A Comprehensive Report on Executive Compensation and Equity Theory

This report provides a literature review on executive compensation and equity theory, examining the viewpoints of various authors. It explores the impact of equity theory on executive performance, including the effects of base salaries, incentives, and benefits. The report also discusses motivational strategies for employees, such as incentive plans and pay-for-performance models, while acknowledging their limitations. The analysis considers the role of government in controlling executive compensation and ensuring fairness. The conclusion emphasizes the significant impact of equity theory on executive compensation and the importance of performance-based incentive strategies to maintain employee motivation and foster a fair work environment. The report uses various sources including journal articles and online resources to support its claims.

Motivation

Literature Review
Introduction
Provided part of report covers viewpoints of various authors on executive compensation
and equity theory by considering relevant literature. Further impact of equity theory on
performance of executives and Motivational strategies for employees has been
discussed to resolve given case issue.
Executive compensation and equity theory
Executive compensation is believed contravened entirely in comparison to justice
method within the equity theory. Although; the same is seemingly “fair” in contrast to
CEOs of similar organizations who are completely in lopsided present job Market.
Equity theory is one of the approaches which compare the ratio of output and input or
the same can be expressed as the reward you received after providing the specified
quality or amount of effort for accomplishing your obligation (Pepper and Gore, 2015).
Further, the same is being compared with your coworker, family member or any other
person. In case the result of ratios which have been derived are equal or equivalent
then it represents the existence of equity; however, in case, the ratios are not equal
than the same is referred as under-equity or over-equity. In case of under-equity, the
results make believe the employee that the reward is not in order with the effort which is
being made by you as the referent point is receiving even after making less effort than
you have made. Guay, Kepler and Tsui, (2017) asserted that in over-equity the outcome
received by the employee is more in comparison to the effort made for same and
referent point person is attaining less even though the effort put by him or her in more
comparatively.
Impact of equity theory on performance of executives
There is a serious question which has been raised regarding the base salary, incentives
and benefits for executives and their implications as all these are main variants of
motivation. The most important concern regarding the high pay level to chief executives
is they might be supported for taking the business decision which is beneficial for them
by ignoring company’s needs so that they can achieve performance goal which is
needed to get the incentive pay (De Vaan, Elbers and Di Prete, 2018). This is

especially for the incentives which are for short-term. For instance, to attain large
bonuses executives might make up short-term profits which cannot be continued so that
they can leave the organisation prior to long-term financial problems are exposed.
In this aspects Rau (2017) states that the existence of over and under equity leads to
de-motivate the employees as the same and might have a negative impact on efficiency
and performance of employees. In case an organization enhances the bar for executive
compensation, then the other companies initiate to reassess the manner in which they
see the bar of executive compensation. If executive compensation is intimately
connected with the total revenue of organization for the year and it is possible to
distribute the same to employees than moral and work effort should see the
enhancement. Usually, the positive motivational consequence is connected with
compensation pay. Further, evaluation of performance assists in ascertaining the
manner in which annual bonuses of the company should be distributed. In words of
Edmans, Gabaix and Jenter, (2017 if in a case an employee makes an optimum effort
and has a positive effect on the productivity of company than same he should be
provided with the compensation rightfully.
Further, in case if the employee believes that system is fair than the same will develop a
positive environment in the organization and will boost up the morale of employees. The
government has the very important function of controlling executive compensation
through regulatory authorities for various types of companies (Newton, 2015).
The perks and bonus slab are developed in accordance with provision set by the
government. Further, if the government makes it mandatory to provide the basis of
performance slab measurement than employees could be assured that equal behaviour
has been done with all the employees and same will motivate them to focus on their
work. It is because; the norms and regulations relating to compensation of chief
executives are formed after considering the provisions provided by the government
relating to the executive compensation. In case government provides details regarding
the base in accordance with which compensation is being decided than employees will
be able to assess whether they are treated fairly or not.

Motivational strategies for employees
In order to motivate employees incentive plans are the best method for making an
attempt to attain into the maximum level, but there is one problem under this that they
are generally not flexible. Many incentive plans include pay-for-performance in which
staff of the company is rewarded for the accomplishment of the particular objects.
These are the types of executive compensation strategies which are likely of medium-
range duration and contain performance criteria that characterise broad operational or
financial metrics. Limitations of this strategy are that it involves various significant
events which occurs irregular timeframe before standard cycle; the impact of employees
on plan criteria might be narrow or focused on uncontrollable factors. So these all are
the reasons for which employers must think about other compensation strategies in
order to provide appropriate compensation to optimum performers (Obermann and
Velte, 2018.). When an employer wants to meet the outcome, these contracts are
helpful, i.e., it helps in achieving both tangible and which has considerable monetary
value to the organization. The payout is made restricted on generating the particular
result of the work or through which employees are not bounded by the drawbacks of
incentive plans.
Conclusion
By considering above described literature it can be concluded that there is significant
impact of equity theory on executive compensation. Further incentives strategies must
be based on performance of employees to keep them motivated and to ensure fairness
in work environment.

REFERENCES
De Vaan, M., Elbers, B. and DiPrete, T.A., 2018. Obscured Transparency?
Compensation Benchmarking and the Biasing of Executive Pay.
Edmans, A., Gabaix, X. and Jenter, D., 2017. Executive compensation: A survey of
theory and evidence (No. w23596). National Bureau of Economic Research.
Guay, W.R., Kepler, J. and Tsui, D., 2017. The Role of Executive Cash Bonuses in
Providing Individual and Team Incentives.
Newton, A.N., 2015. Executive compensation, organizational performance, and
governance quality in the absence of owners. Journal of Corporate Finance, 30,
Pp.195-222.
Obermann, J. and Velte, P., 2018. Determinants and consequences of executive
compensation-related shareholder activism and say-on-pay votes: A literature review
and research agenda. Journal of Accounting Literature, 40, Pp.116-151.
Pepper, A. and Gore, J., 2015. Behavioural agency theory: New foundations for
theorizing about executive compensation. Journal of management, 41(4),Pp.1045-1068.
Rau, R., 2017. Executive Compensation. Foundations and Trends® in Finance, 10(3-4),
Pp.181-362.

REFERENCES
Books and journals
Online