Arethere any trends in CEO compensation? Which ones? Why?
Concernshave been raised not only by the investors and the economic scholarsbut also by the non-governmental firms and the general public aboutthe practices around the compensation of the Chief Executive Officers(CEOs) such actions or practices are deemed excessive. It is evidentthat the compensation of the CEOs has increased radically from the1980s. Unfortunately, this is occurring in contrast to the swellinginequalities in the distribution of capital in the OECD nations. This has resulted into varying degrees of reactions from investorsand policymakers. In several nations, the legislators have come upwith laws, which call for companies to carry out Say-on-Pay polls,announce the pay ratios between their CEOs and workers, or themaximum extras (Ferri, 2013). Social security funds have resorted tomaking use of their ownership rights to express their levels ofdissatisfaction in relation to the excessive compensation that isaccorded to the CEOs. With this in mind, my paper will focus on thetrends that have been experienced in the compensation of the CEOs andthe reasons associated to such occurrences or trends.
Trendsin compensation of the CEOs
Inthe contemporary times, there has been a dramatic pay increase amongthe CEOs from all corners of the globe, in general and the industriesin particular. For instance, the pay ratio between the CEO and theworker in the United States of America was at 42:1 in the year 1982.However, by 2012, the ratio had risen to 354:1(Kimbro, 2013). At thesame time, the levels of inequality in the income distribution grewin number from the 1980s up to date. It is evident that thecompensation of the CEOs has continued to surge making them earn morein overall off late.
Whythe increase in compensation?
Severalarguments have been put forward to clarify why there has been a vividincrease when it comes to compensation of the CEOs. One of thereasons put forward is the emergence of the global, which is in therun to absorb competent CEOs (Kimbro, 2013). In the past years, therehas been a tremendous transformation in the executive markets fromthe national level to take the global picture due to globalization.This has made employers to source for the best CEOs around the worldto run their entities. To make this easier, they increase theircompensation packages to entice them.
Theimplementation of compensation program, which is based onperformance, has also been attributed to this trend (Ferri, 2013).The push for high compensation package in line with the performancecan be traced back to the late-1980s. The main objective of this movewas to increase the sensitivity of performance. However, it wasrealized that a fraction of their pay was “at risk” and theincreased compensation was seen as the only option to cover for thisrisk.
Therehas also been a remarkable change in the job nature of theexecutives. External hires, the possibility of being fired and thestressing on the general abilities rather than the initial careerspecific ones have greatly has become a common characteristic in thejob nature of the CEOs (Kimbro, 2013). These characteristics havedirectly increased the chances for them to move from one sector toanother resulting into the adoption of high compensation to attractthose with the best skills.
Itis apparent that there has been intense rise in the CEOs compensationcontemporarily. This has been attributed to globalization and changesin the job nature among other reasons that I have discussed.
Ferri.F. (2013). “Say on Pay votes and CEO compensation: Evidence fromthe UK”, Reviewof Finance, 17,527-563.
Kimbro,M. (2013). “Shareholders have a say on executive compensation:evidence from Say on Pay in the United States”, Working PaperSeries.