A Closer Look at Executive Compensation

By Fleming, Mary M. K. | The National Public Accountant, November 1997 | Go to article overview

A Closer Look at Executive Compensation


Fleming, Mary M. K., The National Public Accountant


Executive's compensation packages have reached an all-time high. For many firms, profits have improved dramatically since the recession of the early 1990s. The stock market has soared to new heights. The unemployment rate has decreased and consumers' confidence has improved. Still, there is growing concern about such chronic problems as the size of the national debt, the economy's long-term growth potential, and the trade balance of payment. Congress has renewed its efforts to balance the budget. Focus is being directed toward revising the tax system, improving education, and ending the rising stream of welfare payments.

Within corporations, attention is being paid specifically to factors for sustaining the rate of economic growth. Growth is influenced by advances in technology and improvements in labor productivity. Capital investments rejuvenate the firms' infrastructure. As companies become increasingly global, their complexities require talented and far-sighted leaders who can be expected to seek high rewards for their efforts. With improvement in financial performance, there is a reluctance to question the compensation paid to the executives at the helm.

Many view the gigantic compensation packages for firms' top executives with considerable disdain and wonder if such hefty compensation reflects their real value. Stakeholders are relatively powerless to halt the expanding compensation packages. Perhaps some of the blame can be attributed to institutional buyers whose primary mission is seen as maximizing the return and growth of the funds they manage. Satisfying their constituents can be more important than involvement in managing the firms in which their funds are stockholders. A considerable portion of the remaining stock is typically held by a multitude of widely scattered investors who may not have the expertise, power, or opportunity to band together to force Boards of Directors to reject outrageous compensation packages. Still, rebellion can occur, such as at the annual meeting in 1997 some Disney shareholders unsuccessfully protested lucrative compensation awards and denounced the Board of Directors nominees as too closely aligned with the chief executive.

In reality for many firms top executives have almost a free reign to set their own compensation so long as they can get it approved by the Board of Directors. Even this control is relatively limited as top executives are frequently members of the Board and are able to exercise substantial influence over its decisions. Such executive power results in a self serving compensation package with heavy emphases on the short-term and a de-emphasizing of the factors that contribute to the long run success of a firm. The purposes of this article are to evaluate the weaknesses of the current bases for paying executives and to suggest changes that focus on long term factors that contribute to profits, growth, employee welfare, and public policy.

Emphasis on Short-term Results

U.S. companies have traditionally motivated managers by paying them to maximize short-term results. Reward systems, including performance evaluations, tend to discourage top managers from making decisions congruent with the firm's long-term interests. Long-term economic interest emphasizes the importance of technological development. Recognition of the importance of capital expenditures lead to improvements in productivity. It also includes an understanding that product quality is a major factor that drives a firm's long-term vitality. Many management decisions are made that increase short-term results. Executives have substantial power to camouflage their decisions; therefore, it is not always obvious that their decisions conflict with a long-term view of economic efficiency. Decisions promoting their own welfare to the detriment of others are ethically wrong. A few of the more common methods by which executives can manipulate their personal earnings and satisfy their own personal needs follow.

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