Ceo Presentation

Is executive

compensation too

high?

CEO Packages

Emma Kitchen, Laura JibsonGeorge Rispin, Xue Junzhao

Introduction: Aims

Illustrate historical and current levels of CEO compensation

Assess views of justice in wages

Examine arguments for and against high levels of compensation

Recommendations

2

The average workers compensation only increased by 36%

During the time period of 1991-2001, CEO compensation increased by 340%

Background

CEO’S pay has increased significantly following the enactment of anti takeover laws passed in 1980’s.

This resulted in CEO’S receiving a large proportion of their compensation in the form of stocks and shares

There is an increased sensitivity to performance and the amount they received was dictated by the market and industry factors.

This is especially relevant now as the cheap stocks which CEO’S received during the stock market decline are starting to rise, resulting in huge pay-outs

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Two Decades of CEO Pay

5

Justice in Wages

According to Moriarty (2009) there are three common views frequently applied to justice in wages:

– The Agreement View “Appropriate prices for goods are obtained through arms length negotiations

between informed buyers and informed sellers”

– The Desert View “People deserve certain wages for performing certain jobs, whatever they might

agree to accept for performing them”

– The Utility View “To maximise a firms wealth by attracting, retaining and motivating talented

workers”6

The Agreement View

CEO compensation is decided by the ‘Compensation Committee’

This is made up of directors who serve on the company's board

Directors are elected by shareholders

Members should be informed and independent

7

The Desert View

Compensation should be based on contribution and performance

Which other factors should be taken into consideration?

How can CEO contribution be measured?

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Example: Fred Goodwin

Fred Goodwin is the former chief executive for RBS, of which 70% is now owned by the taxpayer.

The guardian newspaper referred to him as “The worlds worst banker” due to his irresponsible dealings in the sub prime mortgage market.

He received an very large payoff after he agreed to resign

His pension is £16.9 million, this works out at an average of £693,000 per year

Cont.

His payoff is in line with fellow bankers who receive an average of £650,000 per year

The high pension caused anger with taxpayers and MP’S

Bank of England governor criticised Goodwin's large pension, saying that it encourages reckless gambling and rewarding bad behaviour

Example: Black and Decker

New USA legislation passed in 2010 resulted in public companies having to let shareholders vote at least once every three years regarding CEO compensation

In 2011 only 12 companies voted against CEO pay, this is due to industry pressure to “pay the going rate”

The board voted against Black and Decker’s CEO John Lundgren receiving $32.6 million

But the board eventually gave in to pressure and paid Lundgren, making him the fifth highest paid CEO in 2010

Cont.

Theory of Managerial Power supports this. As Lundgren was very powerful he could demand the package

Due to public anger, the board tried to disguise the amount he received by issuing him 325,000 shares valued at $18.7 million

With the average employee earning $40,000, this resulted in a pay gap of 325-1

Example: John Lewis Group

69,000 employees as ‘Partners’, essentially owning a share of the profits

Bonus structure is the same for every worker at every level, a common % of income based on the group’s annual profit

2009 Operating Profit £316.8m, Partners’ Bonus = 13% of salary, total £125.4m

2010 OP £389.7m, Bonus = 15% of salary, total £151.3m

2011 OP £431.0m, Bonus = 18% of salary, total £194.5m

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Arguments For and Against

Arguments For

Economic Analysis

Correlation between CEO pay and company performance

Will provide an incentive for innovation and risk-taking

Attract, retain and motivate talented leaders

Arguments Against

The relation between executive and average employee’s compensation

Widening gap between executive and average employee’s compensation

Gap between domestic and foreign executive compensation

Compensation equity vs. work equity

Distributive equity

Recommendations

Base CEO compensation on improving real measures, such as; earnings per share, return on invested capital and market share

Ban executives from selling shares for a fixed number of years

Specify the dates on which equity awards will be given

17

Cont.

Payoff shares based on an average stock price, rather than a single stock price

Introduce a measure whereby executives must release a statement detailing how and when they will sell any shares

Salary caps

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References

Boatright, J. R. (2010). Executive Compensation: Unjust or Just Right? In G. G. Brenkert, & T. L. Beauchamp, The Oxford Handbook of Business Ethics (pp. 161-201). New York: Oxford University Press.

Cheng, S., & Indjejikian, R. J. (2009). The Market for Corporate Control and CEO Compensation: Complements or Substitutes? Contemporary Accounting Research, 26(3), 701-728.

Crane, A., & Matten, D. (2004). Business Ethics. Oxford: Oxford University Press.

DeGeorge, R. T. (2010). Business Ethics. New Jersey: Pearson Education.

DesJardins, J. (2009). An Introduction to Business Ethics. New York: McGraw-Hill.

Henderson, B. C., Masli, A., Richardson, V. J., & Sanchez, J. M. (2010). Layoffs and CEO Compensation: Does CEO Power Influence the Relationship? Journal of Accounting, Auditing and Finance, 25(4), 709-748.

McCall, J. J. (2005). Assessing Executive Compensation. In J. R. DesJardins, & J. J. McCall, Contemporary Issues in Business Ethics (pp. 102-112). Belmont: Wadsworth, Cengage Learning.

Meredith, D. R. (1992, September). Exploding Myths of CEO Pay. (79), pp. 32-44.

Moriarty, J. (2009). Do CEO's get paid too much? In T. L. Beauchamp, N. E. Bowie, & D. G. Arnold, Ethical Theory and Business (pp. 692-702). New Jersey: Pearson Education.

Nichols, D., & Subramanian, C. (2001, February). Executive Compensation: Excessive or Equitable? Journal of Business Ethics, 29(4), 339-351.

Perel, M. (2003). An Ethical Perspective on CEO Compensation. Journal of Business Ethics, 48(4), 381-391.

Rawls, J. (2998). Distributive Justice. In T. Donaldson, & P. H. Werhane, Ethical Issues in Business: A Philosophical Approach (pp. 222-232). New Jersey: Pearson Education.