Executive Compensation Essay

1768 words - 8 pages

The objective of a properly designed executive compensation package is to attract, retain, and motivate CEOs and senior management. Despite substantial heterogeneity in pay practices across firms, most CEO compensation packages contain five basic components: salary, annual bonus, payouts from long‐term incentive plans, restricted option grants, and restricted stock grants. In addition, CEOs often receive contributions to defined‐benefit pension plans, various perquisites, and, in case of their departure, severance payments It has been seen that the increase in executive compensation has far outweighed the rise of regular employee compensation the objective of this paper is to investigate ...view middle of the document...

Under the assumption that disclosure of executive
compensation packages effectively shames boards into
doing right by their shareholders and employees, a steady
stream of decisions by the SEC over more than 70 years
made disclosure of compensation policies more transparent,
more comprehensive, and more comparable from firm to
firm. Put more formally, transparent disclosure reduces the
costs of shareholder monitoring of corporate board decisionmaking,
and in theory, reduces agency issues between them.
This culminated in the 2006 rule, where the SEC created
the “Compensation Discussion and Analysis (CD&A)” filing,
in which companies are expected to disclose all prior and
potential payments, of any form or function. Notably, perks,
severance, and retirement packages, as well as payout ranges
for incentive plans, must be clearly spelled out.28
Today the United States has perhaps the most comprehensive
executive compensation disclosure rules of any country.
Yet, as disclosure increased over time, so has executive pay,
implying that disclosure rules are, in the end, ineffective. For
one thing, even with a well-constructed disclosure scheme,
corporate boards and their compensation consultants may
seek increasingly opaque forms of compensation (such as time
on the company jet), which are more costly, dollar for dollar,
than simply paying the executive what it is they think he or she
is worth in cash, just to avoid the public outrage that follows
disclosure of seemingly exorbitant remuneration.
Second, as compensation consultant James F. Reda pointed
out to The New York Times, compliance to the 2006 rules. has been further limited by a large loophole that excuses
companies from providing details on performance targets
if publishing them would put the firm at a competitive
disadvantage. Namely, if a competitor knows a firm’s
performance benchmark, and knows that in a bad year
executive bonuses will be meager or foregone, the competitor
could move in to steal away the firm’s executives with better
offers. Of course, many companies have claimed this loophole.

• Say On Pay
Given the challenges regulating executive compensation levels
through rule-based tax penalties and disclosure policies, a
superior approach to combat ill-designed or inappropriately
generous pay packages may be in the offing: Shift additional
power to shareholders through binding or advisory votes on
compensation issues so that they may effectively prod the
board to refine poorly designed proposals to better represent
shareholder interests.30 These “say on pay” powers are
increasingly common in Europe but are rarely granted by firms
in the United States. In 2006, a campaign led by the American
Federation of State, County, and Municipal Employees
attempted to push more than 60 companies to accept
advisory say on pay votes
The most important development in regards
to United States adoption of this rule was the inclusion of
a say on pay...

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