Assignment: Question 4

It has been proposed that HR managers should be more involved with compensation committees charged with determining executive pay packages. In light of this argument, argue if executive pay levels are unreasonable. Use examples to illustrate your argument, what measures are available to make executives more accountable? How HR should be involved in determining pay levels?

The landscape of business and financial markets has evolved over the years.

In particular, the subject of compensation is becoming an issue prevalent

across all spectrum of society. Thus, it been proposed that Human Resource

Managers should be more involved with compensation committees charged

with determining executive pay packages. For this reason, this essay shall

justify the argument of unreasonable executive pay levels. Secondly, outline

the measures available to make executives more accountable to

stakeholders. Finally, to state the involvement of HR in determining

executive pay, bonuses, perks and so forth.

The issue of executive compensation is a very delicate subject with its own

intricacies. To begin with, it is important to understand the basic definition of

who is an ‘Executive’ in organizational context. Furthermore, to determine

the basis by which these ‘Executive(s)’ are compensated for their service. By

understanding the background of Executive Compensation then and only,

can we provide support for the unreasonable executive compensation

package(s). The term ‘Executive’according to Perkins (2009, pg. 149) ‘is

someone in an organization’s senior management group employed at

corporate level’, more specifically pepper (2006, pg. 5) describes executives

as “responsible for defining and executing a company’s strategy, who

through their actions are capable of directly affecting (positively or

negatively) the company’s profits, share price, reputation, market position

and so forth”.The aforementioned definition establishes executives as Chief

Executive Officers for which this argument will focus on. Furthermore, there

are five basic components of executive pay packages as stated by Milkovich

et al. (2011), these are; base pay, bonuses, perks, short term bonus and long

term incentives. A base pay is the established minimum salary that an

employee receives for his/her designated position although the base pay

varies according to the position one is designated to. Exorbitant

compensation is largely recorded in CEO’s position, for instance, Milkovich et

al (2011) noted that Robert Iger, the CEO of Disney had total compensation

of USD$51 million. The base pay determined was USD$2 million and with a

bonus of USD$14 million. In addition, he also received a massive USD$34

million in stock options. The second component of compensation is bonus

package which exist in the form of indemnity, disability insurance, social

security plans and so on, and for this, executives typically receive higher

benefit than most other exempt employees. Furthermore, Perquisites or

‘Perks’ are becoming an evident part of compensation. These perks

according to Milkovichet al (2011) are designed to satisfy unique needs and

preferences. For instance, if James Bernhard CEO of the Shaw group dies, his

family will receive perk pays of up to USD$18 million. Equally, William

Weldon, CEO of Johnson & Johnson, got USD$154,000 of company jet use

and USD$26,000 for a car and driver, (Milkovichet al, 2011.pg. 485). Another

component of compensation is the bonus of executives which are intended

to stimulate better short term performance. For instance, American Airline

executive were paid as much as USD$2 million after its shares jumped from

USD$1 to USD$20, owing heavily to employee givebacks (Milkovichet al,

2011. Pg.482).finally, long term incentives in the form of stock options have

a built-in incentive for executives to strive for long term success.These

components are important as they form the foundation of executive pay.

The argument of unreasonable executive compensation is justified on the

grounds that certain payouts does not reflect Pay-on-performance, secondly,

to a certain extent it does not mirror the prevailing market value and/or

profitability of the organization.Finally, it is most unethical and inequitable in

every respect for a single person to receive such payments under current

economic elements. Firstly, Pay-on-performance compensation is the linkage

of wages to executive performance. The idea is, if the company’s executive

performance exceeds stakeholders’ expectations bonuses and stock payout

will consequently follow. However, in recent decade most payouts are done

without proper justification; meaning that it is not reflective of their

performance which in this case is the poor performance of the company. For

example,EthicsWorld(Anon, 2008)reported that in 2007Countrywide lost $1.6 billion

