Impact of Managerial Power on CEO Compensation


Added on  2019-09-20

8 Pages2443 Words496 Views
IntroductionThe compensation at the executive level has become trending over the time and has presentlybecome one of the most creative sections of the research study in the field of the finance. Sincethe 1990s, as and when the world economy started to prosper, there was a need felt by theshareholders to create the contract for the executives as well as provide them with the incentivesto boost up the stock market value of the firm with every passing year. Research makers, as wellas the academic scholars, initiated the exploration of the optimum method of incentives as wellas compensation that can inspire the executives to work harder as much possible. The importancewas not only given to the principles but also the mode of payment to the executives. Thesemethods of payment can be either in the form of short duration payments such as wages, orbonus payments or relatively longer duration payments in the form of long-term plans forincentives or stocks in restricted form or there can be another form of payments like hikes orincrements. The large level of payments to CEO in the United States has resulted in the seriousdiscussion about the kind of procedure of pay setup and the resulting consequences. Someresearchers have argued that a grand amount of executive packages in the form of pay have beenthe outcome of the influential managers negotiating for their own compensation and moreoverextracting rent from the firms. Another side of the story says that such large compensation hasbeen the outcome of contract agreement in the market of competition filled with the talents andskills at managerial level. The research study here focusses on the compensation levels ofexecutives and evaluate the argument in favor and against such descriptions. It has beensuggested that the power at the managerial level and the forces of competition in the market arethe major determiners of the compensation at CEO levels. The origination of the CEO paymentssince the Second World War can be segmented into two phases- phase of pre-1970s and post-
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11970s till now. Before the period of the 1970s, the levels of payment have been quite small, therehave been a lesser amount of variation across the superior level managers as well as thesensitivity level in terms of performance on the payment basis have been neutral. However in theperiod after the 1970s till mid of 2016, the payment levels of the managers grew at adramatically faster rate. Moreover, the inequality levels in the payment levels to the managers aswell as the firms have broadened up, and the benefits that arise out of a better performance atequity accumulation have tied together the interests of managers to the propelling or decliningperformance of the firm. However, till now there have been no theory to clearly convince uponthe regimental diversion that has happened during the period of the 1970s and there have beencomplications in all the theories either in terms of tendencies observed in time-series data or thecross-sectional study. The significant contribution in the recent times has evaluated the impact ofchanges at the exogenous level in the form of the compensation levels of CEO, behavior patternsof the firms and their performances. For example, the deregulating process of the industry hasbeen interconnected with higher compensation levels to CEO.Decision Maker for Executive Compensation The relevant thing is to determine the procedure by which payment setting is done and also to decide who eventually determine the pay for executive level. The principal-agent model has beenconsidered as the standard theory on economic grounds for the compensation to the executive. According to this theory, the aim of the firm is to create the most effective package that is feasible in terms of compensation so as to invite the CEOs and increase their stability power and the motivation levels as well. Under the principle-agent model, it is the shareholder who is responsible for the determination of the compensation levels. In the real world, although, the
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2committee is created by the board of directors to set the compensation levels on account of the shareholders. Here, the shareholder who is considered as a principal is the creator of the agreement and he is the one who make a proposal offer to the agent i.e. CEO or manager in this research study. The aim of the shareholders here is to create for a best possible package of compensation so as to incentivize the CEOs and thereby to interconnect their interest with the shareholders. Such approach is used to determine the pay at the executive level. Elements of CEO pay levelsEven though there exist lots of diversities in the practices regarding the payment structure but on the whole, there are some fundamental elements of bonus on an annual level, salary packages, payment in the form of high duration incentives, option grants in restricted form, and grants of stocks in restricted form. Along with these elements, CEOs are also subjected to fixed beneficial plans of pension, as well as, payment of severance at the time of their completion of work duration. However, the relevance of these components of compensation has changed over time ata comparative level.
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