CEO Compensation: An Analysis of Agency and Equity Theory in HRM

This report examines CEO compensation, focusing on its increase and implications for agency and equity theory within the context of Human Resources Management (HRM). It begins with an introduction to HRM and the role of HR managers, followed by an analysis of CEO compensation trends, highlighting the significant rise in CEO pay compared to average worker compensation, supported by statistical data. The report then delves into the application of agency theory, explaining its role in compensation structures and the relationship between shareholders, directors, and board members, along with its merits and demerits in compensation practices. Equity theory is also discussed, emphasizing its influence on employee perceptions of fairness and its impact on motivation and performance. The report further explores different types of compensation, including direct and indirect financial compensation, and examines factors affecting compensation, such as individual and collective factors. The report also addresses the gender pay gap. The report concludes by summarizing key findings and emphasizing the significance of compensation strategies in organizational performance.

CEO compensation

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Human Resources Management (HRM) may be described as handling staff efficiently
within an organization (Gerakos, Ittner and Moers, 2018). HR management provides the
connection between the success of the staff and the corporate priorities of the organization. In
fact, an effective HR management team will give businesses a competitive edge in their rivalry.
HR manager plays essential role in the organization where they perform several activities such as
employee’s training, motivation, compensation, rewards etc. This essay based on the topic of
CEO compensation which increases in comparison to last year. It has several consequences
which affect the agency and equity theory.
MAIN BODY
CEOs have various degrees of management ability and are highly competitive suited to
businesses. This is believed that the incremental influence of talent for a CEO would grow with
the valuation of the company under his management (Glikson And et.al., 2019). The model
generates accurate hypotheses of CEO pay along all firms, over time, and among nations. In
comparison, a model benchmark design indicates that the recent growth in CEO pay is an
effective optimum reaction to firms' improved market demand, rather than a consequence of
agency problems. The greatest CEOs afford the largest firms in our equilibrium model, since this
significantly increases their influence and economic efficiency. By targeting their protest
movements at compensation levels, unwelcomed but impactful guests at the management
negotiating table intimidate members of the board and restrict the contract terms among
shareholders and managers which are specified among both of them.
CEO compensation has markedly increased in proportion to average pay over the last
decades. Between 1978 and 2018, the CEO’s rewards increased by 1.008 percent, while the
average worker’s compensation improved by 12 percent. In 2018, on average $17.2 million has
been paid to CEOs of the top 350 firms in the world. Workers in those sectors from retail to
development and production usually paid $64,500, researchers said. In 2017 and 2018, equity
awards and cash-in stock options received CEO salary of $7.5million. Integrating equity into
compensation structures is one way to encourage CEOs and increasing salaries reflect the C-suite
job market, some analysts claim.
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Figure 1 Average Salary, 2019.
As per above data, it has been analysed that average monthly salary of Arab, Asian or
Western countries are increasing but Western package is higher than from all (Average Salary,
2019). Local companies of Arab provide $23,366 monthly compensation for CEO post and on
the other side in multinational companies it will be $ 35,789. This statistics shows that CEO of
the organizations get the higher pay as well as other benefits in compression to other post such as
HR manager, IT manager etc.
Agency theory is used by the organizations to compensate someone and it can be anyone
such as their employees on behalf of the management on their performance. It is used to explain
the connections between employees and supervisors. In a specific financial contract the agent
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represents the principal and is anticipated to portray the principal's long term interests without
reference for self-interest. In Agency theory, relationship is between the shareholders, as
directors, as agents, and board members. This theory used to resolve the organizational issues
and they also ensure that no compensation system is perfect which can address the each and
every problem or satisfy their staff members. The contradiction and the expense of the business
occur because of division of control from management, specific risk perceptions, asymmetry in
knowledge and moral hazards. Many approaches have been quoted in the literature, such as tight
management power, administrative participation, elected board members and numerous
committees may be helpful in managing the dispute with the organization and its costs.
There are some benefits as well as consequences which agencies has to bear, if they
following this theory in the organization to compensate their staff (Magnan and Martin, 2019).
Some of the merits are, it explained the different degree of compliances, leads to an agency
condition where citizens comply more as more power is granted with the commands. Use the
agency state and autonomous state helps to clarify unexplained behaviour and also beneficial to
find someone who is found guilty. Another advantages of agency theory in context of
compensation, it pays on the basis of increase in sale. CEO gets the compensation when sales
revenue increases which provide large payout. On the other side, there are some disadvantages as
well which affect the organization and they has to pay some consequences such as it neglect the
non- selling duties of an employees and the range of salesperson’s income is different. There are
several factors which affect the growth of individual person rather than salesperson’s
performance.
