Management: CEO Compensation - Research Paper Example

? Management: CEO Compensation Number Establishing employee remuneration rates is an arduous task for any organization and so is deciding on CEO’s salary and allowances. Deciding on a CEO’s salary and allowances is a complex task because of the multiple factors that are involved in the entire exercise. The CEO is a high-ranking officer so that it is nearly impossible for the human resources management [HRM] department to easily rule on it, while the CEO and his colleagues at the executive level of the organization may not fairly award themselves their remunerations because of conflicts of interests. Likewise, paying the CEO fairly may motivate him to hard work, and there are yet many models that can be used to establish proper rates of remuneration for the employees and CEOs. Similarly, losing CEOs because of low remunerations is serious leakage to an organization since the CEO together with the executive team plan and decide how organizational synergies are to be expended towards the attainment of organizational goals, vision, mission and aims. The difficulty and its possible solution may be seen in the ensuing discussion. 1. Critiquing and Evaluating Considerations That Are Traditionally Used to Determine CEO Compensation There are different considerations which are used to determine CEO compensation. One of the considerations is merit. In the consideration of merit, CEOs like employees are rewarded or compensated in accordance with the academic credentials that may have been acquired by the employee. Herein, certificates, diplomas and degrees may be used to determine the effectiveness of the same. Outstanding performance in these forms of scholarly testimonials may also be applicable: in this light, candidates with first class honors and those with additional degrees such as Master and Doctorate degrees may receive better emoluments or remunerations compared to their counterparts who graduated with second class lower and did not go past the Bachelors’ degree. This may be followed up with the experience that an employee may have received. Those who have attained a ten-year experience may receive higher remunerations, compared to those with a two-year experience. However, the drawback with the use of merit as a way of determining CEO compensation is fallaciously based on the assumption that education and experience are readily and mutually inclusive of performance. Bank of Credit and Commerce International, Eastern Airlines, British Satellite Broadcasting, Maxwell Communications Corporation, Krueger & Toll, AC Cars, Associate Motor Cycles, Sinclair Vehicles, Frontier Airlines, Lernout & Hauspie, HIH Insurance, Trans World Airlines, Corbin Motors, Maersk Air, EU Jet, Air Wales, Independence Air, NetBank and Habitat are some of the organizations that failed despite having highly learned CEOs at the helm. According to Moriarty and Kolb (2011), many organizations have also used bureaucracy to determine employee and CEO compensation. In this setting, roles, responsibilities, duties, power, privileges and remunerations are distributed according to an office and the rank of that office, in relation to organizational hierarchy. In this light, auxiliary staff is to be awarded the least amount of remunerations, followed by the junior staff, then the managerial staff and finally, the executive staff and the CEO. The crux of the matter herein is that the CEO and the executive staff make an organization’s key decision making organ and should therefore be awarded higher remunerations. The problem with this approach is that it readily makes an assumption to the effect that there is a direct and consistent relation between organizational hierarchy and optimal performance. In fact, Patrice and Baillargeon (2013) observe that 95% of organizational failures have been precipitated by human error, stemming from the executive staff. 2. Creating a Matrix or Sample Evaluation Tool That Details the Factors You Believe CEO Compensation Should Be Measured by in a Company The company is to have an elected Board of Directors that is to help determine the rate of CEO compensation. The members are not to be members of the management, in order to steer clear of conflicts of interest. These members of the Board of Directors are to be tasked with determining the market rates [and this rate is to be used to determine CEO’s compensation]. The determined market rate may then be discounted with 10%, so that the CEO is paid at least 10% to ensure that the company’s CEO is paid [10%] above the market rate. This is to ensure fairness, while also injecting competiveness and prestige into the organization’s lifeline. The Board of Governors is to be elected by the rank and file of the organization’s personnel in the organization’s AGM meeting, but the discussion of the CEO’s remuneration is to be discussed after every four years. Recommends Elects Appoints 3. Evaluating How Transferable This Tool Would Be Across Industries The tool that has been proposed above is highly transferable across several industries because it factors the reality of the prevailing market rates. That the tool above is transferable is a matter which is underscored by the observation of the market rates and this allows even applicability to nonprofit-making organizations. In the case of nonprofit-making organizations, the 10% discount may be applied downwards, so that the CEO and the executive wing is paid 10% lower than the normal market rate. This will cushion the nonprofit-making organizations from extra expenditure (Bogle, 2008). The use of prevailing market rates will ensure that the CEO, an organization’s executive organ and the entire personnel are not paid dismally or given unfairly low remunerations, even if the organization may be nonprofit-making. This will ensure that the CEO is still motivated. Conversely, profit-making organizations will still be able to motivate their CEOs by according them with more competitive remunerations. That the organization’s employees are to elect the board of governors and the members of the board are the ones to be tasked with the responsibility of evaluating market rates, is a matter which significantly abates conflicts of interests. 