and its stock lost 80% of its value. Merrill Lynch’s stock lost 45% of its stock

worth $10 billion. Citigroup also lost $10 billion and its stock lost 48% of its

value.  In spite of substantial losses, the CEOs were still remunerated

considerable amounts. Accordingly, in the case of Merrill Lynch’s stock

wipeout its then CEO Stanly O’Neal was reported to have been eligible to

USD$161 million in retirement package. Moreover, in 2007 the

companyreportedly paid USD$15.9 billion of compensation and benefits,

exceeding the company's revenue by USD$4.6 billion. It is in this regard that

such compensation was unreasonable and unsubstantiated and comes at a

time when New York based companies were cutting back on job due to the

collapse of the US mortgage market. Secondly, exorbitant compensation

may fail to reflect the conditions of market forces as such presents a degree

of unreasonable compensation package. Certain organizations align their

internal pay structure according to competitor’s decisions based on the

market. Milkovichet al (2011) presumed that fairness is echoed by market

rates. However, the bone of contention lies in the question of whether an

executives pay is truly reflective of the company’s market value and/or the

profitability of the company. For instance, Intel’s CEO Paul Ottelini’s

compensation doubled in 2007 and his salary capped at USD$770,000. This

is despite the dramatic drop in Intel’s stock by $9 per share to $25 per share

(Milkovichet al, 2011. pg. 478). In addition to that, the company’s earnings

and market shares have also declined.In light of this supporting argument it

should be made certain the degree by which compensation proves

unreasonable, so that the organization can align its priorities and better

reflect value created for money. Failure to do this can have serious

implications to the organizations success. Finally, it is most unethical and

inequitable for executive to be paid so much at the expense of others. This is

Unethical in the sense that, executives like the CEO is paid ‘top money’ in

the midst of the organizations restructure plans or downsizing period. An

example would be the Pacific Brands Crisis in Australia that led to the

sacking of 1850 Australian workers. According to schermerhorn et al (2011,

pp. 55-56), Pacific Brands is an Australian Company that manufactures

international brands like bonds, berlei, hard yakka, holeproof, firefighters

uniform and so forth. Its values as stated in their annual report are flexibility,

quality, speed and ‘ethical responsibility’. Moreover, schermerhornet al

(2011, p. 56) went on to state that the company was moving its

manufacturing plants to china, where cheaper labour is readily available. In

the midst of this entire furor, its CEO Sue Morphett’s pay rose from

AUD$680,000 to AUD$1.8 million but although it does not register in the

league of highly paid executive. It nonetheless, sparked outrage among

Australians due to the loss of significant number of jobs. In analyzing this

case, the value of ‘ethical responsibility’ has been ignored. There is no

way to ascertain the validity of her pay increment in light of the sacking of

1850 workers. As such it is argued that there was a high degree of unethical

responsibility displayed regarding compensation as such, warrants

justification of unreasonable compensation awarded to the CEO Sue

Morphett. Nevertheless, there are measures which are available to make

executives more accountable to the public and to its key stakeholder(s).

Accountability as a vital element of trust can be addressed by the

organization. To begin with accountability according to the Oxford English

Dictionary (2002) is defined as someone who is responsible for or required to

account for ones’ conduct. It is simply referring to someone in a position

where he/she is answerable to a group of people. Since executives like the

CEO’s are involved in the strategic planning and direction of the company.

