How do compensation committees set executive compensation

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Reference no: EM133451318

Assignment:

Few topics in the business press grab headlines and ignite the public like the compensation packages received by top management, which continue to rise. CEOs in Canada's 100 largest companies earned a median compensation of $10.8 million in 2019.

How do compensation committees set executive compensation? In many cases, it comes down to equity theory and depends on the referent others to which the CEO is compared. To determine a "fair" level of pay for a given CEO, members of a compensation board find out how much CEOs with similar levels of experience in similar firms (similar inputs) are being paid and attempt to adjust compensation (outcomes) to be similar. So, CEOs in large tech firms are paid similarly to CEOs in other large tech firms, CEOs in small marketing companies are paid similarly to CEOs in other small marketing companies, and so forth. Proponents of this practice consider it to be "fair" because it achieves equity.

However, critics of high CEO pay want to change the perspective by comparing the CEO's pay to the pay of the average employee. For example, Canada's 100 highest-paid CEOs are paid 202 times more than the average employee. From this perspective, CEO pay is grossly inequitable and thus "unfair."

In response, many CEOs, such as Sundar Pichai, CEO of Google, have taken $1 annual salaries, though they still earn substantial compensation by exercising their stock options. In addition, shareholders of some companies, such as Verizon, are playing a greater role in setting CEO compensation by reducing awards when the company underperforms.

Discussion Questions

1. How does the executive compensation issue relate to equity theory? How should we determine what is a "fair" level of pay for top executives?

2. Individuals generally think performance should be essential or very important in deciding pay. What might be the positive motivational consequences for average employees if CEO pay is tied to performance?

Reference no: EM133451318

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