4. How Technology Can Best Be used to assist In the Development of the Factors You Identified as Factors That You Believe a CEO Should Be Measured By IT [information and technology] Technology will be useful in assisting in establishing the emoluments that properly fit a company’s CEO. That there is to be an establishment of the market rate is a matter which requires elements of IT technology such as the Internet, computers, telephones, facsimiles and email addresses. This is especially the case if the global market trend is to be observed. In like manner, creating the right format for rewarding the CEO and the rest of the employees will also need the input and engagement of IT technology. The same may apply to the task of harmonizing the technical background and functional expertise of the CEO and the executive organ (Edmans, Gabaix and Sadzik, 2012). 5. Challenges to Effective Evaluation of CEO Compensation There are several challenges that technology would have on the effective evaluation of CEO compensation. Chief among these challenges is dealing with inaccuracy in information. This is because, with the advent of IT technology, information has become abundant and easily accessible. Because of this, it will be easy to publish and access information online. This means that the organization will have to siphon truthful data from inaccurate ones, when trying to study market trends. Sun, Xiangjing and Xue (2013) observe that the use of IT to establish effective remuneration of the CEO may necessitate the use of company or organizational website. The same also necessitates the existence and input of an IT department. This translates into extra costs for the organization. This is paramount since tasks cannot be assigned to other departments. This challenge differs from traditional ones on the performance management process because, by using IT provisions to determine the market rate so as to gauge favorable CEO the organization will have to contend with IT security issues [because of the dangers of hacking and Internet fraud], and an IT tech-savvy task force. This may translate into extra expenditure. 6. Whether or Not the Factors Identified As Considerations Would Remain Relevant To the Next Decade, or Not It is a fact that the factors that have been put into consideration can be relevant from 2014 up to 2024. This is because, the need to pay CEOs and the rest of the employees are to be accorded with remunerations which are fair. One of the most reliable ways of ensuring fairness in employee remunerations is by using current market rates. This is to the effect that organizations that pay employees below market rates underpay their employees, while those that pay employees above the market rate pay their employees competitively. In the same wavelength, given the manner in which the world has become globalised, many businesses have become multinationals. Because of this, it is important to adopt international standards when establishing remunerations for the company’s CEO and personnel. This trend is bound to get stronger as the world continues to get increasingly globalized. Similarly, the Internet will continue to remain the most significant way of communicating, due to its reliable, rapid and ubiquitous nature. The use of IT and the Internet to study market trends is therefore a likely to remain a long-term undertaking. Closely related to the above observation, the observation of global market rates in personnel and CEO remunerations is likely to have a strong staying power because it is the strongest incentive to fairness, motivation and competiveness: employees feel treated fair when they realize that their remuneration and perks are commensurate with what the rest of the world offers. Again, the need to establish a team [such as the Board of Governors discussed above] is a practice that is bound to persist for many years to come. This is because, the world is constantly under financial strain and the need to have organizations observing frugality may still be paramount. In this light, many organizations and industries are likely to appoint or elect a team to determine employee and CEO remunerations. References Bogle, J. C. (2008). Dynamics of CEO Compensation. Academy of Management Perspectives, 22 (2), 21 – 25. Edmans, A., Gabaix, X. & Sadzik, T. (2012). Dynamic CEO Compensation. The Journal of Finance, 67 (5), 1603 – 1647. Moriarty, J. & Kolb, R. (2011). CEO Compensation. Business Ethics Quarterly, 21 (4), 679 – 691. Patrice, G. & Baillargeon, L. (2013). CEO Compensation in Canada, 1971-2008. International Journal of Business and Management, 8 (12), 1. Sun, F., Xiangjing, W. & Xue, H. (2013). CEO Compensation and Firm Performance. Review of Accounting and Finance, 12 (3), 252 – 267. Read More