Executive Compensation

Executive Compensation

Response to Classmate’s Post

Great Insights! I share a similar opinion that the main issue is not the compensation amount but the approach. If companies seek to enhance ethics and achieve commendable financial performance, they must strategically develop competitive compensation schemes. I also agree with you on vesting the executive in the firm’s long-term performance (Needles, Powers, & Crosson, 2013). In re-aligning the executives, with the shareholders’ wealth maximisation objective, it would be best to reward them with stock options. Consequently, managers would not pursue their interests at the expense of the shareholders’ interests. Managers owing stocks would optimize the firm’s profitability and implement decisions that are beneficial to the firm.

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Additionally, firms should be very cautious when rewarding employees with the company’s stock options (Buchner, Mohamed, & Schwienbacher, 2019). This initiative could result in a buyout by the managers. The executive may initiate a takeover of the firm and outs shareholders from ownership. Thus awarding stock options should be conducted moderately. Executives should be rewarded in a similar proportion to their output, “a workman is worthy of his wages.” Therefore, managers should diligently work to be deserving of their salaries.

Other Related Post: Home Depot and Lowes Financial Analysis

References

Buchner, A., Mohamed, A., & Schwienbacher, A. (2019). Herd Behavior in Buyout Investments. Journal of Corporate Finance, 101503.

Needles, B., Powers, M., & Crosson, S. (2013). Principles of Accounting. 12th edition.

Response to Classmate’s Response to My Discussion Post

I agree that duties should be separated between executives and those preparing financial reports. More so, third-party accountants exhibit the lowest probability of coercing executives. I also agree with you regarding compensating managers with large salaries. Fair compensation is an essential motivation tool for firms’ employees. Also, managers are bound to enhance their performance when they perceive they would benefit from the financial gains made by the firm.

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Executive Compensation

Can you please help me respond to Classmate’s response to discussion post and also, to her response to my post. Thank you.

Classmate’s Discussion Post

Executive Compensation – High but Fair

Harvard Business Journal argues that debates over executive salary are a smokescreen critics use  that suppresses corporate performance and ultimately underpays executives. HBJ further states that the amount of executive compensation is not the main issue but rather the mix of salary and incentives, suggesting that the more stock an executive owns, the more likely s/he is to ensure that the company does well (Jensen & Murphy, 2014).

Starbucks compensates its executives in a way described as “typical” by Needles, & Powers, & Crosson) with a combo of annual base salary, annual incentive bonuses, and long term incentive compensation, including stock option awards. This standard compensation structure of publicly traded companies is approved by an independent compensation committee of directors.

I believe that both of these perspectives are correct. Executives should be compensated commensurate to the value they add to the company. I think the more vested an executive is in a company, the more likely s/he is to make sound ethical and financial decisions since more of their salary would depend of good decision making.

In the controversy over how much executives make – which depends on individual companies – we assume executives who make a lot of money are more likely to do the wrong thing. But highly publicized corporate scandals could be overshadowing the thousands of executives who are not corrupt. The recent ViacomCBS merger is a good example of a President, Shari Redstone, who is widely credited by Bloomberg and others for her visionary strategy that has substantially increased the value of two companies.

I do agree that executives are ethical leaders and should set a good example, however, their first ethical duty is to ensure that their companies are profitable. The Bible says, “a workman is worthy of his wages” (1 Timothy 5:18) and Jesus’ Parable about the Talents (Matt 25: 14-30) obviously shows the relationship between work performance and resulting compensation. As long as we are “walking in a manner worthy” (Eph 4:1) we don’t have to worry about how much we’re paid because we can be confident that we are earning it fairly.

Reference

Jensen, M. C., & Murphy, K. J. (2014, August 1). CEO Incentives-It’s Not How Much You Pay, But How. Retrieved October 14, 2019, from https://hbr.org/1990/05/ceo-incentives-its-not-how-much-you-pay-but-how.

Needles, B., Powers, M., & Crosson, S. (2013). Principles of Accounting. 12th edition.

Palmieri, C. (2019, August 13). After Years of Battle, Shari Redstone Runs an Empire of Her Own. Retrieved October 14, 2019, from https://www.bloomberg.com/news/articles/2019-08-13/after-years-of-battle-shari-redstone-runs-an-empire-of-her-own.

Classmate’s Response to My Discussion Post

RE: Ethical Issues Arising from Financial Rewards to the Executive

Hi, I think you raised the “unspoken” issue – the same executives being compensated are also preparing the financial reports which are tied to their compensation! I truly had never considered that.

I am not opposed to executives making high salaries; the main purpose of me getting an MBA is so that I can earn a much higher salary. However, I think you are irrefutably correct that a separation should exist between the people preparing reports and the people benefiting  from favorable reports.

I think that many executives might even prefer to be relieved of the burden to deliver positive financial reports and prevent more ethical scandals.

Great insight!!