The Compensation for Executives

The Compensation for Executives

Compensation package offered to the executives nowadays in the United States as well as other major industrialized countries has experienced a sustained rapid growth. A typical CEO’s compensation package includes fixed salary, stock options, free use of company resources and usually, bonuses with tenuous link with performance. A new paper cited by the Economist (2005) reported that in 1997, the average American chief executive of the top firms in the United States took home Ј2.68m, while a typical counterpart in a British company earned Ј955,000. By 2003, the figure in Britain had risen 77% to Ј1.69m and that in the US to Ј2.83m. But take into consideration the relatively small scale of the British with mean (median) 1997 market capitalization of Ј2.2b (Ј420m) compared to Ј3.4b (Ј760m) in the Unite States (Conyon & Murphy, 2000), the CEOs in the UK are also well-paid. In recent years, the trend has drawn attention from both academic researchers and the general public, illustrated by the rapid growth of literature and critiques on the topic. What perplexes the public is that among the CEOs earning tremendous remuneration are ones of companies that are providing negative returns for their shareholders. In this article, several possible causes of the phenomenon will be demonstrated and possible consequences will be discussed as well.

Causes of the high remuneration level with weak pay-performance connection come from both internal corporate governance and external economic as well as social environment. Firstly, the increasing influence by the CEOs on the BOD over time is of course a big concern. Such cynical view of the executives also attested to Jensen and Murphy’s (as cited in Cyert et al., 2002) finding that “arithmetic pay-performance sensitivities were on average higher for 1934-1938 than for 1974-1986”, and that for nowadays is even higher. “CEOs gain power over time as they gain voting control, establish a patriarchal aura, or co-opt the board of directors” (Jensen, as cited in Hill & Phan, 1991). Anyway, CEOs are the ones who nominate new board members; favor from BOD over time is an inevitable outcome, which is just a matter of time. Another corroboration of the CEOs’ growing power in the BOD is the fact that the CEO is also the board chairperson for about 70% of the 4,865 U.S. firms listed on NYSE, ASE, and NASDAQ as well as the largest shareholder in 26.2% of the firms (Disclosure Inc., as cited in Cyert et al., 2002). Secondly, the ever-increasing complexity of the business atmosphere adds to the compensation packages for the CEOs. The CEOs are supposed to adapt the enterprise to the relevant industry and the society. The more ambiguous, ambivalent and uncertain environment the CEO is facing, the better mix of pay package he should be granted as the recompense for his intensive endeavors. Such increase in the pay could also be considered as return of the risk exposure and responsibility the CEO has shouldered. Thirdly, it could not be denied that uncertain events also contribute a lot to the robust growth. Cyert, Kang, and Kumer (2002) refer to the factor as “contingency”. The booming macroeconomic environment in late 1980s and 1990s, the stability of demand for the industry and all kinds of opportunities, when optimistic, all help raise the pay. Last but not the least, the relationship