The increase in CEO compensation
Recent years have seen executive pay shift from cash to stock options in a bid to link pay to performance. However, this has in turn led to an explosion of executive pay that begs the question, "How much is enough?" In this essay, I will first clarify what constitutes executive pay, before highlighting the theory behind the increases in this pay and well as some of the arguments for and against these increases.Traditionally executives' pay packets were a straight salary. More recently, executives have been receiving compensation in the form of a straight salary plus certain extras. These include:· Bonus. A sum of money awarded if certain set performance criteria are met, (usually yearly). · Stock options. The option to buy the companies stock at a specified price at a future date. Stock options and bonuses are the main tool used to enhance performance, however other variations exist, for example. Phantom stock plans enable the C.E.O. to gain the benefits of shares such as dividends and appreciation without actually owning any. Reload options enable the executive to sell his options at the price when the shares were at their highest. Restricted stock awards are only exercisable when performance criteri
The market for top chief executives has turned into a sellers market. His pay scheme included a grant of 1 million stock options exercisable at Apple's then market price of $26. The recent trend over the last decade of downsizing firms, (that is the changing of the structure of the organisation to include fewer levels of management and a flatter organisational chart), has lessened the likelihood of promotion. The option swap swaps the initial stock options for new lower priced options. If the increase in pay is to encourage executives to work hard in the interests of the company, then. The solution may be to increase the availability of these few good men. What is the reason for this change in executive compensation?There are a number of reasons that executive compensation has changed format. If an executive is a non-executive of another firm, he should not sit on its compensation committee if any of its executives are non-executives of his firm. Shareholders can sleep better at night knowing that their chief executive is as concerned with the well being of the companies share price as they themselves. An unanticipated effect of the increase in stock option awards has been the dilution of shareholders share value. · Compensation committees should be subject to certain rules, such as they should contain only non-executives.
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