The Pros And Cons Of Chief Executive Compensation For Employees

Celebrities and famous athletes are not the only ones that make millions of dollars each year. Chief Executive Officers (CEOs), the professionals in charge of running businesses, are making just as much, if not more. Fifty-eight CEOs of public companies in the U.S. made more than $20 million in 2006 (Manzi 1). According to the Bureau of Labor Statistics, there were 20,620 chief executives employed in the United States in May 2015 (“May” 2). Although CEO pay has increased drastically in the past few decades, the same cannot be said for their employees. CEO pay increased by over 725% between 1987 and 2011, which is enormously greater than the 5.7% growth for workers (Nolan 2). This disparity between executive and employee compensation has gained

Executive compensation is shaped by market forces that push towards maximizing value, but they are also shaped by managerial influence which detracts from this outcome (Bebchuk and Fried 73). According to a 1999 article in the Journal of Accounting and Economics by Rachel M. Hayes and Scott Schaefer, compensation is determined by the bargaining powers of contracting parties (Olubunmi et al. 2). Executives earn more if they have a strong bargaining position compared to the board, which occurs when the company is outperforming others or the operations are large, risky, and complicated (6-7). If the workforce is highly skilled, unionized, and irreplaceable, then the pay ratio between executives and employees is lower because they have more strength when negotiating with management

CEO pay will be higher and less sensitive to performance when executives have more power (Bebchuk and Fried 77). “Corporate governance mechanisms such as board compensation (% of outside directors), the job split between CEO and chairman (i.e., CEO duality), the proportion of internal director shareholding, and the relative concentration of external shareholding” are believed to influence the process that corporate boards use to set CEO pay (Cordeiro and Veliyath 2). Increasing outside directors on boards allows for them to evaluate, monitor, and replace managers properly (2). CEO pay will be dispositionally high compared to the firm’s performance and the external labor market if a board has more inside directors (2). If an individual is a CEO and also the Chair of the Board of Directors, then they will have more control over their compensation by appointing sympathetic directors and choosing the information that the board reviews (2). If these position are separated, then the Chair is more likely to be more diligent and fair when choosing CEO pay (2). Less compensation is needed to convince the CEO to make the stock value as high as possible if they also are a stockholder in the firm (3). Blockholders, shareholders that own more than 5% of outstanding shares, are more likely financially and legally obligated to discipline managers and directors, which would negatively impact CEO pay (3). If a company