Social Factors Relating to CEO Compensation Essay

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CEO Compensation

The author of this report is asked to answer a few questions and create a tool relating to chief executive officer (CEO) compensation. Of course, there are some traditional trends and factors that usually inform and help calculate what the pay for a CEO shall be. However, there are some people that are clearly outliers to this and some of these anomalous amounts and/or their overall disproportionality to the entry-level employees pay have created a fair amount of controversy. While calculating the proper level of pay for a CEO is different in every situation and while every situation is different, there are several specific things that should be the main basis, if not the only basis, for what a CEO is paid and why.


The first item to be detailed and described in this report is the traditional factors used to determine CEO compensation. More often than not, the main factors that would go into this calculus would be the size of the company, the amount of employees in the company, the revenue that the company brings in, the free cash flow that is typically realized by the company, the amount that CEO's in the same industry or same size of company and/or revenue make and so forth. The overall number that this culmination of factors would yield and what the final number can or will be do not always sync, but industry trends are what they are based on what actually happens so it should at least define a typical range. Given the above, the matrix that should typically be used, or at least the main focus, of what the CEO ends up being paid is shown in the first appendix.

The next question is how the matrix in the appendix as well as the factors above that fed that matrix would (or would not) transfer to other industries and situations. While there would certainly be situations where the compensation for one or several firms in an industry would throw off the averages because the standard deviations would be off the chart, this matrix should work for most situations. In the event that one or several companies greatly distort the averages, then those companies should be adjusted for or even disregarded so that a better overall average is garnered. For example, a smaller competitor to Apple would probably want to disregard Apple because their revenues, brand value and market share are a seismic share of the overall market. As such, any smaller competitor using Apple as their yardstick, in whole or in part, would be lunacy and they probably would not be able to afford the answer anyway. However, for industries and market sectors where there is a good deal of competition and parity, then a simple average or eyeballing of the figures at similar firms would fairly quickly paint a picture of what will be necessary to get the proper talent hired and paid in line with market forces and trends.

Technology can be wielded and used as a tool to get the proper analysis done thoroughly and with little chance of error. While the person wielding the technology certainly has to input the right values and ask for the right result, the quickness and timeliness that the analysis can be delivered is greatly increased through the use of technology. Even using basic things like Excel and online tools through finance giants (or wings of larger giants) like Yahoo, Forbes, Bloomberg and so forth can shed light on publicly traded companies that, as a matter of law and SEC requirement, must share what they pay their executives and when. The "why" element is something that is elusive in technology but the "what" is much easier to collect, digest and analyze so long as one knows what they are looking for.

Technology could be used to do the averages described in the matrix below, at its most basic point. Technology could also be used to aggregate and analyze a very large number of companies at once if there is a lot of market players involved. This is something that could assist and improve smaller to medium size business analysis greatly as the amount of competitors would be a lot more numerous than, let us say, the laptop industry which is largely limited to giants like Mac, Dell, Acer, HP and not much else. Industries like restaurants, hotels/hospitality, food/beverage companies and so forth have a lot of different players and just eyeballing those figures and coming up with an answer would be crapshoot in a lot of ways.

When thinking towards the next decade or so as it relates to CEO compensation, there are several factors that are going to be an issue, and some of them are factors already but have not truly manifested themselves. First, there was a brief mention of this earlier in the report and it will be fleshed out now. That, of course, is the factor of societal, cultural and even some political forces bemoaning, lamenting and pushing back against what they deem to be "excessive" compensation by companies in the United States as well as around the world. One reason for the sharp increase in CEO compensation, of course, if the increasingly globalizing nature of the CEO rat race due to the developing nature of countries around the world and the ease in which global communication can be undertaken nowadays. However, phenomena will be covered more in depth after this current one.

The pushback that many societal and cultural forces are exerting on executive pay is significant because the source and size of some of these forces and arguments. Even Barack Obama himself expressed reservations in holding back the "pitchfork" crowd, although he later dialed it back, in the light of the AIG bailout/bonus scandal during the Great Recession (. While the political calculations and logic behind some of these complaints and problems bordered on the idiotic, the threat to executives in terms of social and political consequence is very real even if the underlying mechanisms and processes that are going on make complete sense. Indeed, the AIG bonuses that set everyone off were to pay people and incentivize them to stay in light of coming layoffs (known as retention bonuses) and many of them were quite large because even some leaders were among those that were on the way out. Making these contractually-bound payments was a way to keep continuity going while the firm was transitioning to getting itself put back together.

However, one would not know that given some of the proposed legislature bills that would target only those bonuses (which would be unconstitutionally illegal and they surely knew that) and it got to the point where people were protesting in front of the houses of executives and AIG employees of all levels were told to not dare wear anything showing an AIG logo in public lest they be accosted verbally or physically. These topics are not meant to be demagogic or scary. Rather, these are real events that did happen even if things tapered off with no lasting effects. Indeed, AIG paid back the entire bailout and made roughly $22.7 billion on the bailout (Sparshott & Holm, 2012). When the exact same thing, including the bonuses and the same size bailout, happened with Fannie Mae and Freddie Mac (which were taken over by the federal government), there was not nearly as much uproar about executive or employee pay and that money (nearly $200 billion USD) is still being paid back (Prior, 2014).

However, even with the better economic and (to a lesser extent) employment and social climate in the recent years, this has not stopped the protesting and advocacy that seems to ignore even the most basic facts about compensation and who is paid what and why. For example, there have been the recent protests about McDonald's and/or other fast food workers "deserving" to be paid $15 an hour when that would equate to $30,000 a year (roughly) for 40 hours a week of work throughout the year. Even if there is a case for people making a "living wage," doubling the pay of fast food workers would greatly increase the prices that would have to be charged, in all likelihood, as firms like Burger King and such are struggling even with the much lower wages paid right now.

Wal-Mart has faced similar issues over the years. While Wal-Mart's not hurting for cash in terms of profit, their overall profit margin as a matter of percentage is not all that stellar and it would probably go in the toilet if they had to offer a lot more pay and benefits to their 1+ million employees. This may seem like an unrelated tangent but when three of the Walton family (the descendants of Wal-Mart founder Sam Walton) are all billionaires and in the top 10-20 richest people in the world, giving their CEO a raise and not their front-line employees is problematic but firms like Wal-Mart want to attract…[continue]

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