Compensation Final: Three Essays
April 27, 2011
1) Essay Question # 2: Issues of CEO pay that managers need to understand.
CEO Pay Overview
It seems as though no matter how bad the economy gets or how poorly a company performs, the Chief Executive Officer (CEO) (and other top executives) always come out in the best possible position, especially with compensation. Besides lavish compensation packages and best possible amenities, the CEO’s generally enjoy large severance packages or “golden parachutes”. Severance packages are basically contractual deals between the CEO and the corporation that in case the CEO is terminated for some reason or leaves the company, he/she is entitled to a specific sum of money on
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Nevertheless CEO pay packages are generally quite large and very wealthy in relative terms to other professionals, politicians and even the President of the U.S. whose salary is $400,000 per year. (Longley, 2001) When we thing of a $400,000 per year salary, most of us would agree that it is a hefty sum of money and we can include the benefits and other allowances on top to conclude the President is paid well – as he should be – after all he is the most powerful man in America. So this begs the question; what is the average pay of a U.S. Chief Executive Officer? According to the Wall Street Journal research and Psychology Today, the average CEO of a major corporation in the United States was paid $15 million in 2005, and this figure has increased substantially since then. (Wiliams, 2010) This is a staggering figure – one that dwarfs the pay of the President of the United States whose pay is less than half of one million! With such a large pay package for U.S. CEOs there must be considerable issues with the compensation system or there is something to explain these pay packages. What do managers need to know about the issues of CEO pay and the current trends in the U.S.?
Issues of CEO Pay
The first question we need to ask when considering the issues of CEO pay in regards to (compensation) managers is: what are the reasons for such exorbitant CEO salaries? Some of the reasons listed include: CEOs with too