the average pay of CEOs have declined since 2000; (3) the tenure of CEOs have likewise declined from 10 years to 6 years affecting their gross compensation; (4) board of directors fire CEOs for bad performance; and (5) talented CEOs are paid according to their worth and can grab opportunities from various industries. Minow, on the contrary, argue that the high compensation of CEOs are definitely not justified as summed below: (1) the pay structure of CEOs have caused the global financial dilemma; (2) their pay is not linked to performance since despite the financial crunch, CEOs continue to receive ridiculously high pay and financial incentives; and (3) CEOs continue to avail of incentive programs inspite of bad performance and a declining economy. Analysis The two sides of the arguments are not sufficient to decide if the high salaries of CEOs are indeed justified. First and foremost, according to Pope & Young (2010), the composition of executive compensation packages for most executives in the higher echelon are composed of salary, bonuses, option plans and Long Term Incentive Plans (LTIPs). The pay is also correlated to the size of the company and differs according to industry. CEOs of companies which belong to the largest 500 companies have an average pay of “£600,000 (sum of salaries, bonuses, benefits, other cash pay, grant date values of options, and grant date value of LTIP shares)” (Pope & Young, 2010, 1). Using these facts alone, one can already deduce that the average pay indicated by Barclay most probably did not include CEOs belonging to the largest 500 companies. Doing so would significantly change the average pay indicated as £76415 for the year 2009, which is way below the average pay for CEOs belonging to the largest 500 companies. One can also surmise that economists and scholars who aver that high pay of CEOs are not justified for CEOs belonging to these largest 500 companies due to the magnitude of the absolute amount of the pay. Since the pay has been found to be correlated to the size of the company, it is just natural to conclude that the largest companies pay their CEOs substantially to compensate for the amount and degree of accountabilities and responsibilities expected of them to deliver. In addition, the discourse presented by Pope & Young (2010, 1) emphasized that “there is little hard evidence that tying executive pay more closely to firm performance actually helps to improve overall firm performance. The increased use of Remuneration Committees appears to have had relatively little effect on either the level or the sensitivity of executive pay.” Likewise, the study by Conyon & Peck (1998) clearly indicated that “in medium and smaller firms it is still common for the CEO (and sometimes other executive board members) to sit on the committee. Despite widespread calls for the formation of such committees, it remains unclear whether they act to constrain executive pay levels and/or tie pay more closely to firm performance”. This information validates Minow’s arguments that CEOs pay is clearly not related to performance nor would have been influenced and affected by any Remuneration Committee designed to review and evaluate executives’ pay. Conclusion Leaders are assigned and employed to do their tasks. Systems and procedures are installed to implement the necessary operational details to effect the defined strategies. However, when a gap still exists between knowing and implementing the operating systems, the top honcho still takes the helm and assumes responsibility in decision making. Although much has been said about the controversial nature of the CEOs pay, it can only be justified given more parameters and standards that should have been imposed by governing business institutions. Each government has labor agencies designed to evaluate salary structures of all personnel. When deemed excessive, these agencies should put a salary cap depending on the size of the organization, the industry it is in, and the composition of the board of directors – and overlook the implementation of compensation laws. Only when clearly designed compensation standards across the board are monitored and acted upon, could one truly decide whether the level of the CEOs salaries is indeed irresponsibly unjustified. Reference List Barclays. 2009. CEO Salary. Available at: http://www.mysalary.co.uk/average-salary/Ceo_483. [Accessed 13 July 2010]. Conyon, M. & S. Peck. 1998. Board control, remuneration committees and top management compensation. Academy of Management Review 41: 146-157. Kokiri, T.P. 2002. Examples of a Chief Executive’s Job Description. Available at: http://governance.tpk.govt.nz. [Accessed 13 July 2010]. Pope, P. & Young, S. 2010. Executive Remuneration: an investors guide. Available at: http://www.manifest.co.uk/reports/remuneration/pope_and_young_executive_compensation.html. [Accessed 13 July 2010]. Read More