Executive compensation is considered to be a central component of corporate governance mechanisms. It is believed that an effective and prudently designed executive compensation package can motivate managers/executives to perform their duties diligently and to look after the interests of firm owners (or shareholders).
However, there is a widespread belief among the public, regulators, media and investors that the current state of executive compensation structure fails to attain its goal of motivating managers to thrive for the best firm performance. A number of Canadian and international studies indicate that the link between executive compensation and firm performance is quite weak or broken. The other major concern is that the current level of CEO compensation is exorbitant and unjustified.
In a recent report, Hugh Mackenzie (2016) of Canadian Center for Policy Alternatives show that in 2014, Canada’s 100 highest paid CEOs earned on an average $9 million per year – which is approximately 180 times more than an average worker in Canada. Moreover, it is observed that even the financial crisis of 2008 – which exposed the weakness and vulnerability of many firms – failed to stop the rise in executive compensation.
Given the controversies surrounding executive compensation level and structure (fixed vs. performance based pay), regulators have introduced more stringent and transparent disclosure guidelines in the recent years. Various market participants and media are also paying an increased level of attention to the issue of executive compensation. Under the changing scenario, perhaps it is worthwhile to examine the relevant executive compensation issues with more recent data.
- Has the executive compensation structure become more tied to firm performance?
- Does corporate board play any significant role is structuring executive compensation that addresses shareholders’ concerns?
- Does an incentive based compensation structure that separates fixed versus variable (equity based) lead to better firm performance in the subsequent period?
- Does excess pay motivate the CEOs to work harder and make a difference in firm performance?
Answer to these questions will paint a clearer landscape of executive compensation in the context of recent economic and regulatory developments. Hope that it is not – All Talk and Little Action!
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