IN LIGHT of the tight competition nowadays in the corporate circles, companies are not only in the hunt for their respective niches in the market but also for adequate corporate officers who will lead their organizations.
Having the correct people for the job is a key in reaping success in one’s existence as a business organization. This requisite is no more emphasize in hiring competent people at the helm, namely one’s top executives.
However, hiring quality people does not come cheap. This may involve hiring a complete stranger to take charge of the considerable amount of capital investment that has been put into the business, some of which may run into the millions and even into the billions. Often times, other organizations are also in the hunt for the same person and the race will eventually boil down on which organization has the best offer in terms of work conditions and more importantly, financial compensation. Traditionally, the value of these executives is assessed by the weight of the resumes or curriculum vitae.
Lately however, more and more companies are opting to hiring executives who aside from being competent and proficient, can bring in better and bigger business to the company. This means that having an impressive career background is not enough. Though a person may be a highly qualified graduate of a reputable school, this is in most cases not enough as people with more experience and business s are often preferred over the greenhorns who have as yet to learn the reins of an industry.
This preference for experienced executives often lead to some complications as person from a different corporate culture is infused into the organization and at times, allowed to alter or change some policies and aspects of the business. This will result in a lot of adjustments not only for the business as a whole but on the subordinates who are forced into conforming to the new working conditions imposed upon them.
Between 1980 and 2003, the level of CEO compensation has increased six-folds. MIT economist Xavier Gabaix believes that the rise can be traced to the proportional increase in market capitalization of American companies. This simply means that as U.S. corporations grow bigger in capital, so does the level of CEO compensation (Pethokoukis, 2007).
In the U.S., top executive boasts of having the highest paid salaries in a business organization. Thus, board of directors of corporation must do their homework properly in hiring the right and best possible person for the job who they feel is “worth their money”.
But taking into consideration the long hours of work put in by these executives, the rigorous and often punishing work schedule as well as the intense and stressful work conditions that these corporate leaders go through day in and day out, being paid the highest possible salary in the organization is typical of having a very complex and difficult job.
Aside from these punishing conditions, executives are often the first person to be blamed for any errors or mistakes that may occur during the operation. It would be their heads on the line should corporate goals and objectives be not met during the prescribed fiscal period. In a survey conducted by provided by Standard & Poor's Institutional Market Services, a division of The McGraw-Hill Companies last 2001 (Business Week Online, 2001), the top three highest paid CEOs are the following: (1) John Reed of Citigroup at $293.0 million; (2) Sanford Weill of Citigroup at $224.9 million; and Gerald Levin of AOL Time Warner at $163.8 million.
On the other hand, top executives in the Information Technology business, particularly those handling business-to-consumer systems earn as much as $171,000 annually (Enterprise Systems, 2007).
The cases of Hank McKinnell at Pfizer and Robert Nardelli at Home Depot (Holstein, 2007), both being employed by multi-national corporations whose compensation packages has run into the hundreds of millions, has effectively shown that the price wars for these top executives has gone into peculiar heights.
These figures only reflect the financial considerations of being a top executive. Aside from having shamefully large incomes in a period of downsizing and streamlining of business operations, top executives are also allowed certain perks by companies such as spacious and luxurious offices complemented with a comprehensive set of staff and though they may work longer hours, their schedules are most often flexible.
Aside from these, top executives are often given certain considerations such as freedom from corporate protocol as well as being allowed to bring into the company their own team.
Bearing in mind the considerable amount of investment made in these executives and the authority reposed on them to handle the most sensitive parts of the business, companies nowadays asks whether the hiring of these corporate mercenaries may really be worth it.
Are CEO’s Benefits Packages Worth Their Costs? In order to appreciate the cost-benefit ratio of hiring CEOs for the company, it would be best to take into consideration certain premises such as the nature of the job, nature of the industry, the size of the organization that will be handled by the CEO, the complexity of the operations, the current market and financial status of the company, the company’s overall worth and the demands made by both the stockholders and the employees among many things. These factors have affected how much the value of a CEO may be to a company.
We must bear in mind that the CEO or the top executive in any company or organization is, in essence, still an employee who works at the will and pleasure of a Board of Directors, who in turn represent the interests of the stockholders or principals.
Looking at this principal-agent relationship from a certain point of view, the CEO is faced with the dilemma of serving the interests of the stockholders in squeezing as much profit from capital and as much production from labor as possible while at the same time dealing with the employees’ need to extract as much benefit from the company as possible.
In addition, a CEO is a highly specialized person who is expected to be well-versed in the operations and management of substantially every aspect of the business. He is no ordinary employee and is often stacked with years of experience to back up his credentials. Headhunters find people of this caliber quite scarce nowadays in the job market. Though there are a lot of prospective CEOs available for employment, only a handful may be able to get the job done. At times, human resource people find that those CEOs that are left unemployed are often the least qualified and thus the resort to more aggressive and subversive recruitment such as pirating people.
But snatching CEOs that are currently employed would require the company to make better and juicier offers in order to encourage the executive to “jump ship” --- going to greener pastures is slowly an emerging reality in today’s corporate culture.
Since the cumbersome task of coming up with an attractive and irresistible compensation package becomes indispensable to recruiting the right CEO for one’s business organization, then it is essential for a company’s human resources director to do its homework and make sure that the offer will not go for naught. In the performance of such task, it must be able to provide vital information and make correct recommendations to the Board of Directors, who will in turn make its decision based on such reports and recommendations.
In the past years, it has been the folly of most companies to hire CEOs by offering them exuberant compensation benefits through a misinformed or uninformed Board of Directors. Thus, the company finds itself hiring an overpaid employee who may not possess the necessary qualifications for the job.
