Week after week we watch CEOs get paid millions of dollars in compensation for running their companies into the ground. Many people are critical of executive compensation since banks began filing for bankruptcy in the beginning of the 2008 recession. CEOs were given multi-million dollar parachute compensation packages while their companies and associated markets fell into pieces.
Congratulations! Not only are they rewarded for poorly managing their companies, but they also do so at the expense of their investors. In reality, these immense bonuses are typically given on a performance basis, but some critics are calling for executive compensation take the form of higher salaries rather than bonuses.
I think otherwise.
Congratulations! Not only are they rewarded for poorly managing their companies, but they also do so at the expense of their investors. In reality, these immense bonuses are typically given on a performance basis, but some critics are calling for executive compensation take the form of higher salaries rather than bonuses.
I think otherwise.
Recently, Chief Executive Officer Richard Waugh from the Bank of Nova Scotia was awarded $10.9 million dollars in compensation after the bank posted record profits. This brings up controversy once again surrounding executive compensation. Why should these officers get paid so much? What are they doing that warrants receiving millions upon millions of dollars? Critics such as the Institute for Policy Studies suggest that there are multiple repercussions for excessive executive pay, while others believe that the companies that produce the most consistent earnings are those that pay their CEOs a fixed salary over the entirety of the year.
The Institute for Policy Studies claims that the average employee is discouraged with their pay structure when they see their executive paid absorbent amounts of money. While this is a valid point, these executives are responsible and held accountable for companywide operations and major investment decisions. These judgments are those that produce profits for the company, and as a result these CEOs request compensation. It only seems valid to reward these figures with equity compensation in company stocks as this makes the executive more invested in company actions. Additionally, they are directly responsible for decisions made to generate company profits, and therefore should be rewarded handsomely if they prove to establish successful ventures that benefit the firm.
If CEOs were paid on a fixed salary basis, a couple issues would arise. A fixed annual salary suggests that the individual executive has zero performance incentives. They still get paid the same amount whether they boost annual sales by 50% or send the company into the ground. This provides a cushion for CEOs. They can allow for status quo to occur while receiving pay for providing little to no progressive decisions that foster company and stock value growth. All of which benefit the investors. Without providing performance incentives for executives, they can get away with receiving payments for doing as little work as possible.
While some critics might say otherwise, executive bonuses are essential to foster capitalism and promote a growing market. Bonuses typically take the form of stock options, which makes the CEO have a greater percentage of ownership in the company. Likewise, this concept pushes executive officers to have greater investment into the companies they oversee, meaning that they are less likely to lead apathetically if their salary bonuses are based primarily on stock value performance. Investors are happy because this form of compensation makes the executive just another simple investor who is concerned about stock value, something which is beneficial for all those with a stake in the company if this means greater company operation. This is additionally beneficial to the consumer because they see the results of CEOs that are invested in the performance of their company: greater competition, lower product prices, and greater services to make companies stand out amongst each other.
While investors and consumers benefit from bonus compensation forms, so does the economy. Greater competition is an indication of a larger variety in products. With a greater number of products means higher penetration into different global markets, increasing sales revenues and company profits. These profits are invested back into different sectors of business operations, which allows for multiple companies to benefit from the growth of a single business. As a result, the growth of the economy is spurred because there is more money spent, all thanks to compensating executives through bonuses rather than larger fixed salaries.
