Hrm 450 Term Project

Topics: Chief executive officer, Corporate governance, Executive officer Pages: 9 (3148 words) Published: May 3, 2013
كـليـة إدارة الأعــمـال
College of Business Administration

Written by:
Abdalaziz Saad Alamry

ID number:

Course code:
HRM 450

Section number:

Research on “Is Executive Compensation Fair?”

Is Executive Compensation Fair?

Executive pay (also executive compensation), is financial compensation received by an officer of a firm. It is typically a mixture of salary, bonuses, shares of and/or call options on the company stock, benefits, and perquisites, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance. Over the past three decades, executive pay has risen dramatically relative to that of an average worker's wage in the United States, and to a lesser extent in some other countries. Observers differ as to whether this rise is a natural and beneficial result of competition for scarce business talent that can add greatly to stockholder value in large companies, or a socially harmful phenomenon brought about by social and political changes that have given executives greater control over their own pay. Executive pay is an important part of corporate governance, and is often determined by a company's board of directors. Types of compensation

There are six basic tools of compensation or remuneration.
* salary
* short term incentives (STIs), sometimes known as bonuses * long-term incentive plans (LTIP)
* employee benefits
* paid expenses (perquisites)
* insurance
In a modern corporation, the CEO and other top executives are often paid salary plus short-term incentives or bonuses. This combination is referred to as Total Cash Compensation (TCC). Short-term incentives usually are formula-driven and have some performance criteria attached depending on the role of the executive. For example, the Sales Director's performance related bonus may be based on incremental revenue growth turnover; a CEO's could be based on incremental profitability and revenue growth. Bonuses are after-the-fact (not formula driven) and often discretionary. Executives may also be compensated with a mixture of cash and shares of the company which are almost always subject to vesting restrictions (a long-term incentive). To be considered a long-term incentive the measurement period must be in excess of one year (3–5 years is common). The vesting term refers to the period of time before the recipient has the right to transfer shares and realize value. Vesting can be based on time, performance or both. For example a CEO might get 1 million in cash, and 1 million in company shares (and share buy options used). Vesting can occur in two ways: "cliff vesting" (vesting occurring on one date), and "graded vesting" (which occurs over a period of time) and which maybe "uniform" (e.g. 20% of the options vest each year for 5 years) or "non-uniform" (e.g. 20%, 30% and 50% of the options vest each year for the next three years). Other components of an executive compensation package may include such perks as generous retirement plans, health insurance, a chauffered limousine, an executive jet, interest free loans for the purchase of housing, etc. Levels of compensation

The levels of compensation in all countries has been rising dramatically over the past decades. Not only is it rising in absolute terms, but also in relative terms. In 2007, the world's highest paid chief executive officers and chief financial officers were American. They made 400 times more than average workers -- a gap 20 times bigger than it was in 1965. In 2010 the highest paid CEO was Viacom's Philippe P. Dauman at $84.5 million The U.S. has the world's highest CEO's compensation relative to manufacturing production workers. According to one 2005 estimate the U.S. ratio of CEO's to production worker pay is 39:1 compared to 31.8:1 in UK; 25.9:1 in Italy; 24.9:1 in New Zealand. Controversy

The explosion in executive pay has become controversial,...

References: Books
* Lucian Bebchuk and Jesse Fried, Pay without performance: The Unfulfilled Promise of Executive Compensation (2006)
* Bebchuk, Lucian; Grinstein, Yaniv (April 2005). "The Growth of Executive Pay". Harvard University: John M. Olin Center for Law, Economics and Business.
Newspaper articles
* Sean O 'Grady, 'Economist Stiglitz blames crunch on 'flawed ' City bonuses system ' (24.3.2008) The Independent
* Louise Story, 'Windfall Is Seen as Bank Bonuses Are Paid in Stock ' (7.11.2009) New York Times
* '"Chief executives ' pay rises to £2.5m average ' (4.8.2005) The Guardian
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