The impact of executive compensation on long-term shareholder value.
Executive compensation is a hot topic in contemporary finance. There has been a trend in rising benefits for executives, across the world (Fern and Es et al. 323–367). CEOs have been provided with hefty allowances and bonuses at the end of each year. Many companies have embraced the ‘pay for performance’ philosophy. It encourages companies to reward executives on the basis of organizational and stock market performance. In many cases, such pay packages have been disbursed with relatively little consideration of performance. Many corporations maintain stagnant growth, yet executives have enjoyed improved compensation packages.
Motivations for study
There are various reasons that justify the interest in executive compensation packages. Current executive pay packages promote short-term corporate success, since the executives are remunerated according to recent performance (Harford and Li 917–949). This approach may lead to short-term growth forecasts in companies, which puts the long-term shareholders in peril (Brockman and Martin et al. 1123–1161). In essence, these pay packages erode long-term value in stocks. Executives have focused on producing good results, at the expense of future growth. For example, organizations have cut down on R&D and innovation programs in order to improve short-term results. This results in a lack of innovation for such organizations, hence declining shareholder value (Peng and R’Oell).
Secondly, the income inequality associated to such pay packages reduces productivity in organizations. It creates human resource problems as middle and lower level employees have little motivation for improving organizational performance. In effect, such organizations are highly unlikely to improve their performance in future. Shareholders, therefore, face plateauing or declining value for their ownership (Ertimur and Ferri et al. 535–592), (Frydman and Saks 2099–2138).
Current CEO remuneration programs are detrimental to long-term shareholder value (He 859–892).
- Are the trends in executive compensation a global or regional phenomenon?
- Does executive remuneration impact corporate and stock performance?
- Does executive compensation destroy long-term innovation in organizations?
- What are the shareholder perceptions of executive compensation?
- Does executive compensation cause drops in middle and lower level staff performance?
- Is there an optimal level for executive remuneration versus corporate/stock performance?
- What alternatives exist for boosting corporate profits and stock returns, while motivating executives?
Brockman, Paul, Xiumin Martin and Emre Unlu. “Executive compensation and the maturity structure of corporate debt.” The Journal of Finance, 65. 3 (2010): 1123–1161. Print.
Ertimur, Yonca, Fabrizio Ferri and Volkan Muslu. “Shareholder activism and CEO pay.” Review of Financial Studies, 24. 2 (2011): 535–592. Print.
Fern, Nuno Es, Miguel A Ferreira, Pedro Matos and Kevin J Murphy. “Are US CEOs paid more? New international evidence.” Review of Financial Studies, 26. 2 (2013): 323–367. Print.
Frydman, Carola and Raven E Saks. “Executive compensation: A new view from a long-term perspective, 1936–2005.” Review of Financial Studies, 23. 5 (2010): 2099–2138. Print.
Harford, Jarrad and Kai Li. “Decoupling CEO wealth and firm performance: The case of acquiring CEOs.”The Journal of Finance, 62. 2 (2007): 917–949. Print.
He, Zhiguo. “Optimal executive compensation when firm size follows geometric brownian motion.” Review of Financial Studies, 22. 2 (2009): 859–892. Print.
Peng, Lin and Ailsa R\”Oell. “Managerial incentives and stock price manipulation.” The Journal of Finance, (2013): Print.
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