Essay/Term paper: Should top executives make the money they do

Essay, term paper, research paper:  Business

SHOULD TOP EXECUTIVES MAKE THE MONEY THEY DO?



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April 4, 1997







CONTENTS

Abstract ........................................................................................................... iii
Introduction ..................................................................................................... 1
High Pay Seems Small When Compared To Company Profits .......................... 2
Top Executives Are Under A Lot Of Pressure .................................................. 3
US Executives Paid Three Times More Than Other Countries For A Reason .... 4
Pay Should Reflect Performance ...................................................................... 5
Conclusions And Recommendations ................................................................ 6
Notes ............................................................................................................. 8
Bibliography ................................................................................................... 9













ii
ABSTRACT
This report explores the issue of the pay that top executives make, and the reasons why
they do. It also suggests improvements that can be made to make the system better.

High Pay Seems Small When Compared To Company Profits

Many companies pull in profits that are extremely high. When an employee of such a
companies salary is compared to the amount of profit that the company earns, it starts to
seem reasonable. It only makes sense that if the employee is directly responsible for the
success of their company, then they deserve to get their payback. It seems ironic, but
many salaries even look small once compared with a companies profits.

Top Executives Are Under A Lot Of Pressure

Being the CEO of a company is not an easy job. There is all kinds of pressure for a person
in such a position to succeed. If they do not, then it is their job on the line. Therefore,
they deserve to receive a large sum of money for the work that they do. It is the only way
to compensate these employees for the tremendous strain that their job puts on them. It is
essential that the employees get paid the amount of money that they deserve.

Pay Should Reflect Performance

When CEOs are being given big paychecks, they are expected to perform at a high level.
There success is impeccable. However, this does not always happen. There should be
some way of connecting pay to job performance. The best way of doing this would be to
award bonuses to those workers who are at the top of their class. This would not only
motivate workers to do a good job, but also reward the employees that do succeed.


TOP EXECUTIVES DESERVE THE MONEY THAT THEY MAKE

INTRODUCTION

It is a well known fact that many people holding high positions in companies make an
exorbitant amount of money. Some, however, say that they do not deserve the amount
that they are paid. They feel that for the amount of work that is done by these executives,
their paycheck is simply too high. Also, they believe that these high paid workers often do
a mediocre job, while still managing to reap the benefits of being an executive. While
these are viable arguments against this issue, the other side of the spectrum shows that this
is not so. There is an equal amount of evidence, if not more, that suggests that executives
earn every penny of their paychecks.

The CEOs of companies are under an extraordinary amount of pressure. They face the
task of making sure that a company pulls in a profit, or possibly losing their job. There are
few, if any other positions that put an employee in this situation. Important decisions are
made by them everyday, many of which decide whether a company will prosper, or go
under. Many of these men had to work their way to the top. They usually have extensive
business backgrounds, and know their field well. There are very few people qualified, or
knowledgeable enough to perform well in executive positions. That makes the ones that
are, a hot commodity. Thus allowing them to demand the high pay that they earn.




High Pay Seems Small When Compared To Company Profits

When the public sees a salary that they consider to be too big, they are usually looking at
only half of the picture. It is impossible to look at just the salary, without taking any other
factors into consideration. One must look at the amount of earnings, compared to the
profits of the company.

For instance, Robert Allen, who runs ATT was recently pointed out by 60 Minutes as
being an overpaid executive. Their major problem was that he had been responsible for
laying off 40,000 employees, while still managing to give himself a large pay increase. At
first glance, this situation may appear to be one involving a greedy and overpaid executive.
However, upon closer examination, it proves to be much to the contrary. The situation
wherein the 40,000 employees were laid off, was not a matter of getting rid of people for
an unfounded reason. It was more a matter of getting rid of an excessively large work
force, and getting the same job done with fewer people. This not only benefited ATT, but
also, the customers receiving service from ATT. "For exactly the same service in 1996,
the average family will be paying $11 less."1 This is due to the fact that the consumer's
money was not going to a larger number of employees, but going directly to the minimal
cost of performing the job. Robert Allen has a total salary of 20 million dollars. This
salary seems to be extremely high when put as a statistic by itself. This changes, though,
when you compare it to the total earning of ATT. His salary calculates to be 1/3,450 of
ATT's gross. All of the sudden, the 20 million dollars does not seem like such a high
figure after all. Another factor that serves to make his salary a valid amount, is that even
if his total pay was split between all of the laid off workers, they would only receive about
$500, not much more than a weeks pay. When all of the cards are on the table, a salary of
20 million dollar starts to look quite reasonable.