They must fully disclose the details of company’s expenditure and justify

provision of Compensation so that the company’s stakeholders are fully

aware on how their money is spent. The disclosure of organizations

operational, financial and quality performance as Robert and Conners (1998)

put it; can be achieved through, town meetings, focus groups and use of the

media to disseminate important updates regarding projects that the

organization has or is planning to undertake. Secondly, the composition of

board executives should reflect a representation of the diversity of the

social, political, gender, age, and economic background of people so that a

balanced community-wide perspective is considered during the decision-

making process. Thirdly, the implementation of ‘Clawbacks’ provision, which

requires executives to pay back excessive incentive pay in the event of an

accounting restatement, where more recently board executives are trying to

prevent fraud and other accounting errors by tying pay to performance

(DeHann, E. et al,2011). Accordingly, DeHann et al (2011) concluded in their

analysis of 300 firms that Clawbacks develop the accuracy of financial

statements and increase investor trust. Any accounting misstatement

intentional or not sends a firm’s stock price tumbling and for this, Clawbacks

provision ensures a reduction in the risk of restatement by making

executives repay fraudulent performance-based compensation, thereby

decreasing the expected benefit to executives from overstated financial

statements. Finally, for effective accountability of executives, firms should

compensate top executives according to a value based system; whereby

they are paid on the basis of ‘flow on return’ achieved by the executive

concerned.

Human Resource personnel play a key role in organizations work processes.

In light of this perspective, Human Resources should be involved more in the

determination of executive compensation. However, according to CNS (2008)

too much emphasis is placed on the softer sciences of Human Resources

selection, recruitment, training and development rather than determining

the wages of executives. Their work in this area as stated by CNS (2008) is

very much limited to helping consultants with the paperwork. To mitigate

this weakness, HR could play a vital role in assisting executives understand

how their compensation is being determined, that’s if the company’s

compensation policy is determined on a subjective criterion rather than

objective performance goal. This subjective basis is one way in which goals

are set so that they can be easily achieved by the organization. Secondly,

Human Resource Managers can aid their company determine the type of

performance metrics to use, to better evaluate executive performance. By

not getting involved in executive compensation. Human Resource executives

are losing the opportunity to influence the company’s strategy in a key area

they could understand completely; leadership development and succession

planning. Thirdly, According to Meisinger S (2006), Human Resource

professionals could provide compensation boards with figures on the

company’s overall compensation structure, examining industry best

practices, and, inmost instances, develop pay philosophies and designing

executive compensation plans. Finally, HR professionals according to

Meisinger S (2006) are referred for the purpose of incorporating the various

strata of executive-level compensation, compensation-legal compliance,

uniformity in pay philosophies, benefits and perks-to ensure that it is on par

with the organizations performance objectives and ethical standards.

Equally, Meisinger S (2006) added that the debate over disproportionate

executive compensation and the condition for greater financial transparency

have led organizations to depend on Human Resource personnel for this

critical function. Therefore HR as a critical component of organizations

success must be more proactive in the determination of executive

compensation. By failing to do this, HR is ignoring a major part of its role.

In Conclusion, it can be argued that executive compensations are unjustified

in many respects. The exorbitant compensation packages as seen in the

case study examples are not reflective of the performance of executives,

however lacking it may be. In spite of this, there are always measures of

accountability for which this essay has provided in the form of disclosure of

executive interests and so forth. In addition, Human Resource professionals

should be more involved in the formulation of executive pay and bonuses to

ensure accountability and transparency in the running of the organization

and more importantly, the determination of compensation at all levels of the

organizations hierarchy. It is therefore recommended that any such

compensation should be subjected to a set of stringent guidelines that

ensure a pay-for-value package. Moreover, executives and top level

managers must be held accountable in the day to day affairs of the

organization. By failing to take heed of this arguments organizations are

paving the way for corrupt practices and other dishonest behaviors. (word

count: 2062)

BIBLIOGRAPHY

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<http://www.crainsdetroit.com/hr-must-play-key-role-in-executive-pay-insiders-say.htm.

[Accessed on 29 April 2012]

DeHann, E., Hodge, F. and Shelving, T., 2011.Clawbacks make CEOs more accountable for

firm's financial reporting. [Online] Available

at:<http://www.foster.washington.edu/clawbacks.aspx.htm. [Accessed on 30 April 2012]

EthicWorld, 2008. U.S. House committee holds hearing on CEO Pay. [Online]

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2012]

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