Equity and Executive Pay

Running Head: EQUITY AND EXECUTIVE PAY 0
Individual Case Study Analysis Report- Equity and Executive Pay
Student Details
4/11/2019

Equity and Executive Pay 1
Contents
Summary....................................................................................................................................2
Advantages.................................................................................................................................2
Disadvantages............................................................................................................................2
Options.......................................................................................................................................3
Recommendations......................................................................................................................3
References..................................................................................................................................5

Equity and Executive Pay 2
Summary
This case study discuss about the pay gap between the chief executive officer (CEO) and the
other employees. A research is conducted in this scenario in order to now about what is ‘fair’
pay according to the people and the research suggest that according to most of the people
higher officials or the top management such as chief executive officers and other officials
should be pay less. The executive compensation issue is linked with the equity theory in most
of the situations. Most of the organizations, especially the MNCs use equity theory to
determine the compensation pay for the top management. Procedure for calculating the
compensation depends on reference compensation from the market. Equity theory says that
employees’ compensation is determined by considering what they put into a job and what
they get from it. In Australia, the compensation pay for a CEO is 263 times more than a
lowest ranking employee.
Advantages
Using equity theory for deciding the compensation pay for the top management and the
workers of an organization is considered to be beneficial in terms that the compensation pay
is strongly related with the performance of CEOs and the employees of the company. It
means that they are paid on the basis of their work performance. When the incentives are tied
to the performance of the organization it will motivate employees to align their activities to
the goals of the organization (European CEO, 2019). Organization level compensation will
motivate employees to think more like stakeholders and make them to consider what the
organization is expecting from them to enhance the effectiveness of the company. It will also
make individual to have control over their actions as they will be paid based on their
performance, this will result in enhancing the performance of the organization (Sepe, 2011).
Tying compensation pay to the organization’s success will also results in enhanced job
engagement. Increased job engagement results in higher involvement of employees into the
task performance and leading organization towards success. Indirect benefits such as profit
sharing to employees for their hard work also considered as compensation pay which is tied
to overall success of the company (Pepper & Gore, 2015).
Disadvantages
Disadvantages associated with equity and compensation pay for the top management includes
it has the potential of diluting the equity stake of existing shareholders excessively. It
provides little incentives to mid-level and junior employees who have little capability of
influencing the financial performance of the company (European CEO, 2019). Lowest paid
employees find accumulation of long-term incentive pay less attractive as compared to annual
cash bonus. It also makes them consider that they are in organization for the long-term
purpose and have nothing to do with the short-term issues (Huhman, 2015). Executive
compensation pay is different from the equity theory. While it seems the pay to the CEO is
fair but when the pay is compared to the salaries of other employees it is completely
overpaid. It is true that an executive officer is the head of the company and he is the one who