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Executive Compensation Essay

1788 words - 8 pages

Case Report on Executive Compensation

In the modern society, chief executive officer has become the most important part to many companies especially to the publicly listed corporations. They generally make a significant contribution to the profitability of their firm. However, in some case the managers’ interests conflict with their companies’, and thus their decisions may probably do not maximize their companies’ value. Therefore, it is a problem that how shareholders ensure that top executives want to maximize their wealth. This paper explores the principle for compensation, makes an attempt to design a new compensation package to the chief executive officer of Nike, Inc., and finally ...view middle of the document...

Although on such a competitive market, its company value keeps growing every year because of innovation. It can be seen clearly from figure3 that the stock price of Nike increased over the last decade. Today it establishes retail stores in more than 160 countries, employs more than 33,000 people around the world.

Packer, Mark has been President and Chief Executive Officer of NIKE since January 23, 2006. In 1979, he employed by Nike as one of the first footwear designers. For more than thirty years, he brought innovative concepts and expertise into product design, and leading the continued growth of Nike brand. What’s more, it can be seen from Nike’s website that Parker is responsible for the growth of Nike, Inc.'s global business portfolio, which includes Cole Haan, Converse Inc., Hurley International LLC, and Umbro Ltd.

II. Analysis

This section explores the principles for compensation, analyses the existing pay package of Packer, Mark, and then present a new one.

As mentioned above, CEOs play an important role in their firm, especially in the United Stated, where ownership and control is separated in most of company. They responsible for almost everything of the company such as operations, financing, marketing, sales hiring, firing, human resources, setting strategy, building company culture, leading the senior management team and so on. However, the interests of most managers are their salary, reputation, and short-term performance of the company, while shareholders naturally focus on maximizing the firm value, and long-term development of the company. It means that sometimes managers’ interests conflict with shareholders’, or they face various tempting alternatives when making decisions. It probably leads to their investment decisions that do not maximize investor wealth, or in other words, they maximize their own utility rather than firm value, if the system of incentives does not work effectively. This kind of situations called agency problem. In order to alleviate the agency problem and to improve the correctness of capital investment decisions, the compensation plan must be design to give CEOs a right incentive (cited in Corporate Finance, 2006:306).

To design a new compensation package, the level of total pay should be considered first. As the trend of globalization, many American international corporations including Nike can hire cheaper labor from developing countries, so the salary gap between top executive and typical production workers will unceasingly widened. The next point is globalization leads to greater competition for talent. As the result, shareholders have to provide a higher pay to their top executive, in order to urge the person with ability to stay and service for their company. As Murphy pointed out, the company size is greater, the higher CEO pay (cited in Executive Compensation, p651). On the other hand, a high level of executive pay is simply reflects the intense competition to hire CEO rather than a...

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