In North America, there has always been a dispute about the compensations of CEO’s. Some people state that the compensation is reasonable while others think it is unreasonable. I will be supporting the statement which says, “Compensation plans for private sector CEO’s in North America are reasonable”. Before going ahead, I will like to define:
The term Compensation “is used to indicate the employee’s gross earnings in the form of financial rewards and benefits or system of rewards that can motivate the employees to perform” (Smriti) while a Chief Executive Officer (CEO) is “a top executive responsible for a firm’s overall operations and performance. He or she is the leader of the firm, serves as the main link between the board of directors (the board) and the firm’s various parts or levels, and is held solely responsible for the firm’s success or failure” (Business dictionary).
Compensation is quite important for every organization, because it serves as a level of motivation. This means more compensation brings more motivation and this directly leads to more productivity or performance on the long run (Long and Parbudyal 2018 p 212).
In the case of the CEO’s in North America, research has shown that they are highly paid. “In 2016, the CEOs of the top 350 U.S. firms earned on average $15.6 million. The average CEO pay is 271 times the nearly $58,000 annual average pay of the typical American worker” (Ruth).
CEO’s in the private sector with high compensation plans are receiving these payments for so many reasons which include and is not limited to:
With respect to the points mentioned above, I will like to discuss about some theories that relate to CEO compensation. One theory is called Human Capital Theory. According to Ted Mock, Human capital refers to an individual’s experience or skills. The theory states that the more experience and skills you have, the more money you get paid (Mock). This can be related to the Executive pay.
It can be seen that before CEO’s attain such high-held position, they must have gone through a lot i.e. years of experience and also developed a lot of skills i.e. managerial skills.
“Consider the impact of Jack Welch on General Electric. Before his tenure as CEO, the company was a bloated giant, floundering under its own weight. Splintered into dozens of distinct and inefficient business units, GE was scarcely making a profit. Welch turned it around. He streamlined and reorganized the company’s operations and implemented a sound business strategy yielding more than $400 billion worth of shareholder wealth” (123helpme). It is quite obvious that Jack Welch brought success to this organization, hence such CEO deserves a large amount of compensation.
Another theory is the Tournament theory. This theory states that “the greater difference in the value of first price versus second price, the greater the motivation (Mock). This indicates that the more compensation that goes to the CEO, the more motivation for the second in place to get to the CEO’s position and this will increase productivity.
CEO’s pay is determined by the board of directors (123helpme doc 164959), but it should be noted that a CEO’s compensation should be attractive enough to retain them in the organization. This is because they are highly skilled, and it will cost a fortune to start a new employment process for the position of a new CEO. For example: If a company that pays the CEO $550,000 annually, then decides to reduce it due to the complaints of other employees; this will leave the CEO no other choice that to leave the company. The company then has to recruit for the position to be filled and based on market value for that position, and they might have to pay more than the previous CEO. This indirectly means that CEO’s are indispensable (123helpme doc 21032).
The stress level attached to this position is high. CEO’s go through a lot of stress for their respective organizations, hence they deserve huge salaries. The CEO’s are always thinking out of the box to figure out what is the next best option for success in the organization. Coupled with the fact that they have the years of experience, this allows them see things form different points of view, whereas an average worker might just show up at work to do just what he is assigned to do.
The method by which CEO Compensations can be directly linked to performance is by stock ownership: owning shares in the organization (123helpme doc 164956).
Some CEOs are paid a token salary but are rewarded with large parcels of company stock; last year, for instance, the CEO of Apple Computer, Steve Jobs, earned $1 in salary and received stock valued at $75 million (123helpme doc 21032). This indicates in this situation that Steve Jobs compensation is from stock ownership, this gives room for top ranked performance.
If the CEO has a level of stock ownership in the organization, this will make the CEO work in a way that will profit the company as a whole on the long run and also the shareholders. If this is not in place, the CEO will not have the interest of the shareholders at heart, which means the CEO will not have the drive for the success of the company.
In conclusion, from the points stated above it can be seen that CEO compensation in North America is reasonable.
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