Corporate Governance Assignment Help
Summary
Is CEO compensation too high? That was the question put to business students at Babson College. CEO compensation has skyrocketed recent decades going from just 40 times the average person's salary in 1970 to 500 times today. CEOs including Jack Welch, Michael Eisner, and Dennis Koslowski were all paid multi-million dollar compensation packages during their tenure as CEO.
Some students at Babson College shrug off the excessive pay packages noting that everyone has a chance to reach the top, and those that do should be rewarded. Indeed at least one former CEO, Jack Welch, claims he was simply being paid what the market was willing to pay. According to this laissez-faire approach, CEO compensation merely reflects market forces.
Other people though, are critical, wondering whether the mega pay is really justified. They note that there is a lack of oversight when it comes to CEO pay, and that conflicts of interest abound. CEO pay packages are determined by company boards - boards that are appointed by the CEO.
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Teaching Note
This video explores the ethics of executive compensation.
Discussion Questions
1. Is it ethical for CEOs to be paid 500 times what other employees earn? Is it ethical for CEOs to accept compensation packages in the millions of dollars?
The strategy of high compensation packages to CEO is justified by the companies in accordance with the concept of free-market. CEO responsibility can be considered more complicated, as it is aligned with complex leadership, developing new strategies for the growth and progress of the company. Furthermore, the decisions made by the CEO are the key turn, because of which company achieves and retain competitive positioning. Hence, with such capabilities of the CEO, a high compensation in the present competitive scenario is worth. On the other hand, for CEO, the acceptance of a high package is acceptable in accordance with human nature (Executive Excess, Part 2. Video). Moreover, the CEO was also aware of their job difficulties as well as complications, and contribute in accordance to the expectation made by the companies. Hence, as long as the decision standards and vision of CEO are helpful for the company in achieving its goals, the compensation package is acceptable compared to that of the low-level employees.
2. Discuss the potential for conflict of interest in CEO pay. Should a company's board of directors determine CEO pay?
The potential for conflict of interest in CEO pay is that the CEO or board of member should not take personal advantage for their position. The decision for CEO pay level should not be affected by favours, psychological manipulation or relationship. Furthermore, the interest should not affect the consideration of the stakeholders, rather it should be dedicated to the growth of the company.
The company's board of directors are expected to act ethically. While determining the pay of the CEO, the decision must be made on the basis of competitiveness in the market, the worth of CEO based on previous experience and achievements. Conscientious board members have the potential to determine the good and bad for the company. Thus, offering a high salary to the CEO expects them to develop strategies that can help the company in retaining competitive positioning (Murphy & Sandino, 2017). Thus, company' board must determine CEO pay, however, the board members should not be selected by CEO or should remain immune to the decisions made by CEO, rather they should be governed by stakeholders.
3. As a shareholder, how do you feel about CEO pay? Is the high compensation of Michael Eisner, CEO of Disney, justified? How about that of Dennis Koslowski? Would you feel any differently if you were a shareholder in Tyco during Dennis Koslowski's tenure as CEO?
As a stakeholder, the CEO pay is justified, if his/her vision helps the company in achieving competitive positioning and ability to retain the market positioning. Considering the case of Michael Eisner, CEO of Disney, his initial contract was of 7 years, in which he was able to transform the company from the position when it has no directions into a leader of the industry. As a result of increased stock prices of the company, he was signed for further years and this explains the worth of his compensation package.
Likewise, in the case of Dennis Koslowski, he was able to raise the revenue of Tyco by 48% during 1997-2001. Since his contribution is beneficial for the company, he was worth for the package. However, there is the negative side of his performance, as convicted for misappropriating company's fund, which is an unethical act.
4. Some critics have called for more government oversight of CEO compensation. Do you agree with this?
The fact that, if companies are paying more to their employees compared to their income tax paid to the government is a matter of concern. The individual payment of CEO aims to retain them for the benefit of the company. However, the CEO themselves are responsible for paying individual taxes to the government. In such a scenario, compensation and tax regulation are acceptable.
On the other hand, it is also important for the government to investigate the contribution made by the CEO, the intensity of competition existing in the market, and reward system implemented by the company. Controlling these issues can minimize the difference between (i) high packages of CEO, (ii) average salary of employees, and (iii) the unemployment rate in the state. Reviewing these standards can certainly avoid the occurrence of the financial crisis and government insight into the existing issues.
In my opinion, the CEO package should not be considered as a political issue. If the performance of the CEO is worth for the company, which in turn can strengthen the GDP of a nation, it is appropriate (Black, 2015).
5. Discuss the ethics involved when a CEO manipulates financial information to influence a company's stock price. Is this practice acceptable as long as it is legal?
The reason associated with manipulating the financial statement is that CEO compensation is directly tied to the financial performance of the company. From the legal perspectives, Financial accounting standard board have implemented flexibility and feasible corporate style that can help the company to retain market positioning and existence (McCord, Young & Weisdorn, 2017). However, the CEO's manipulation to the financial information for personal benefit is not ethical. This can lead to conflict between the investor, corporate clients, and auditors. As a result of which, the overall financial condition of the company and nation can be affected.
This judgment can only be made in terms of ethics because the manipulation of financial accounting can only be considered illegal if it fails to align with the accounting principle, misappropriate the fund of the company, and leads to a loss for the investors or stakeholders. Thus, these practices must ensure that generally accepted accounting principles are not violated.
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