Submitted by: Submitted by Ali1902
Views: 554
Words: 741
Pages: 3
Category: Business and Industry
Date Submitted: 04/03/2011 08:23 AM
Do Executive Compensation figures reflect an efficient market, or a failed one? Are pay levels adequately disclosed? Should Shareholders have more say? "Are there issues of fairness and justice?"
Canadians may have been hard hit by tough economic times where organizational downsizing, rightsizing, layoffs, and restructurings are a constant but it seems that Canada’s CEO’s are enjoying a soft landing. Terms like “excessive” and “abusive” are used to describe compensation plans that seem, at least to outsiders, to reward top management while the companies they serve remain unprofitable. Executive compensation has been a target for criticism by academics, shareholders and shareholder activist groups over the past several years. Even during the worst of economic years, the average earnings of Canada’s highest paid 100 CEOs were 174 times greater than Canadians earning an average income.
Does Executive Compensation reflect an Efficient or a Failed Market:
A highly paid CEO will likely argue that his compensation is subject to market forces thus assuming that the market for executives is both efficient and fair. They say that if a CEO is overpaid or underperforming, then the market can provide the company with another qualified person. But looking at the market we find that it is not so, the transaction costs associated with finding and hiring a CEO are tremendous. The company may have to spend millions to find the right person and pay millions as severance package for firing the old CEO. Many companies may also have to deal with volatility in their stock prices due to the uncertainty associated with a new CEO. In addition board members are often inclined to hire executives whom they know and trust and thus do not look outside the normal pool of candidates for fear that if they fail, the board will be to blame. They find themselves in what game theorists call a prisoner’s dilemma and believe that if they paid their CEO less, it will be financially a less attractive...