Executive Compensation: Is It Too High or Too Low?

Written by Luke Thomas, Grade 12 Student, Investments and Finance

What is Executive compensation and how does it differ?

Before we can confidently say whether high-ranking executives are entitled to their compensation or not, it is important to go over what is executive compensation. An executive’s compensation can vary tremendously, however, it usually includes a base salary, long and short-term incentives, severance and prerequisites such as private plans and club memberships. The main difference between executive compensation and your own salary is the range of salaries and incentives. The executives have free will to negotiate their contract and what it entails. This is unlike most jobs that have a set range of salaries so that an employer can maintain their budget. Finally, an executive’s pay is typically heavily based on bonuses in order to keep them motivated.

Argument for High compensation

There is definitely a case to be made for high compensation with many compelling arguments. to begin with, an executive’s job is complex and they have to be able to manage major parts of an organization, especially if they are in charge of a major organization. An executive such as a CEO also has to deal with the media and maintain a good public image to make sure stock prices do not fall. In exchange for this, they are also paid a huge salary and have amazing incentives. Just like most jobs executives also receive bonuses based off of their success. However since their jobs are critical to a companies success, their bonuses will often be comparable or higher than their base salary and exponentially larger than an average bonus given to employees. This helps to motivate executives to work longer and harder so that they will receive massive bonuses. It is because of the bonuses and their crucial role in a company that many people believe in high compensation for executives.

Low Compensation For Executives

Even though there are many reasons for high compensation, there are many who believe that executives are overpaid. One of the major reasons against high compensation is greed. Due to the high amount of money executives receive it is natural that many will resort to questionable tactics to achieve and maintain the position. There have been countless stories of CEOs use unethical and illegal practices to gain an edge on the competition. If executives were paid less or at least less in incentives it might dissuade them from attempting to earn even more. along with the negatives of short-term incentives. For example, if a CEO was to receive a one million dollar bonus for raising the price of the stock by 5%. An ethical CEO would find a solution that would help the company raise its stock price and maintain it at that price. However, there are many CEOs who would initially inflate the stock just to receive the bonus. This however would not be stable and would most likely cause the stock price to plummet. This is the main argument against high compensation and is why many believe that executives are incorrectly compensated.

My opinion

Overall I do believe in High compensation for Executives, this is due to their stressful and intense job specifications and that high compensation often leads to better performances. It is because of the high incentives that I believe their compensation is worth it and will lead to a better outcome for the company. Additionally, when looking at a companies financials their change in profit and stock price often match their CEO’s compensation. Meaning that they are paid according to the success of their work and the company. Another aspect to consider is the pay of a founder and non-founder executives. Traditionally CEOs and other executives that had a part in creating the company are always paid more. I believe this is extremely fair as they are one of the reasons the company exists and should be compensated. Although this may not seem important it is just another reason why executives are highly compensated. In conclusion, I believe executives deserve a high compensation if it is highly incentivize based and correlates to the companies success.

Resources

Heathfield, S. M. (n.d.). How Is Executive Compensation Different From Other Employees? The Balance Careers. https://www.thebalancecareers.com/executive-compensation-1918119.

Kuepper, J. (2021, May 19). Evaluating Executive Compensation. Investopedia. https://www.investopedia.com/articles/stocks/07/executive_compensation.asp.

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