Executive Compensation the Average Compensations Research Paper
- Length: 9 pages
- Sources: 9
- Subject: Economics
- Type: Research Paper
- Paper: #10085027
Excerpt from Research Paper :
In order to compare the executive compensation in both countries, the countries firms should be matched and compared according to industry, size and operation. The executive compensation can be measured or compared accurately according to the industry and firms sizes. From the data, it was found that the executive compensation in both countries were high whereas the firm performance was reducing. The data collection for the executive compensation in both countries provides the detail information on the executive salary. Executive compensation can be divided into four main categories such as salary, bonus, benefits and long-term incentive plans. These benefits include the incentives like medical, life insurance, pension allowances plan and many other incentives. Bonuses and benefits are the short-term compensation and these are the part of the salary packages. The components of long-term incentive plans are the stocks and shares. The long-term incentive plans or the stock base compensation is the largest part of united state executive. This incentives plan is same for Canada. The Canadian firms contain over 90% stocks options and this percentage is increasing every year (Sapp, Southam). There are many other factors which influence on the compensation comparison of two countries like U.S. And Canada. These factors are the differences in tax laws, regulatory and monitoring system of stock option and the cultural differences. These differences can be neglected because it highlights the comparison of the United State and Canada due to the fact that taxation and monitoring system are almost the same. The Americans tolerate the inequality more then Canadian because Americans focus on the benefits, efforts and talent. The Americans firm rewards the talented personnel by providing the share base compensation. It can be concluded that the executives compensation difference in both countries are not much high.
Another interesting way to approach the two countries compensation comparisons is to compare the pay-performance sensitivity. The pay-performance relationship depends on the economic regulations and it affects on the firms performance. The higher executive compensation raised the public concerns and inequality issues. Therefore due to public concerns, U.S. did not disclose the executive compensation to the public. As it has been stated earlier that U.S. executive compensation base on share or stock option. This resulted in the higher and attractive long-term executive income as compare to other countries in the world. The aim of this stock option is to encourage the executives financially and maximize the share holder profit. The Canadians have implemented the same practice in past and they disclosed the executive compensation to the public also. Studies have shown that the pay-performance relationship is positive for the Canadian firms. There is a commission for the executive compensation in Canada which was obtained from firm's proxy statements. It was required to disclose the payments to executive officers. These data were obtained from the samples of 365 Canadian firms and observed 1183 cases. Similarly the financial data for the executive compensation was obtained from annual report. They took compensation samples from the 675 U.S. firms and total observations made were 2159 (Zhou, 282).
How executive compensation changed in last 25 years
The most effective researches were made after the 1992 because the data of executive pay are easily available executive compensation data base. This data base reports the compensation of firm's highest paid officers. The executive compensation value reduces from about $0.9 millions to $0.75 million from 1950 to 1975. It followed every year in last 25 years averaging reduction were 0.8% per year (Frydman, Saks). This compensation level started to increase in mid 70s at higher rates. Compensations were consisted of salaries and bonuses in last 20 years. As it has been described before, these type of compensation are known as cash or short-term compensation. The long-term or stock base compensation was not the common practice at that time but some companies started to compensate the executive on the stock options. The long-term compensation increased rapidly and in 2005 it reached to 35 percents of the total pay.
The tax policies had a significant impact on the executive pay. The tax reforms were the significant approach for the restriction in compensation based on stock option. The tax reform policies implemented the tax system on the capital gain instead of executive income. The stock option or shared-based compensation increased at high rates. For example in 1950 the executive compensation increased 15% but by the 1990 it increased 82% high (Frydman, Saks). It is also important to consider the firm size in order to collect the data because the prior researched did not focus on size of the firm. The data collection and requirement of available data is mandatory and prior researched did not include information of the compensation based on shares. Recent or latest data collection and reliable information on the stock-based compensation estimate the accurate and consistent relation of management wealth and firm performance for a longer period of time. Nowadays option or share-based compensation are the essential part of the compensation packages and executive earns more income from stock option. It can be concluded that the long-term incentives should not be increased and similarly the stock or share base compensation should be reduced. There is a need of uniform and clear pay practice for the executives across the market segment. Recent studies showed that use of stock base compensation practice is declining but data showed that the executive compensation value is increasing continuously which depends on share and market segments.
This report has addressed the issues which arise due to the high executive compensation. The impacts on society, economy, and country have also been discussed. The above paragraphed also showed the difference between the stock based and the cash compensation. The United State follows the stock option for the executive compensation. This option base or share base compensation process result in the excessive executive compensation. In the end, it can be concluded the executive excessive compensation should be reformed and monitored by implementing the efficient procedures.
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