Executive Compensation Setting Principles and Processes
Chief Executive Officers are the senior staff of the company with the overall responsibility of the company. The duties of the CEO include outlining the vision of the business, policy-making, and value-creation in the enterprises of the company. They have a special scheme called Executive Compensation, which is an Act that sets down their remuneration arrangements. The packages are distinctive and exclusive in comparison to the other staff of the firm. This executive pay scheme extends from wages, pensions and long-term rewards to bonuses. Describe the Executive Compensation Setting Principles and Processes. The three theories that will help in understanding this subject are the tournament, the agency, and the social comparison theories. Agency theory asserts that the shareholders negotiate with the executives to help them remain on top of the company. They chat out with the executives about the best possible ways to protect their shares in the business (Carberry and Zajac 118). Tournament theory places a lucrative prize on the position of a CEO which ensures competitive contests among managers who wish to occupy such positions (Dittmann et al. 1809). Social comparison theory calls for a match in skills and performance between those eyeing to take up executive roles and their predecessors. The process of compensation plan formulation involves three main players – compensation consultants-hired consultants, who propose compensation plan to the company, board of directors who represent interests of shareholders and make a final decision on the report from compensation committee, and compensation committee analyzing compensation consultants’ recommendations and forwarding them to the board of directors for approval. It leads us on to principle question. First, executive compensation should directly conform with shareholders long-term interests through equity-based compensation to executives. Second, the plan should be determined by independent directors free from any compromise such as the personal relationship with shareholders or executives (Carberry and Zajac 98). Third, the compensation committee should require the executives to hold a certain proportion of the company’s stock as partners to the company to enhance accountability. Fourth, recommendations of the compensation plan should be made available to the shareholders in due time, accurately, and in full (Dittmann et al. 1805). Lastly, it requires the compensation committee to oversee the complacency of the compensation plan to check any excesses of the executives which might be a disadvantage to other employees regarding remuneration.
Provisions of the Dodd-Frank Act
This law protects consumers by regulating monetary cycle in the United States (Dittmann et al. 1806). The provisions include: restrictions to the banks to deal exclusively with private equity funds (Volcker rule); establishment of an independent financial regulator (the consumer financial protection bureau) to protect consumer laws; provision by banks not to release a certain percentage of their capital in the market (capital and liquidity requirements); independent financial regulators to assess the viability of the economic system (financial stability oversight council); lastly, the act gave Federal Deposit Insurance Corporation authority to declare a failing fiscal body bankrupt (Carberry and Zajac 78).
Do you believe U.S Executives are paid too much? Why?
I do not believe that the U.S executives are paid too much. The amount of time and responsibility needed from a CEO is a clear indication they deserve the pay they receive. Their prowess in management skills is highly sought. Hence, no company can afford to go bankrupt due to incompetent CEOs. The competitive selection of CEO posts tells a lot about the profession, after all, why should one sacrifice his/her own family, time, and leisure to see somebody’s company grow if the pay is not matching their skills?
Carberry, Edward, and Edward Zajac. “How US Corporations Changed Executive Compensation after Enron: Substance and Symbol.” Academy of Management Proceedings, vol. 2017, no. 1, 2017. Dittmann, Ingolf, Ko-Chia Yu, and Dan Zhang. “How Important Are Risk-Taking Incentives in Executive Compensation?” Review of Finance, vol. 21, no. 5, 2017, pp. 1805-1846.