Executive Pay disscussion, business and finance homework help

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“Executive Pay” Please respond to the following:

• Some evidence suggests that there is a direct and positive relationship between a firm’s size and its top-level managers’ compensation. Explain what inducement you think that relationship provides to upper-level executives.
• Recommend what can be done to influence the relationship so that it serves shareholders’ interests.

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In recent years, inducements have grown to be the major way for appreciating the achievements of executives (Executive Compensation Service (U.S.), 1984). They add up to 0.5 % of total executive compensation. Inducements are rewards that are intended for particular long-term achievements of the company. The most famous long-term inducement is the stock option that either offers the executive free organization stock or enables him or her to buy a firm stock at lowered prices for a particular period of time. These stocks grow to be more valuable as the firm improves in terms of finance, and therefore, stock possession is meant to motivate the executive to make the company more profitable. Later after the stocks have valuably appreciated, executives sell the stock making more profit and therefore giving compensation above other workers in the organization. Recently, news have emerged concerning company growth failures where no moral accounting practices on unnatural inflation of stock prices made lower-level workers lose investments in firm stock have questioned the methods used to grant high amounts of stocks to executives.

To influence the relationship to serve shareholders’ interests, profit sharing policy of compensation should be used. A 2014 IMF study shows that a huge inequality in salary is defeating since it lowers economic growth. It also damages employee’s morale and production. From the research, profit sharing has proved to be the ideal measure to the challenge of profit distribution and employees compensation (“Economic Impact of Profit Sharing,” n.d.). This is the best policy to serve shareholders’ interests too. Profit sharing enables employees to increase their wealth expanding opportunities. This policy is mostly practiced by employee-owned companies. This works best for companies that have a long-term focus and long-term goals, which imply, it should not be a public company. An example of a company that employs this profit sharing policy is HUAWEI.

References

Executive Compensation Service (U.S.). (1984). Compensation policies and practices for the smaller organization. Fort Lee, N.J. (2 Executive Dr.: Executive Compensation Service.

The Economic Impact of Profit Sharing. (n.d.). Profit Sharing and Company Performance, 17-38. doi: 10.1007/978-3-8350-5508-7_3