Over the years, executive compensation has soared to ridiculous proportions. In the 1980s, the ratio of the salary that is being paid to CEOs and that of the average employee was 42:1. In the new millennium, this figure dramatically rose to as much as 400:1. However, U.S. Securities and Exchange Commissioner Roel C. Campos believe that the performance of CEOs hasn’t improved by the same degree over the last quarter century (Campos, 2007).
According to a couple of professors at the University of Texas-Austin's McCombs School of Business, CEOs who are paid higher does not really mean that they are better. In examining data collected from 1996 to 2004 extracted from 1,500 of the largest public companies, it appeared that “the more "connected" a company's board of directors-meaning the more members served on other companies' boards-the bigger the paycheck going to its CEO” (Ewers, 2006).
According to a new study, CEO compensation drastically rose in the 1990s when their average compensation grew more than 500% ---from $1.9 million to $12.4 million, mainly because of the practice by companies of competitive benchmarking or making sure that their CEOs do not get less than what was perceived to be industry standard (Business Week Online, 2001).
In fact, the SEC has required companies to disclose executive perks that goes beyond the threshold of $10,000. When the new policy took effect, signs of decline in corporate spending have been experienced as of early 2007 (MacMillan, 2007).
However, companies have been tempering the skyrocketing costs of CEO compensation by coming out on other perks such as performance bonuses and incentive pay in order to compel the CEO to earn his keep. Thus, the less the CEO works, the smaller his compensation gets.
Another method employed by some companies is to provide these top executives equity in the company with the idea that by converting them as part owners, they may be forced to protect their assets by working beyond par which hopefully would result in profits.
The cost is not worth it but we pay it. Running a successful business is similar to building a competitive professional basketball team. It will not be enough just to have a good program but it is also important to land in your roster the marquee players who will not only bring the talent to bring your team’s game to the next level but also to bring the needed spectators to add to your team’s current fan base.
Fortunately, today’s companies are slowly realizing the mistake of engaging in a bidding war for the best CEO. Some companies are slowly rethinking their executive benefits plan and removing tax breaks, club memberships and perks like a special retirement or severance plan for their CEOs. The biggest decline among these perks came to the reimbursements companies “its give top executives for the personal income taxes they owe on their other perks” (Business Week Online, 2001).
In 2002, many companies were reported to have been making their CEOs pay for their lousy performance as the year saw a 33% decline in compensation, a rate last experienced during 1996 (Business Week, 2003).
The vicious practice of granting ambitious benefits to CEOs, particularly those who appear underperforming, just to keep them within the company’s fold must be regulated at the very least.
Most business organizations end up sacrificing more than what they can offer up in this age of pay for performance in the business circles thereby disrupting an equitable distribution of the company’s wealth among those who actually work and perform for the company in their respective capacities.
Otherwise, we may see more cases such as those of Home Depot, where its former CEO Robert Nardelli walked away with a $210 million severance pay much to the shock and dismay of its shareholders (Business Week, 2003).
The Home Depot case served as an eye-opener to the rich payout that has been prevalent among the business world but has only recently decided to reveal its ugly head. In bringing into the company top-caliber executives, directors and stockholders must be weary that it is bringing in good men and not corporate monsters.
Pethokoukis (2007). On CEO Pay and Plunging Unemployment. Retrieved January 13, 2008, from the U.S. News Web site: http://www.usnews.com/blogs/capital-commerce/2007/2/1/on-ceo-pay-and-plunging-unemployment.html
Business Week Online (2001). Special Report: The Top-Paid Chief Executives...And 10 Who Aren't CEOs. Retrieved January 12, 2008, from the Business Week Web site: http://www.businessweek.com/magazine/content/01_16/b3728015.htm
Ewers, J. (2006). Monet & Business: Corporate Exec, Help Thyself; It's Not What You Know But...; In Search of Softball Questions. Retrieved January 13, 2008, from the U.S. News Web site: http://www.usnews.com/usnews/biztech/articles/061217/25brief.htm
Enterprise Systems (2007). 2005 Salary Survey, Part 2: Salaries, Bonuses for IT Executives Rise Slowly. Retrieved January 10 2008 from the Enterprise Systems Website: http://esj.com/enterprise/article.aspx?EditorialsID=1481
Holstein, W. (2007). Armchair MBA: Q&A with Compensation Consultant Pearl Meyer. Retrieved January 12, 2008, from the Business Week Web site: http://www.businessweek.com/managing/content/oct2007/ca20071016_932352.htm?chan=search
Speech by U.S. SEC Commissioner Roel C. Campos in his remarks at the 2007 Summit on Executive Compensation at New York, New York. January 23, 2007
Business Week Online (2001). Commentary: The Artificial Sweetener in CEO Pay. Retrieved January 12, 2008, from the Business Week Web site: http://www.businessweek.com/magazine/content/01_13/b3725122.htm?chan=search
MacMillan, D. (2007). Smaller Perk Packages for CEOs. Retrieved January 12, 2008, from the Business Week Web site: http://www.businessweek.com/managing/content/oct2007/ca20071011_003612.htm?chan=search
Business Week (2003). Special Report: Executive Pay. Retrieved January 12, 2008, from the Business Week Web site: http://www.businessweek.com/magazine/content/03_16/b3829002.htm?chan=search
Business Week (2007). News & Insights: A Better Look At The Boss's Pay. Retrieved January 12, 2008, from the Business Week Web site: http://www.businessweek.com/magazine/content/07_09/b4023044.htm?chan=search
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