Furthermore the money they do earn is simply as compensation to what has been scarified. This does not only apply to what they have had to forego during their period of influence, but also what they must have sacrificed in order to deserve such an esteemed position. However, the performance of the company may not necessarily be a result of its CEO's actions. In addition, there may be a connection between CEO compensation packages and the actual detriment of share value. The question has also been raised as to whether they would work just as well for half the pay; both sides of this issue will be further examined and discussed. This blog will then explore what it is that truly motivates the top level executives across the world. This essay will tie this in with relevant theories associated with needs, motivation and incentive. Concerns such as stress will also be addressed. Finally the paper will take a closer look at Australian executives and how stringent government regulations moderate their salaries. This paper will constantly connect these issues with real life examples of the top Fortune 500 executives and other Australian Companies.
Many critics argue that CEO salaries are far too exorbitant (Loomis, 1982). In some cases this is very much true. There are some horrific instances in which the compensation packages for Fortune 500 executives have actually been directly connected to the detriment of the company's share price. In that, had the CEO not have received such excessive pay packages the company's stock would have generated a return, not a loss (Crystal, A, 1999).
Take Michael Dell, CEO of Dell Computers. His compensation packet including stock options, fringe benefits and salary is close to 1.4 billion dollars a year as of 1999. That same year saw Dell's share price lost 23.7 percent (Crystal, A, 1999).This raises the important question of how large an affect Dell's package had on the value of the company's stock.
Reh commentates on an investigation by Business Week that reveals the typical chief executive officer in the United States earned 42 times more than the average salary within the same company. Over twenty years this figure has risen to state that the average CEO would earn 531 times more than the average employee salary (2006)
Reh furthers his argument insisting that the CEO is not completely responsible for the success of the company. He highlights the efforts middle management and lower level employees as a collective being pivotal to the success of an organisation (2006).
Wall Street Journal writer Lublin dismisses the notion of pay for performance. "In some companies, pay for performance now translates into forgive and forget, "(April 8, 1999). This was said with regard to some boards' desperate attempts to keep a proven chief executive officer within the company. So the idea of stock options encouraging performance is forgotten provided the CEO in question has a proven track record (Lublin , April 8, 1999). Essentially irrespective of the company's performance, CEO will get rich. Between free restricted shares packages, high salaries and excessive bonuses it would be hard for them to lose.
An example of this was found in Applied Magnetic's CEO Craig Crisman who saw the exercise prices slashed on his essentially worthless shares. Unfortunately this attempt failed, when the shares lost even more ground, so they cut the exercise price even further and then proceeded to reprice his entire stock options package. This was under the instruction of the board compensation committee chairman Herbert Dwight. All of this was in an attempt to stop Crisman from looking for 'greener pastures,' (Lublin, April 8, 1999).
An interesting example of Steven Jobs the CEO of both PIxar and Apple dismisses the notion of pay for performance. Much to his credit Jobs does not receive a cash salary. He also owns one solitary share in Apple. During his influence at Apple he managed to get the company to return an average of 102 percent per annum, making it the third highest performing stock on the S&P 500 index. Essentially Jobs worked for nothing, and turned Apple around to become an industry leader. On the other hand, although Jobs does not receive a Salary at Pixar he does have over one billion dollars in stock. With an investment this significant, you would expect Jobs to have worked exceedingly hard to make the investment profitable. "We should find tremendous performance because of tremendous share ownership," (Crysral, B, 1999:1). Unfortunately it did not eventuate in line with this theory. Over four years after Pixar was publicly traded, the stock returned an average of 0 percent. When compared with S&P 500 Index which yielded a 27 percent average return to investors, thus putting Pixar in the 25 percent worst performing stock in between 1995 and 1999 ," (Crysral, B, 1999:2).
From this information Crystal concludes that,
The composition of a CEO's pay package has nothing to do with his future performance; the CEO may not make all that much of a difference in whether the company is a success or a failure.
"Top executives are worth every nickel they get," (Murphy, 1985:125). Australian Prime Minister John Howard reaffirmed that comment nation wide in February, 2004. Although he empathises with social frustration over failed CEO payouts, he still deems it necessary for large company's to attract skilled executives (The Age, February 3, 2004). He was quoted as saying;
This idea that you legislate to restrict what companies pay their chief executives by way of ordinary salary and remuneration, I think that is ridiculous and short-sighted (The Age, February 3, 2004).
The aforementioned comments were made in the wake of the multi million dollar 'golden parachute' payout received by disgraced former NAB chief executive Frank Circutto whom resigned over a controversial currency trading fraud. Circutto left the company with over three million dollars cash and millions in options and other benefits.
Former Labour leader of the opposition Mark Latham was outraged by both Prime Minister Howard's comments and the NAB scandal. He proposed a one million dollar cap on tax related deductions surrounding corporate payouts in an attempt to curb these 'golden parachutes' (The Age, February 3, 2004). He reported to the media;
I don't mind rewarding success in our society, that's an important part of a market economy. But I think most Australians would feel that someone who's gone out in unsatisfactory circumstances, that sort of money, is outside a decent community standard. (The Age, February 3, 2004).