Top Executives Are Under A Lot Of Pressure

Most jobs are clear-cut. A person has a designated task to perform, and the method of
performing this task is clearly laid out. If all directions are followed, then there is not too
much that can go wrong. This, unfortunately, is not the situation for top executives in
companies. They are in the tough position of making decisions that may affect the whole
company. With one bad move, they can bring a multi-million dollar business under. On
the same level, though, that can bring in an infinite amount of profit by making a good
move. All executives realize this, and this puts an superfluous amount of pressure on
them. Most people could not handle this on a day in, day out basis. It would eventually
catch up to them.

Seeing that one person is given so much power, what guarantee is there that they will do a
good job? There is none. That is why there has to be a large amount of money involved.
If a person did a job such as this, and received a small amount of pay, then there would
not be much incentive for them to do a good job. They could always find another job,
with a similar amount of pay, that did not put them under the stress that executive jobs put
them under. Once an immense salary comes into play, then that gives a person reason to
thrive in such an industry. When a person has a goal such as this, it tends to elevate their
performance to a higher level. This means a company succeeds, and pulls in a profit. It
seems that whenever money becomes a factor, a much greater importance is put on things,
and a much smaller margin of error is tolerated. The top executives are the ones who are
affected by this, and it is they who are rewarded, or punished depending on the outcome
of their company.



US Executives Paid Three Times More Than Other Countries For A Reason

US executives receive a substantially larger pay than their worldwide colleagues. One
report on earnings showed that "US CEOs were earning 3.2 times more than their British
counterparts."2 This is a tremendous difference, when one considers that these people are
doing the same job. This contrast in salaries leads one to ask the question: Why do
Americans earn so much more? The quality of work is not an issue. There are many quite
successful businessmen in Britain, as there are in America. It is not a question of talent,
because if a person can be successful in one field or situation, then they will most likely be
able to cross it over into another area. In other words, if a businessman is able to be
successful in Britain, then they will presumably be able to succeed in America. The reason
why Americans are paid more is really quite simple. America does things on a much larger
scale than other countries. This does not only concern salaries, but just about all other
fields as well. The problem is not finding qualified people that will work for lower wages.
However, it is more an issue of companies realizing the magnitude of the job being done,
and rewarding the employee with an amount of money that they deserve. This is an
acknowledgment by businesses, that CEOs of companies should be getting the pay that
they get.

If a company in America wanted to, they could easily hire an executive from another
country at a lower rate. In fact, many workers from other countries are hired. However,
when this happens, it is not a decision designed to save money. It is a decision that is
meant only to bring in quality workers. The new employees are usually started off with an
"American" level of pay. It is the company, not the worker, that is responsible for high
wages. This negates the idea that quality workers can not be found at a reasonable rate.
It is the decision of the company to pick pay rates that are high, rather than a result of
worker demands. If people in the industry decided that executives were not worth the
money that they earn, it is up to them to lower their pay.

