Aligning Employee Compensation to the Performance Ceos  Essay

  • Length: 5 pages
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  • Subject: Business
  • Type: Essay
  • Paper: #48240027

Excerpt from Essay :

Performance Management Process and the CEO

Critique and evaluate considerations that are traditionally used to determine CEO compensation

Many reward compensations adopted by the CEOs of this era contain five primary components: limited stock grants, limited option grants, payouts for incentive plans, annual bonuses, and salary. While the amounts of bonuses, compensation and perquisites found in not-for-profit sectors may pale in comparison to those in the for-profit world, they generate combined reactions. Their existence can ignite debate, especially in periods of shrinking budgets and increasing costs. However, the ability to hire, maintain, and compensate CEOs is essential in all sectors, and is mostly achieved using a variety of executive compensation plans. The issues around the design of these systems in both the business and not-for-profit areas are similar (Bhattacharyya, 2011).

The last two decades have witnessed a drastic transformation of the executive compensation in many organizations. Compensation of top executives has expanded considerably quicker than that of ordinary workers. As of 2003, the common large firm CEO made 500 times than those of ordinary employees. Consequently, the numbers involved have become quite substantial. In a span of five years, CEO compensation at each company in the widely used ExecuComp data source, aggregated over the 1500 companies in the data source, totaled at approximately $100 billion (Bebchuk & Fried, 2004). CEOs set their own salaries. Consequently, they claim, even though CEOs are under a fiduciary responsibility to expand shareholder value, compensation plans for CEOs often do not succeed to provide CEOs with proper rewards so to do and may even cause shareholder and executive interests to diverge.

Create a matrix or a sample evaluation tool that details the factors you believe CEO compensation should be measured by in the company

Pay-for-performance would be the most useful device in calculating CEO compensation. In order to establish defensible compensation choices in the current era of corporate governance and effective investors, the management needs new tools such as pay-for performance. It must be linked to key business metrics, targets, and business strategy. This tool identifies the total cost of a CEO relative to:

(i) Return on investment capital, which excludes the cost of capital

(ii) Shareholder Return

(iii) A 10-year Treasury and (iv) Six chosen real professional organizations with corresponding compensation adjusted to the level of work complexity or the role of the CEO. Administrators need performance metrics and periods that help them evaluate the stability of the business technique, whether it will allow the company to make value with the capital offered from investors, and if so, how much (Chingos, 2002).

In order to create defensible compensation choices boards need to look beyond previous times one to two years of operational efficiency, unless the company is up for sale Three to five-year efficiency times should be the lowest benchmark for pay-for-efficiency planning and evaluation. Executives can keep no better legacy than guaranteeing the stability and viability of the business over which they have strategic management. In order to achieve this, directors require new procedures and new tools, like pay-for-performance to help them precisely determine the executive performance metrics and work accountability of CEOs that align with the strategic plan for the company. For the pay-for performance to become a reality, directors need to be completely advised and test to ensure the executive pay programs and policy they accept lead to the development of real and maintainable value for investors.

Evaluate how transferable this tool would be across industries.

There is minimal efficiency for performance-based compensation device across diverse sectors. Nobody can transfer anything that works in one setting and have it work in another. Therefore, the kind of tool used in health care is not going to work in transport. Each of the areas is unique. Simultaneously, there were enough parallels for carrying out a successful evaluation. Medical care is not the only sector in which there is collaborated production going on; that is also true in education. The situation in education is that while there is a main instructor who is 'first on deck,' as a doctor would be in healthcare, at some point, the teacher's efficiency will be affected from instructors and many others engaged in the academic process. In addition, in health care, one has combined care, and CEOs often work in groups. Moreover, maybe in those cases, the right tool of accountability will not be the individual employee, but perhaps a team.

Determine how technology can best be used to assist in the development of the factors you identified as factors that you believe the CEO should be measured by The entire efficiency and settlement system should have a powerful technological innovation supporting. Without a powerful technological platform, companies end up with static objectives and performance records that are not customized based on changing business conditions and are not analyzed until the next performance evaluation. In addition, the skill calibration procedure depends on a single view of company skills. Without a technological enabler, skill's evaluation becomes a long and costly manual system. The technological innovation is also critical to moving the adjusted performance evaluation data into the compensation technological system. With the outstanding complexity of international settlement systems, versatile and highly configurable technological innovations are essential in handling the procedure, in ways that promote top-performing CEOs (Chingos, 2004). The technological innovation should take a "heavy lifting" off the settlement team concerning CEO settlement eligibility and transparency into procedure and practice in any organization across the world.

Considerations for the technology system should include an evaluation of how settlement guidelines and computations are designed, modified, and applied. Such an undertaking will be crucial in the management of complicated settlement scenery. Additionally, the program should be capable of dynamically determining CEO qualifications. Since CEOs might be qualified for multiple plans, and it is certain that they will transfer between geographies, eligibility can change along with these changes. While using performance metrics, concern should be given to whether the settlement program can use the input framework to measure variable compensation. For example, if CEOs are paid depending on financial results for their companies, the settlement system must determine the proper benchmark in accordance with the data approved from the financial system.

Discuss the challenges that technology would have on the effective evaluation of CEO compensation and how this challenge differs from traditional challenges technology has had on the performance management process.

While digital evaluation techniques have several benefits associated with network-based technological innovation, they can also suffer from familiar problems related to other technological innovations. First, it is important to consider the attitude that CEOs may have toward technological innovation. In particular, some people may have a mistrust or discomfort with technological innovation, which can damage the achievements of any program that depends on it. As a result, people who will be using it can lead to a company investing significant figures on devices that will not be used successfully. Consistent with this line of thinking, one study revealed that companies recognized inadequate coaching and support for technology-based HR techniques as the biggest hurdle to their achievements. As such, in order for a digital CEO evaluation program to be effective, both CEOs and their employees need to completely understand the technological innovation and feel safe using it, a process that can include expensive and time-consuming coaching prior to adopting.

The above challenge differs from traditional challenges technology has had on the performance management process. Traditionally, technological innovation had a far larger effect on employment, in office work and professional services. Technological innovation like the Web, big data, artificial intelligence and enhanced analytics -- all made possible by the ever improving accessibility to cheap computing power and storage capacity -- are automating many routine projects. Plenty of conventional white-collar projects, such as many in the postal service and client support, have vanished (Blazey, 2013). Brian Arthur, a leading specialist at the Xerox Palo Alto Research Center's intellect systems lab and a former financial aspects lecturer at Stanford School, refers to it as the "autonomous economic system." It is far simpler than the idea of automation and robots doing individual projects. It includes digital systems speaking with other digital procedures and creating new CEO evaluation procedures. Eventually, companies will be able to do many things with fewer people and making other human jobs outdated.

Thinking ahead to the next decade, discuss whether the factors you identified as considerations would remain relevant.

Regardless of the remarkable heterogeneity in compensation practices across companies, most CEO rewards contain five primary components: limited stock grants, limited option grants, payouts for incentive plans, annual bonuses, and salary. Moreover, CEOs often get contributions to defined-benefit retirement programs, various perquisites, and, in case of their leaving, severance pays. The significance of these settlement components has modified significantly over time. From 1936 to the nineteen fifties, CEO settlement consisted mainly of incomes and yearly bonuses. As nowadays, benefits were non-discretionary, connected with one or more measure of yearly accounting performance, and compensated in either stock or cash. Payments from long-term incentive programs,…

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