Regulation of Executive Compensation and its impact on the stability of the financial system
In corporate circles, the financial crisis and its effect on companies is sometimes illustrated as a systematic phenomenon in which there is no individual responsibility. Public discussion, on the contrary often assigns the blame of the crisis to bankers or managers, and suggests conclusions of salary reductions or individual liability in terms of losses. In this paper the implications of executive compensation surrounding the financial crisis will be debated. Firstly, the types of executive compensation will be discussed and the implications of them. Secondly, how ...view middle of the document...
However some would disagree and say that executives in fact do deserve their compensation, due to the vast work hours, high stress and pressure of being in a top managerial position. This begs the question, should executive compensation be regulated?
An article “CEOs Deserve Their Pay” by Robert B. Reich uses quantitative data to reveal that, “According to research published recently by the Washington-based Institute for Policy Studies, the 20 highest-paid corporate executives earned on average $36 million in total compensation last year. The typical CEO of a Fortune 500 company earned $10.8 million, that's more than 364 times the pay of an average employee. Forty years ago, top CEOs earned 20 to 30 times what average workers earned.” This falls under the observation aspect of the empirical cycle, as Reich is following the trends of the pay that CEO’s receive. With the enormous increase in pay in the past half a century, many would argue that this is not fair, and their pay should be regulated, however Reich disagrees. Reich states that the change in pay is due to “a fundamental shift in the structure of the economy over the last four decades, from oligopolistic capitalism to super-competitive capitalism.” That although the pay has risen, so have investor returns and even if shareholders had a full say, they would not reduce it. This is his hypothesis, that the reason for the high pay of CEO’s is due to the change in the structure of the economy. Thus, his prediction and use of deductive thinking shows that CEO’s pay is likely to continue to rise substantially over the years.
“The CEO of a big corporation 40 years ago was mostly a bureaucrat in charge of a large, high-volume production system whose rules were standardized and whose competitors were docile. It was the era of stable oligopolies, big unions, predictable markets and lacklustre share performance. The CEO of a modern company is in a different situation. Oligopolies are mostly gone and entry barriers are low. Rivals are impinging all the time -- threatening to lure away consumers all too willing to be lured away, and threatening to hijack investors eager to jump ship at the slightest hint of an upturn in a rival's share price.”
Reich shows us that the job description of a CEO has changed over the past 40 years, an increase in competition in markets have increased the need of a CEO, “who has to be sufficiently clever, ruthless and driven to find and pull the levers that will deliver competitive advantage”. “There are no standard textbook moves, no well-established strategies to draw upon. If there were, rivals would already be using them. The pool of proven talent is small because so few executives have been tested and succeeded.” He shows us, with good reason, that in the ever changing market of today, that executives do deserve their compensation and that executive compensation should not be regulated.
Regulation of Executive Compensation
In the beginning of 2001, but...