In a recent discussion by esteemed economists Xavier, Landier and Augustin find that, statistically speaking, a large proportion of CEO compensation packages, particularly those in the United States are in lieu with their industry's relative gains in the share market. "Viewed as a whole, these salaries are a result of competitive pressures rather than the exploitation of shareholders," (2006:6-3).
That said in earlier studies conducted in a similar nature indicate little to no connection between CEO salary and stock packages and the comparative magnitude, profitability and expansion of the company or industry as a whole. In a study of one hundred Fortune 500 companies, it was only concluded that there was on a marginal connection between the abovementioned economic determinants and CEO packages. And that remuneration is determined by the compensation board in line with the tournament theory (Finkelstein & Hambrick, 1988; O'Reilly III, Main, Crystal, 1988:257-274).
Therefore it can be concluded standards in CEO compensation packages have been regulated somewhat, as so there is at least some underlying economic justification, surrounding this issue.
It had earlier been suggested in this paper the proposal of whether these executives would perform as well, if not better if their salaries were significantly reduced.
In recent studies in the USA conducted by ZD Net; research as to total executive compensation against share value reveal that total return to shareholders was greater in many organisations whose CEOs received under $500,000 compared to companies who paid their CEOs exorbitant amounts in salary, share and benefits packages (Reh, 2006).
In comparison it was Mariotti refers to the works of Bok when he explains that it is simply a matter of supply and demand. In a fast paced, economically turbulent state of affairs, few people desires the inherent risk and stress associated with executive level management; thus creating a high demand for those that can handle the pressure and have proven business success to support their claim. He furthers this by explaining that it is these successful, hard working individuals that can command what ever price the wish (2005). In referring back to the previous works of Reh, Mariotti argues; although middle management and lower level employees are essential to the success of a business, it is the CEO's vision that drives that success. Interestingly enough, it is the world's best and consequently highest paid executives that are not leading their company for their compensation packages, but are goal orientated leaders motivated by success (2005).
To understand what the driving force behind the world's top executives is one must begin to understand the theories surrounding the notion of motivation.
Funk and Wagnalls define motivation as, "A conscious or unconscious need, drive… that incites a person to some action or behaviour; incentive; goal," (1982: 425). Robbins, Bergman, Stagg and Coulter give a business specific explanation as,
The processes that account for an individual's willingness to exert high levels of effort to reach organisational goals; conditioned by the effort's ability to satisfy some individual need, (2006:524)
Motivation is often seen as a quality that some people have and some do not. In some circumstances this may very well be true, but theorists agree that everyone is motivated, just by different situations, needs and goals.
A need has be explained as, "An internal state that makes certain outcomes appear attractive," (Robbins et al, 2006:524). Thus to achieve a successful company it is imperative that the individuals needs are similar to that of the organisation.
To understand what motivates these high achieving CEO, the paper will investigate three early theories regarding motivation. They will be compared and contrasted to recent theories, thus one step closer to understanding how top level CEOs achieve such greatness.
The most common theory behind motivation is that of the theorist Maslow and the hierarchy of needs theory. Humans are explained as having five particular needs these include in order of most important to least important: Physiological, the need to substantiate ones physical needs such as food, shelter, drink and sex. Safety, the need for security and protection from harm both physically and mentally. Social is the need for affection, association and general social interaction. Esteem needs pertain to the ones self esteem regarding appearance, social status and recognition. Finally, self actualisation is the need for growth in all areas which revolves around setting and achieving both. In order for esteem and actualisation needs to be meet one must first realise their simpler needs such as safety, physiological and social. Maslow believes that once a certain need has been achieved they are no longer driven to achieve this, thus their motivation pertaining that need will decrease or disappear (Robbins et al, 2006:524).
From this it can be established that the main need that motivates some CEOs is the esteem and self actualisation needs.
That said it is worth highlighting in correlation to money and compensation packages; psychological condition known as self doubt may see some convince they cannot achieve the aforementioned needs of esteem and actualisation. "If they aren't deriving a sense of self-worth from other parts of their lives, they may feel that owning a lot of things proves they are successful," (Arkin, 2002). These people, believing that that they cannot achieve these needs, use money and material objects to validate their existence, and it is the need for money to compensate for the lack of needs being fulfilled that acts as a motivator (sixwise.com, 2005; Arkin, 2002) This in some cases may very well be an example of what happens to some CEOs. Especially those that are on substantially high pay, yet still commit fraudulent crimes.
McGregor proposed a theory that intertwines with the theory of Maslow. However there has been little further research to validate this theory. His X and Y theory that predicts that superiors view their employees in either a positive light, Y or a negative manner, X. Theory X explains that management may view their employees as being driven by the simpler of the five needs, physiological, security and social. Therefore it could be concluded that management regards employees as working only as a means to fulfil these three needs. Consequently staff are treated accordingly. Theory Y however, suggests that the self actualisation and esteem needs of employees are more important, either because the others have already been fulfilled or that they are of diminutive importance. Thus, management will nurture creativity, innovation and independence. Regardless McGregor insists that they theory Y is more conducive to enhancing motivation and high performance in employees (Robbins et al, 2006:524).
