Analysis of an Article about Compensation
Business
Analysis of an Article about Compensation
Davis, DeBode, and Ketchen (2013) have articulated various management theories that have a bearing on CEO compensation. How much and in what manner to pay a CEO is arguably one of the most important decisions a Board of Directors has to make. The decision would convey strong signals to the external as well as internal environment. Competing firms and the industry would be likely to benchmark the CEO’s compensation to their own. Shareholders would be keen to assess how the CEO compensation translates to a return on their investment in the company. Employees would measure the multiple by which the CEO earns as compared to the average worker, and draw important conclusions about how the company values the CEO as well as the contribution of the individual. The article would be analyzed from the perspectives of business strategy, compensation to CEOs and ways to attract, retain and motivate CEOs.
Business Strategy
The CEO compensation would throw light on the overall business strategy of a firm. A firm that is in an industry with a number of close competitors would endeavor to better these competitors in performance. It is likely that such firms pitch CEO compensation in fair comparison with those of the CEOs of competing firms. The researchers have highlighted the automobile industry, where the Big Three ( Ford, Chrysler and General Motors) CEOs often get comparable salaries. It is pertinent to note that the institutional theory that propels firms to thus pay their CEOs makes relatively poor business sense. In the bid to look purely at what the competitors are doing, firms may lose important ingredients that may otherwise have made a more sound business strategy for their future.
How much a CEO earns in cash, stock options and perks respectively plays an important part in giving the right signals to the workforce of the company, and providing the right impetus for the CEO. There are, however, no immovable benchmarks in the matter of compensations. If CEOs have unique and irreplaceable qualities, the become strategic resources for the firm and are accordingly compensated. The authors highlight Apple’s Steve Jobs and Starbucks’ Howard Schultz as representative of such resources, justifying compensation on the basis of resource based theory (Davis, DeBode & Ketchen, 2013, p. 540). The pay mix, however, is always recommended to be in a manner that the CEO focuses on short-term performance as well as long-term gains for the company. This is reflected in agency theory, and represented in the pay mix awarded to the CEO of Comcast (Davis, DeBode & Ketchen, 2013, p. 538). The fact that agency theory focused compensation packages ensure a relatively smaller proportion in the cash component also plays in favor of equity theory, as the average workers would invariably be comparing the pay they take home with those of the CEO (Davis, DeBode & Ketchen, 2013, p. 538).
Ways to Attract, Motivate and Retain CEOs
Whichever method the Board of Directors adopts to compensate a firm’s CEOs, it needs to nevertheless focus on the big picture. A CEO who fits the profile of an industry and can respond to the needs of a firm in terms of stability, turnaround or expansion would be invaluable. Compensations paid in accordance with social comparison theory, paying CEOs on par with the best in the business, would undoubtedly act as a boost to the self-worth and motivation of CEOs. However, of even greater importance is the suggestion by the authors that the Board needs to always have a conversation with prospective CEOs regarding compensation (Davis, DeBode & Ketchen, 2013, p. 540) so that the CEOs do not feel undervalued and as a result, impelled to perform below their potential. In the final analysis, no single theory is best while deciding on how the compensation package for a CEO would be tailored. The method has to be tailored to the needs of the firm, reflect the dictates of the business environment and above all, be able to suitably attract, retain and motivate the right person to perform as CEO.
Reference
Davis, S.A., DeBode, J.D. & Ketchen Jr, D.J. (2013). Dollars and sense: the implications of CEO compensation for organizational performance. Business Horizons 56: 537-542. doi:10.1016/j.bushor.2013.05.008