Pay Should Reflect Performance

Now that is has been established that CEOs deserve their paychecks, it is time to examine
problems with the system. It is not perfect, but for that matter, neither is anything else.
One major setback is the fact that most wages are not representative of the productivity of
that employee. Whether a worker is a model employee who is very prolific, or a poor
worker who is unproductive, they still are given the same treatment by a companies far as
pay is concerned. This can lead to a business losing vast amounts of money, while the
CEO fills his pockets with money. For example, Varity Corporation was a business that
was once one of Canada's biggest and highest profiting companies. However, it struggled
greatly during the eighties, and lost money most years. That did not stop its chairman
Victor Rice from earning "more than $1-million in annual compensation".3 This is clearly
an abuse of power. If an employee is allowed to continuously do a poor job, while still
benefiting from his job, then there is little reason for them to attempt and do a good job.
In the case of Victor Rice, there was obviously no correlation between the quality of his
work, and the pay that he received. If he did such a bad job though, then how come he
still had a job. This answer to this is one that affects many businesses. Many times it
actually costs a company more to get rid of an unwanted employee, than it would to keep
them on as a worker. "When Paul Stern stepped down as CEO of Northern Telecom last
year, he left with $164,112 for two months of employment, a cash compensation package
totaling $6 million and another $1.5 million in stock options."4 The reason for this is that
many times, when a position such as CEO come into play, a contract is written up. That
means that the worker is supposed to be with the company for a certain amount of time.
If this time period is cut short, then that is a breach of their contract. By law, they must be
compensated for their removal from the company. This may cause a business to hold onto
an employee that is unwanted, because it is such a hassle to get rid of them.

One solution is to make a direct connection between the amount of money that a person is
paid, and the quality of work that the person does. This would not only put pressure on
that individual to do a good job, but it would also give them incentive to produce more.
The best possible way to implement this would be to start people off with a low base
salary, and award large bonuses for any goals that they meet. Right now, there are many
hard working employees. They appear to be putting their full effort into their job.
However, it is amazing to see how much more can be done when monetary awards are on
the line. It may mean the difference between an employee staying focused on his job and
making his business successful, rather than an employee slipping a little bit and forcing his
company to lose money. This technique of linking pay to performance is practiced often
in countries such as Germany, but is discouraged in place such as America and Japan.
This is definitely a policy that should be considered in countries across the world.

CONCLUSIONS AND RECOMMENDATIONS

It has been established that top executives do make a lot of money. It has also been
established that they deserve the money that they receive is well deserved. These
employees are making important decisions everyday. They are under a tremendous
amount of pressure to succeed. It is their job to make sure that large corporations. Their
jobs are arguably some of the most important in the world. This certainly allows them to
be presented with such large salaries.

There are a few steps, however, that can be taken to regulate the salaries that are
executives are paid. This is necessary because only the select workers that do their job on
a superior level deserve the high amount of money that they get.
1. Give employees a base salary, and award bonuses on top of that for any profitable
work done by that employee. This would not only give them a reason to bring their work
up to a premium level, but also create a distinction between those employees who are
successful, and the ones who are not. This would also serve as a way to weed out those
employees who can't cut it.

2. In order to guarantee that workers are paid based on performance, there needs to be
more legislature passed to put restrictions on method of salary payment. Right now,
Clinton gives a tax break for the companies that pay their employees based on how they
do their job, but even those who do not are able to find ways, through the use of
accountants, to get such tax breaks. There must be stricter laws in place, with no
loopholes.

3. The world on a whole, should agree on a standard level of pay for executives. It is not
fair that people in countries other than the US, receive 1/3 of the pay, for doing the same
job. This would help to give the executives around the globe, the amount that they should
be getting.

4. It should be easier for a corporation to get rid of an unwanted employee. Right now,
many are tied into contracts that require a large sum of money be paid if the employee is
released early. There needs to be escape clauses if that employee performs lower than
expectations. This will keep only the best employees running businesses, meaning that
these companies will be more successful.

If all of these ideas were implemented, then the world of high paid executives would run
smoothly, without and controversy, or dispute concerning amount of pay.



NOTES


1. "Rich-Baiting Time," National Review, 62 May 5, 1996

2. "Random Numbers," Maclean's, 42 May 9, 1994

3. "Giving Capitalism An Obscene Reputation," 35 May 9, 1994

4. "On The Right," Economist 62 June 3,1995



































BIBLIOGRAPHY


1. "Rich-Baiting Time," National Review, 62 May 5, 1996

2. "Random Numbers," Maclean's, 42 May 9, 1994

3. "Giving Capitalism An Obscene Reputation," 35 May 9, 1994

4. "On The Right," Economist 62 June 3,1995