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Futures Senarios - Excessive Ceo Compensation

Essay by   •  May 8, 2012  •  Case Study  •  1,503 Words (7 Pages)  •  1,451 Views

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Anticipating all possible scenarios is good business practice. The future of excessive CEO compensation could play out in a multitude of outcomes. This just provides a sampling of those future scenarios which each address the issue at hand in different ways and takes into account different aspects of the business environments.


All teams in the NBA, NFL, and NHL (Major League Baseball has a "luxury tax" instead) have a salary cap that limits the amount that each team can pay to their entire team. These salary caps are designed to maintain a competitive balance between large and small market teams (Dietl, Lang, and Rathke, 2010). Could the idea of salary caps work to better serve taxpayers and the general public? As stated previously, the median pay for top executives at 200 of the biggest US companies was $10.8 million (Joshi, 2011). Suggesting that CEO pay be regulated would be met with little or no opposition to the average citizen. Yet there is no specific plan on how to regulate CEO salaries being proposed in congress or amongst any political candidates. Evident from the history of CEO pay and the ever growing disparity between the rich and the poor in the United States, the average American citizen feels that CEOs earn excessive salaries and compensation. We have a minimum wage, why not a maximum wage?

The idea of a salary cap for CEO's could be very up front and simple. The cap for CEO total compensation (including stock options and any other perks) would be $30 million a year. According to the latest Forbes (2011) report, 21 CEO's would have to take an immediate decrease in pay and find a way to live on less than $30 million a year. A cap placed on CEO compensation would provide a check to the amounts of pay, stocks, stock options, and perks received by executives felt to be unjustly too high.

A golden parachute is an agreement between a company and the executive specifying that they will receive certain significant benefits if employment is terminated (Cochran, Wood, & Jones, 1985). There would be a need to immediately dissolve any "golden parachutes" that allow CEOs to run from failures with tens of millions of dollars.

Performance Based

One perspective suggests that stock options are "cheap" because they provide more incentives for the same dollar outlay as an equivalent investment in stock, enabling companies to save on compensation costs associated with providing incentive (Dittmann and Maug, 2007). Supporters of stock options say they align the interests of CEOs to those of shareholders, since options are valuable only if the stock price remains above the option's strike price. Stock options are now counted as a corporate expense (non-cash), which impacts a company's income statement and makes the distribution of options more transparent to shareholders. The idea behind compensation being tied solely to performance is to properly align the principle and the agent. We have seen before the pitfalls of stock options as a means of compensation when looking at the current business situation. Executives are incentivized to take risk when stock options comprise the majority of their compensation (Bebchuk and Grinstein, 2005). Because increased volatility increases the value of the call option, stock options can increase the risk the CEO is willing to take. This can promote the executive to engage in excessive risky behavior with the company, which can lead to catastrophic failure, as seen the early part of the decade. An alternative to this could be a situation where performance based on other measure comprises the compensation structure. This would rely on finance performance to incentivize executives. Figures such as profit, revenues, ROIs, ROAs, and other quantitative economic measures would be used to calculate pay and bonuses.


Throughout the years, there have been attempts to control the pay levels for CEOs and other executives. In 1938, the SEC first required firms to disclose executive compensation (Dew-Becker, 2008). In 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and consumer protection Act, in order to further control executive compensation. These reforms, along with many others have been reactive to high executive salaries, and attempts by companies to get around previous legislation.

One way the battle between companies and the government over compensation can end is through complete deregulation. Companies would be able to set their CEO's salaries at a level that they feel is fair based on the business and market forces. This would mean that instead of being paid out in several different ways such as salary, stock options, performance bonuses, company performance bonuses, the companies would be able to have a much simpler and more transparent pay structure. This would also help reduce the number of CEOs who manipulate the companies numbers and cause scandles because their compensation is based on stock prices (Wu, 2011)

This could also lead to issues in that executives, in



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