Executive compensation and corporate governance

Executive Pay

The Problem With Executive Pay

In recent years executive pay practices have come under scrutiny as more and more employees and boards are recognizing that executives may not be living up to the expectations placed on them when hired for the position they serve in. Corporate scandals and compensation abuses have recently come to light that have suggested executive pay is a weakness in many U.S. companies (Chingos, 2004).

There have been some federal bills passed to help mitigate the effects of executive abuses, including the Sarbanes-Oxley Act of 2002, which focused on strengthening auditing bodies within organization to help limit the potential abuses of executive officers (Chingos, 2004). However many of these bills have failed to address the shortfalls that exist with regard to executive pay. This paper will try to describe the shortfalls that currently exist with regard to executive pay and attempt to offer suggestions for correcting the situation.

Analysis of Executive Pay

There are many problems with executive pay. One point of criticism that is fairly common is the inequity that exists between gender pay for male and female executives. According to one research report, the gender pay gap that exists among top corporate executives "was significant" (Bowline, Renner & Rives, 2002). The report published by Catalyst, an organization known for promoting women's issues in business, stated that women are still paid only 68% of the pay that men are in equivalent positions with similar skills (Bowlin, Renner & Rives, 2002: 331).

Perhaps the largest criticism of executive pay has been excessive pay. Far too often executives are paid top dollar whether they produce results or perform up to the level of expectation (Bowlin, Renner & Rives, 2002). Studies also suggest that executive pay continues to rise despite a failing economy or other organizational shortfalls. A survey conducted in 2003 of CFOS showed that 44% expected their salary to rise regardless of economic setbacks, with less than 6% predicting a drop in their salary (Kell, 2004). In fact a majority, more than 62% usually, predict that their salary will increase from year to year (Kell, 2004). From a sensible perspective executives should plan to facing the same cutbacks employees would in the face of budget shortfall, however more often than not this is not the case.

Common Features of Executive Compensation Packages

Among the more common features of executive pay packages include stock options, which entitle the owner to purchase corporate stock for a fixed price (Griner, 1996). However this option is often controversial in part due to issues governing the administration of such packages and their resulting perceived benefit (Griner, 1996).

Other benefits include payouts or large severance packages should an executive leave a corporation, whether or not they fulfilled the terms of their initial contract (Griner, 1996). There has been some criticism of late of agencies and organizations that offer compensatory packages for CEOS that do not meet organizational objectives. Employees in many instances are not afforded the same benefits or exemptions that executives are. Most employees are likely to be fired or laid off without any benefit or pay out particularly when their performance is considered marginal. This is not always the case however with executive pay.

Change on the Horizon

One of the biggest challenges that lies ahead for HR managers and organizations will be holding executives accountable for the results they produce within an organization. Boards must more and more take a "rigorous approach to ensure that pay reflects performance" so that stakeholders can measure executive contributions to the organization, to its growth, market share and human capital (Chingos, 2004). Executive pay should also be more closely scrutinized to ensure the gender inequalities evaporate in the coming years.