CEOs Salaries should be Regulated or Not?Introduction

Published: 2019-10-15 07:00:00
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Executives salaries regulation forms one of the most controversial topics in the current society. There has been a rise in the executive pay in the last several decades, thus reaching a higher level. Some of the largest organizations in the US pay their CEOs $100 million annually in salary, stocks, and bonuses (Matthews, 2016). Though the move for regulation of the CEOs salaries has been unsuccessful, and there is a need for the stakeholders to pay their CEOs any amount they wish because executive pay play a critical role in financial recession and crisis in excessive risk taking. According to Matthews (2016), there is much concern that the view of the public concerning the pay of executives should be regulated, legislated, reformed and rethought. However, this should not be the case. This is only a natural reaction to unprecedented events as regulating the pay for CEOs can result into a real damage. Therefore, this paper provides reasons why CEOs salaries should not be regulated.

Motivation of the CEOs

The traditional pay model of CEOs using stock incentives and cash is working for most companies. This motivates leaders in steering their companies towards high performance and thus the pay-for-performance model make a company to succeed. Studies show that successful companies pay CEOs a lot while low performing companies pay their CEOs much less wages.

Thus, regulating CEOs salaries through limiting them to a certain level may affect the performance of the organization as the CEOs will be faced with decreasing morale to give their best to the company at that position. The large compensations given to the CEOs play a critical role in financial recession and crisis in excessive risk taking. The CEOs may be risk reluctant their financial, human and reputational capitals are all liable to be linked positively to the organizations performance. When CEOs take risks that increase the chances of bankruptcy with the organization, they will never be comfortable as the risks increases the likelihood of unexpected returns for the organizations shareholders. The CEO may thus have to be paid massive amounts of compensations to be encouraged to take the point of risk of the organizations assets that there investor needs (Posner, 2009).

Murphy describe the whole history of executives compensation regulation as full of unexpected results. For instance, the coerced revelation of perks in 1978 led to increasing in perks as the executives were able to view what their fellows were getting (Edmans, 2016). Furthermore, the golden parachutes law of 1984, a reaction to one contract to a single organization, enhanced the implementation of golden parachutes by signaling CEOs who does not have them to their existence. The rule by Clinton, the then US President, that oversaw a $1 million salary limit saw the CEOs who were below the limit adjusting their wages above it and those above the limit classified the extra income as a bonus (Edmans, 2016 Para. 6). Furthermore, maintenance of high salaries to the CEOs allows the organization to prevent itself from facing criticisms should the organization face poor performance by stating that they paid the highest dollar to the CEO. The generosity of the massive salary package given to the CEO thus acts as evidence that he was the best choice indeed (Frank, 2009 p.1024). For example, an organization known as Sharper Image in March 2007 ended up employing a cheaper candidate for the CEO post, who was recommended to it, Steven Lightman. This CEO took only ten months for the job, within which the stock of the company dropped; the organization is now faced with bankruptcy, which preceded the coming financial crisis. No one knows whether the employment of a different candidate could have done better as compared to Lightman, but not to doubt, most of the directors would view the experience of the Sharpers Image as verifying the perception of conservative advance for the CEO payments (Frank, 2009 p. 1025). Restrictions on the CEOs salaries could also make boards concentrate on the pay optics like low ration and assume more significant elements like targets in performance being long-term other than short-term (Edmans, 2016).

Allow for Employment of talented CEOs

This forms another move why it would not be wise to regulate the CEOs salaries. The issue that comes out here is that every organization is after employment of a well-talented CEO. Relative salaries determine the choices of jobs. For instance, if the salaries of the CEOs were limited to $2 million yearly, the candidates who are highly talented would not see any reason to go for the positions that utilize their talents more. Furthermore, limiting the payments for the CEOs jobs without doing the same to other jobs would see the most talented potential individuals going for other posts like lawyers. Considering larger organizations, even very minimal difference in the talent of managers can come out with a huge difference. Take, for instance, an organization that make $10 billion annually but has limited its CEO search to about two finalists. If one of the finalists could be in the position of coming up with a better position as compared to the other annually, the earnings of the organization might move to 3% or even more. There have been many critics that the CEOs usually employ their friends within the boards to approve huge sums of money for their compensation, but they have always put their friends in such positions, so this can not be used to provide the explanation to the recent trends of the rising salaries (Frank, 2009).

Furthermore, the trend of increased salaries for the CEOs has become more due to increased size of the organizations. This will thus call for increased in the executive mobility. Hiring committee has the belief that executives who are talented from other organization could as well work with any other different organization. This new view for talented executives has affected their salaries with the organization aiming at employing the most qualified CEO, who will bring positive change to the organization (Frank, 2009).

All in all, there are opponents who want a rethink of the pay model of CEOs as this has impacted the attitudes of employees. Thus they recommend the protection of core incentives to minimize irritants. Research was established recently by the Chartered Institute of Personal Development, which see over half of the employees stating that the high payments to the CEOs demoralize their morale to work (Matthews, 2016). The opponents argue that the payment to CEOs need to be regulated to reduce inequality. Targeting to reduce the inequality by regulating the salaries got by the CEOs may have the same unexpected consequences, and could to some extent increase inequality. However, this movement may not be successful as regulation of the CEOs salaries should not be a primary concern, especially when motivated by the move to fight inequality. In fact, the CEOs payment has never been the primary cause of inequality. If equality is a major concern, then it is better to be looked into through considering the high-income tax rates and limiting loopholes in tax investment at a minimal rate. This will look into the inequality which results from all occupations well.

Conclusion

It is clear that the regulation of the CEOs compensation has been the major issue trending in the current world. Individuals have failed to understand the reason for the highest compensation for the top executive. Most executive system do not deal with the excessive pay of CEOs. The formal efforts to reduce the pay is unsuccessful. There is a need for the stakeholders to pay their CEOs any amount they wish because executive pay play a critical role in organizational success. One may have thought that the move to regulation could limit the inequality that is common in the modern world, but this may only worsen the situation. However, high compensation has been seen to be the decision of the stakeholders who are the primary owners of the organizations and the reason for the high compensation has been observed for the motivation and employment of the talented CEOs. It is clear that there is no need in the carrying out of the regulation of the CEOs salaries but leaves that decision to the stakeholders who pay according to the performance of the firms.

References

Barbara, M. (2015). Executive Pay: Are CEOS worth the Millions in Compensation they receive? SAGE business researcher. Retrieved from

http://businessresearcher.sagepub.com/sbr-1645-96551-2688702/20150720/executive-pay

Edmans, A. (2016). Executive Compensation: Stop making CEO Pay Political Issue. Harvard Business Review. Retrieved from

https://hbr.org/2016/07/stop-making-ceo-pay-a-political-issue

Frank, R. (2009). Economist View: Should Executive Pay be capped? New York Times. Retrieved from http://economistsview.typepad.com/economistsview/2009/01/shouldexecutiv.htmlPosner, R. A. (2009). Are American CEOs overpaid, and, if so, what if anything should be done about it? Duke Law Journal, 58(6), 1013-1047

Matthew, W. (2016 January 5). How should we set Executive Pay? BBC News. Retrieved from http://www.bbc.com/news/business-35238299

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