Adam’s theory of equity suggests an individual perceiving inequity of his or her
compensation tries to recover equity. The philosophy emphasizes equality in the pay system and
remuneration for workers. Employee's impressions of just how certain employers perceive them
are of vital significance to them. The dictum 'fair day job for a good day’s work provides a sense
of pride felt by workers. If workers experience inequity, lower morale, higher absenteeism or
staff absenteeism may result. For business executives, equity theory has much consequence
where people calculate the sum of their contributions and performance. This suggests that a
working mother can receive lower compensation pay for more flexible working hours in
exchange. Specific workers ascribe contributions and results to personal beliefs.
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Equity theory also has some advantages and disadvantages which motivate the employees
and employers to make their decisions or identify the factors which create inequity which further
affect the productivity as well as performance of individual employees. Equity theory helps in
reducing exploitation, it become source of motivation through getting equal pay, maintain good
relationship with others etc. On the other side, its drawbacks are differences in the individual’s
perception; all the factors are ignored, exact comparison is difficult etc.
Compensation seems to be the overall monetary and non - monetary benefits that send to an
individual in return for their company job (Ramli, 2019). It's usually one of largest expenses for
workplace companies. Compensation is higher than normal paying wages for an employee. This
also contains several other pay and compensation types. Compensation will be classified into
direct and indirect financial compensation. Direct compensate relate with the pay which workers
received directly doing a job and it comes in terms of salary that is fixed on monthly basis,
wages on hourly basis, compensation etc. On the other side, indirect compensation include all the
other benefits which is not included in the direct compensation such as paid vacation, medical
leaves, workplace insurance etc.
Indirect financial compensation also include the monetary or non monetary compensation
where employees get the benefits in terms of money and the other side, they get appreciation,
awards, promotion etc. There are several factors which affect the compensation such as
individual or collective factors. Individual factor includes the individual sales, skills set,
experience, performance etc. On the other side, collective factors include the employees
performance in the group, team or division performance, profit sharing, gain sharing etc.
Gender pay discrimination is very major topic as well as important because statistics clearly
shows that woman’s get the low pay in comparison to man in most of the countries and it does
not matter that how qualified she is. Below mention data shows that the situations of woman’s in
different business and what their numbers in comparison to man was.
In government sector, the average salary difference between Saudi men and women who do
the same work is very small (Gender Pay, 2016). The study has said that the private industry
non-Saudi women are given average monthly wages and benefits of SR 5,204 while non-Saudi
men are given only SR 3,676. As per the research, the Saudis employed in the business
community earn better salaries than those employed in the other private industries and even the
army, spanning the first three months of each year 2017 (Rose, Brink and Norman, 2018). The
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study said business-sector Saudi men get an overall monthly wage of SR 14,240 while Saudi
women were paid SR 11,618 which is lower than men. Mohammed Al-Naji, chairman of the
Shoura Council's Administrative and HR Committee, said the employment law forbids granting
men and women different salaries that do the same task.
Many private sectors are still not ready for woman employment, so they hire women just to
perform specific tasks. Al-Naji said other expatriate females in certain private sectors, such as
health care and education, are paid much more expatriate men, as they're more on demand. As
per the study, the average wages of people with fifteen years or more expertise in the public
sector are SR 10,480 while the non-Saudis who do the same job that earn a maximum wage of
SR 9,406.
CONCLUSION
From the above discussion it has been analysed that Compensation strategy is among the
most significant factors in the performance of an organisation. It not only affects how top
management treat themselves, but that also helps decide what types of executives an company
attracts. That's what's so detrimental to the noisy demonstrations over CEOs. In order to motivate
their CEOs, companies provide high compensation to encourage them to generate more revenue
for the organization with the help of their effective performances. Because of motivating or
encouraging staff members, compensation regularly increases.
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REFERENCES
Books & Journals
Gerakos, J. J., Ittner, C. D. and Moers, F., 2018. Compensation objectives and business unit pay
strategy. Journal of Management Accounting Research, 30(2), pp.105-130.
Glikson, E. And et.al., 2019. When and why a squeakier wheel gets more grease: the influence of
cultural values and anger intensity on customer compensation. Journal of Service
Research, 22(3), pp.223-240.
Magnan, M. and Martin, D., 2019. Executive Compensation and Employee Remuneration: The
Flexible Principles of Justice in Pay. Journal of Business Ethics, 160(1), pp.89-105.
Ramli, A. H., 2019. Compensation, job satisfaction and employee performance in health
services. Business and Entrepreneurial Review, 18(2), pp.177-186.
Rose, J. M., Brink, A. G. and Norman, C. S., 2018. The effects of compensation structures and
monetary rewards on managers’ decisions to blow the whistle. Journal of Business
Ethics, 150(3), pp.853-862.
Szymendera, S. D., 2020. The Federal Employees’ Compensation Act (FECA): Workers’
Compensation for Federal Employees.
Online
Average Salary, 2019. [Online]. Available Through:
<https://www.statista.com/statistics/711872/kuwait-monthly-salary-of-expats-by-sector/
>.
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