To what extent does executive pay influence company performance
Executive pay has a lot to do with company performance. Chief executives, as the leader of a company, can exert some impact on the company’s future. Normally, they get a large amount of payment as well as the severance pay. Except the base salaries, they often get a compensation which is several times of their remuneration. According to CNBC, the average S&P 500 company CEO made 373 times the salary of the average production and non-supervisory worker in 2014, up from 331 times in 2013, according to the AFL-CIO. I would argue that executive pay will effect company performance a lot economically and socially.
That kind of high payment could become a motivation for both executives and employees. Just as mentioned by Kubo (2005), in order to get as much pay as executives, ...view middle of the document...
And this would make the company more competitive than others. According to reasons above, a relative large amount of payment is instrumental in improving a company’s performance.
For another, an overpaid executive would effect the company’s reputation and arise resentment among public. For instance, some company’s boards have little influence of executives so that they can select compliant directors prepare to wave through pay proposals. Public company of doing so has aroused outage and complaint among society. Since a company’s fortune is associated with its reputation and its stock price, an overpaid executive will overshadow the company’s achievement by influencing the decline of the stock price. Also, at the time of economic hardship, high executive pay would exert pressure on the firm’s development.
According to the passage from Economist, payment may can be a contributory factor in the banking industry’s meltdown. Because of their fat annual bonuses, bankers had little reason to dwell on the risks associated with the deals that they were signing. In some way, banker’s interest is connected with that of shareholders. But a slash of payment may drive talent people out of the industry which will also do harm to the company’s performance.
The relationship between payment and company performance is actually the relationship between executives and shareholders. Apparently, chief executives are not willing to let the board reduce their pay. A pay-for-performance model (the depression of the company or the lost of shareholder benefit will cause a decline of bonus) is worth to try. Under this model, the executive pay is related to the firm’s performance, which forms an impetus to the executive. It is also necessary to give the vote right to shareholders when there occur some changes in the payment policy.
To conclude, the extent executive pay influence company performance depends on industries and company’s own position in the market.