Asking the Right Questions - Term Paper Example

Introduction Browne and Keeley (2010) indicate that asking the right questions is crucial in critical thinking. This will provide a sound basis for evaluating the reasons given for arriving at a conclusion. Browne and Keeley (2010) indicate provides a list of critical questions which critical thinkers need to seek answers to as they evaluate the reasons for conclusions drawn by others. They are as follows: ‘What are the issues and the conclusions?’ ‘what are the reasons?’ ‘Which words or phrases are ambiguous?’ ‘What are the value and descriptive assumptions?’ ‘Are there any fallacies in the reasoning?’ ‘How good is the evidence?’ ‘Are there rival causes?’ ‘Are the statistic deceptive?’ ‘What significant is omitted?’ ‘What reasonable conclusions are possible?’ Some or all of these questions can be used by critical thinkers to analyse and evaluate reasons provided as explanations for conclusion drawn on a particular matter. Evaluation of the PDQ Case The issues and the conclusion in the PDQ case is that CEO’s pay is exorbitant when compared with the salary levels in similar companies. The reason given is that the CEO has received double digit increases – reportedly 40% while over the period growth has been only a mere single digit of 3%. In addition to that a story which appeared in the local newspaper indicated that Raymond James he is “The Highest Paid Valley Executives.” However, before we can agree with this conclusion we have to evaluate the reasons given and to determine if they provide adequate evidence on which such a conclusion can be based. Benchmarking Benchmarking is the process of using industry figures as a point of reference in evaluating a particular scenario. In this case the figures relating to compensation are being compared with that of similar companies in the industry. Benchmarking Raymond James basic pay with that of similar companies in the industry is a good way to determine whether his pay is exorbitant. Information from the Economic Research Institute indicates that the average salary for a CEO of a company with similar characteristic in the same industry as PDQ for the year 2007 – the latest year for which information is available is approximately $391,659. The figures from PDQ’ human resource department indicate that the CEO’s basic pay was $506,722. This is approximately $115,000 more than the average. The fact that $391,659 is the average indicates that some of the basic salaries are higher and some are lower than the average figure. However, we do not have any information on the highest and lowest figures used in the calculation. Therefore, the information from the Economic Research Institute does not provide sufficient information to agree with that conclusion. Additionally, the information from the Economic Research Institute is not current and therefore the statement that “it is now probably much more than that since he has received raises totalling 24% in the past two years is ambiguous. Furthermore, if the lowest figure is very low this would have a major impact on the average salaries. Best Practice Best practice is a term used to describe what is considered to be a good practice that can be recommended throughout the industry. This practice is one that others in the industry look up to as a solid way of carrying out operations or in dealing with a particular matter which in this case happens to be the matter of CEO compensation. Best practice is generally copied by similar companies in the industry. However, one has to be cautious in utilising such practice. In terms of best practice an independent research firm indicates that in medium sized companies that have characteristics which are similar to PDQ the levels of compensation for CEOs’ fell significantly since 2002 when median total compensation declined by 7.5%. This information refers to total compensation and not basic pay which is the issue being discussed in PDQ’s case. No information has been provided in terms of total compensation for Raymond James and so this information has no value and therefore cannot be used to evaluate the situation. Best practice information also indicates that a survey of executive pay practices which was conducted in 2009 revealed that almost 65% of the companies that responded either froze or trimmed the base salaries for their executives in 2009. The fact is that, this information though providing information on what some companies are doing to lower the impact of the financial crisis on their business, does not provide a complete set of information on all the players in the industry in which PDQ operates. We do not know the characteristics of the nearly 65% of companies who responded in that manner or the status of their financial statements that could have precipitated such and action from them. We are also not sure if these companies were paying more or less than PDQ to their CEOs’. Another issue is the claim that was made in a recent academic paper and which was cited in the Baltimore Sun is the argument that excessive pay to CEO’s was the actual cause of the recent US recession. This is so despite the varying reasons given by rating agencies and despite the measures taken by the government and numerous financial analysts that spoke to other reasons. It is true that CEO’s engaged to both companies