To What Extent Do You Think Executive Payment Influence Company's Performance

827 words - 4 pages

To what extent does executive pay influence company performance?

Whether there is a relationship between the level of executive pay and company performance is a topic of great interest. The forms of executive pay can be both equity-based compensation which is based on the price of company’s stocks, like stocks and options, and non-equity-based compensation, such as cash compensation- including salary and bonus (Bebchuk & Fried, 2006 ). A company’s performance can be measured by its economic return, in other words, the accounting performance on financial statement (Gulen & Rau, 2009). This essay supports that executive pay may have no significant influence on company performance, ...view middle of the document...

In other words, the firms could have use lower cost to generate the same motivation for CEOs, or they could have spent the same amount to create much stronger incentives.

Another important reason is that managers can obtain substantial rewards with the options or stocks from equity-based compensation even when their performance was not as desired or even poor (Bebchuk & Fried, 2006 ). The equity-based compensation enabled the managers to gain the stocks or options with lower price. In principle, the stocks and options can provide managers with substantial incentive because the value of the stock is closely related to their own interest. Unfortunately, managers have been able to make money for themselves with these equities when they did not make corresponding contribution to the rise of the stock value. For example, firms have failed to find out stock price rises that simply because of industry and general market trends, which are quite unrelated to managers’ own contribution to stock value. According to Bebchuk & Fried (2006), there are plenty of ways to “filter out” such windfalls, but majority of firms choose sticking to conventional option plans rather than evaluate managers’ work scientifically. Therefore, there are quantities of equity-based compensation paid to managers which are not tied to their own performance.
In addition, the executives of firms always have broad freedom to “unload” these options and shares. This is a practice which reduce the risk of executives but costly to shareholders.

Another reason for the decoupling of payment and performance is that the company need to use the director’s pay to motivate not only the directors, but also the...

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