American CEOs - Research Paper Example

This is because the public is concerned that unfair CEO compensation can lead to disproportionate distribution of wealth. This paper argues that outrageous CEO compensation can result in depriving the shareholders, force the workers to accept reduced pay and lead to an imbalance which could be unsustainable in the long run for the organization as well as for the shareholders. The different forms in which CEOs were compensated have evolved over the years. In the 1980s the CEO compensation comprised mainly of cash salary and bonus with only 30% CEOs being granted the stock options.

By 1994 options became a major component comprising of 70% of the CEOs receiving new option grants (Core, Guay and Larcker, 2003). Stock options thus became a major component of the CEO equity incentives. Theories have been cited to explain the CEO pay packages but according to Otten (2208) the executive pay packages are set by “simple” economics. It is often believed that the CEOs need to be compensated for the risks they take and hence the market forces set the packages. Qualified professionals are few and hence valuable.

They have to be offered incentives as they take on additional risks for value-increasing decisions, it is argued. Compensation takes various forms such as bonuses, shares and option grants. In other words, Otten argues, they are paid by performance and based on experience and seniority. If CEO pay could boost firm performance then imbalance would not occur but there is no support in empirical studies that there is a link between corporate financial performance and executive pay. Professor Kaplan argues that CEOs are underpaid and their compensation is based on the stock performance of the company.

Walsh (2008) counters this stating that it is difficult to ascertain whether the CEO has been paid for his own performance or for his predecessors. Besides, the stock prices are always industry-adjusted and do not reflect the actual performance of the company. Since compensation is based on level of seniority and qualifications, the CEOs take home much more money than an average American worker (Walsh, 2008). The disproportionate distribution of wealth is evident from the fact that in 1980 the CEO made 42 times the average worker’s salary.

This ratio increased to 107 in 1990 and 525 in 2000. The top 1000 CEOs took home 7% of their sales in 2005 which collectively amounts to Bolivia’s GDP, says Walsh. The Director compensation at Enron was $380,619 in cash and stock, which was the seventh highest director remuneration at that time (Brick, Palmon & Wald, 2006). Locke (2008) contends that the average workers’ pay adjusted for inflation increased by only 4.3% while the CEO compensation increased by 298 percent. While the median US salary in 2008 was $36,140, the CEO of Washington Mutual earned $5.

8 million; the CEO of Boeing earned $19 million while a Church Facilities Manager earned $42,000. The imbalance is further endorsed by Baker and Fung (2002) who argue that the wages of workers have been declining since the 1980s while the CEO pay has been increasing. Even before taking into account the value of stock options and bonuses, the CEOs in the US received compensation that was twice as high as any other nation. There is no evidence that the CEOs of the US firms are more productive than the CEOs of other nations.

The markets know that the true cost of CEO is deliberately hidden (Baker & Fung, 2002).