that did and did not collapse were paid exorbitant salaries. However, this was never advanced as the main reason for the financial crisis. Additionally, it is not clear whether there have been figures to substantiate the conclusions drawn in the academic research paper that has been referred to. We are also not clear as to whether this paper has been subjected to scholarly review. There is no proof that the current base salary is 200,000 – 300,000 above the industry average as no data was available to compare with the company’s figures except for 2007. It must also be stated that the percentages calculated in relation to the annual pay increases are totally accurate in some instances. The following table provides the calculations. Year Base Salary Percentage Increase 2003 $400,000 n/a 2004 $412,000 3% 2006 $432,600 5% 2007 $464,882 7.5% 2008 $506,722 9% 2009 $562,461 11.2% $635,580 11.2% The table above show more accurate figures of the growth in the base salary of the CEO. Even though the rates are close most of the figures have been revised upwards based on the results obtained in my calculations. There is no information on which to check the growth rates given for PDQ and therefore I am unable to check the accuracy of the figures given. Until this information is provided the information cannot be relied on. The 3% indicated was arrived at by simply adding up the percentages given in the table. This is not an accurate way of calculating growth rates. In order to verify this figure the actual figures on which the growth rates were calculated would be required. Over the period the CEO received an increase of over $235,000 which is in excess of a 50% increase in basic pay over the period. If the 40% indicated is the total of the percentage increases for each year as presented in the table provided in the report. The increase was calculated by subtracting the compensation in 2002 from that of 2009. The difference between the two figures was then used to determine the percentage increase using the salary for 2002 as the base year. It has been stated that the compensation committee approved the increases for the years 2007, 2008 and 2009. These increases are actually higher than those agreed to in the initial five year contract. Since the contract had expired in 2006, if there was no basis for such increases then they should not be granted. Raymond James did not grant himself those increases and should not be blamed for it. What needs to be done is that the compensation committee need to consider pertinent factors such as the company’s ability to pay and the performance of the individual in the position in their determination of the increase to be granted. While the CEO’s salary was increasing the table indicates that the rate of growth of the company was declining. This is not to say that the CEO should be blamed. The fact is that the period 2007 to 2009 was a period of crisis all over the world. Large economies such as the USA and various countries in Europe saw a crisis in the financial sector that rippled through the rest of the economy. This period is referred to as ‘The Great Recession.’ The possibility exists that PDQ may have more reserves in the form of retained earnings from which they could continue to reward the CEO because the reduction in the growth rate cannot be taken as reflective of his performance. As a matter of fact it was clearly stated that that should not be a basis for the evaluation. It was suggested that the CEO is wealthy and therefore this should be a basis on which his salary should be determined. This is subjective and should not be allowed or considered by any means. What an individual has already acquired in terms of wealth should not be used as a basis for the determination of his compensation in any position that is held. Conclusion The pan for gold approach was utilised in the evaluation of the PDQ case. This approach allows the critical thinker to analyse a situation by asking the right questions (Browne and Keeley 2010). It is the opposite of the sponge approach which soaks up information presented without carrying out and evaluation of it. While it may be fair to saw that the CEO’s pay is high when compared to the industry average for 2007. It should not be generalised to say that it is so at the current level. There are no facts to support that information. The relevant data needs to be provided in support of that claim. Any information that cannot be supported by proof should not be used to draw conclusion on any matter. What is clear is that additional information would be required if the conclusion arrived at is to be accepted. Further research is therefore required in order to obtain information to support the author’s claims. This information should include and is not limited to information on the highest and lowest basic salaries for CEO with comparable figures. Information on the growth rates of the companies with which PDQ is being compared. Additionally, Information on the figures used to calculate the growth rates for both PDQ and the companies used to calculate the growth rate will also be useful. References Browne, M.N & Keeley, S.M. (2010). Asking the right questions: A guide to critical thinking. 9th ed. New Jersey: Pearson/Prentice Hall Mark Headlee. (2011). Evaluation of CEO Compensation. PDQ Manufacturing Read More