It could therefore be considered that the top CEOs can partially attribute their success to their managerial predecessors who may have encouraged them to strive for excellence in fulfilling their esteem and self actualisation goals.
Herzberg submits a concept known as the motivation-hygine theory. The underlying notion behind this theory is that, "an individual's relation to their work is a basic on and that their attitude towards work determines success of failure," (Robbins et al, 2006:527). The extrinsic characteristics associated with low job satisfaction or dissatisfaction were most notably; supervision, policies, conditions status and security amongst other factors. These are known as hygine factors and can adversely affect job satisfaction and thus, motivation. The factors associated with a high standard of job satisfaction were a feeling on achievement, recognition, the nature of the work, responsibility, advancement and growth (Robbins et al, 2006:527).
It can therefore be deduced that another force behind the success of chief executives were the factors associated with the nature of their work.
A contemporary theory surrounding motivation is McClelland's three needs principle. It dictates that people have certain needs that can be acquired or developed that lead to higher motivation at work. These needs consist of the need for achievement, the need for power and the need for affiliation. (Robbins et al, 2006:527).
The need for achievement is the drive to out perform and thus succeed. These people long to achieve more efficient and thus effective results in all aspects of life. One with such a need requires responsibility, independence yet in the presence of feed back, as so they can perform even better. There is a competitive nature associated in people that have a high demand to satisfy this need (Robbins et al, 2006:529).
The need for power is simply the need to control and influence others' behaviours and actions. The operable word is control. As this is essentially what power brings. People high in this need often believe that they are somewhat superior in their thoughts, ideas and opinions (Robbins et al, 2006:527; Dwyer, 2005:257).
The desire for affiliation relates once again, back to Maslow's theory surrounding social needs. In that there is a certain need for close interpersonal relationships. It is the need to be associates, accepted and respected by others. This can apply both inside and outside of the work environment. People with this characteristic tend to prefer cooperative situations over competitive ones (Robbins et al, 2006:527; Dwyer, 2005: 101)
These characteristics will vary between individuals, typically to CEOs, it is understood that they possess a high need for achievement and power and a relatively low need for affiliation.
Stress is, "a dynamic condition a person faces when confronted with an opportunity, constraint or demand related to what they desire," (Robbins et al, 2006:526). All of which the modern executive would face on a day to day basis. "And for which the outcome is perceived to be both uncertain and important," (Robbins et al, 2006:526). In such an economically turbulent environment the outcomes of a CEO's actions are both pivotal to the success of the organisation yet hardly certain in the modern market.
The Health and Safety Executive of UK acknowledges pressure as an integral part of work, which can, in some people enhance motivation and performance. However it is when this pressure is converted into stress, it may be at the detriment of their work quality or even worse, their heath (hse.gov.uk, 2006; Linacre, 1997:134-135).
Stress can affect a number of health concerns arise from stress. These include; hypertension, high tobacco and alcohol consumption, sleeplessness, anxiety and depression (Robbins et al, 2006:527). Statistics surrounding these conditions exemplify that executives, particularly male executives are four times more likely to commit suicide, are twice as likely to die in a car accident, are 40 percent subjective to hypertension and heart attacks, they are 77 percent more likely to have associated drinking problems, and are 30 percent more likely to die of smoking related illnesses (johngroom.co.nz, 2003).
These figures are an indication of how much stress and thus physical and psychological detriment is caused due to the nature of their executive position. This may very well be why their remuneration packages have been renamed compensation packages. As they have essentially statistically written off their health for the sake of the company. This raises the issue of whether a price can be put on an individual's mental and physical health, if not their life.
In Australia the ASX corporate governance council guidelines implicitly demand that all executive compensation package be disclose to the public, to allow accountability to share holders. This is why remuneration for executives is substantially and proportionately lower than that in the USA. Accounting Standard 1046 requires, "full disclosure in notes to the accounts on compensation packages for directors and five executives with the most authority" (Riggs, 2004). The Corporations Act requires, "a range of information about executive pay to be disclosed, particularly the board's policy for determining pay and its relationship to company performance," (Riggs, 2004). This has taken shareholder's attention away from how much the executives get paid. Instead it has focussed the attention on exactly how they get paid.
The standards, regulations and policies ensure that there is full transparency on the remuneration of companies listed on the Australian stock exchange. By a global standard Australian compensation packages overall are one the most modest, yet effective forms of remuneration.
In conclusion this paper has objectively analysed both sides of the CEO remuneration debate. It has looked at what aspects of life the CEO has had to compromise, whilst looking at whether their packages can affect share price. It has exemplified both arguemnents as to whether they would perform equally well with reduced compensation packages. It then delved into the theories behind the motivation of these top executives. The issue of stress and its ramifications were investigated as to whether they justify exorbitant pay packages as compensation. Finally the paper scrutinised the Australian position of CEO salaries and found that they are a realistic world leader in terms of return on share equity over CEO compensation packages.
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