Role of Ethics in Organization Performance
Introduction
The current level of executive compensation has raised critical questions and concerns regarding the ethical considerations and implication of such compensation. This paper aims to explain this ethical aspect of the executive compensation. Also, it outlines some of the individual and government approaches to revise the compensation system. The second section of the paper analyzes the role of Sarbanes-Oxley Act in regulating executive compensation levels. This section explains various measures enacted by the act and assess their nature of strictness in addressing this ethical concern.
Section 1
Primarily, a major ethical concern relates to the high amount of executive salary compared to that of their employees. This continuous widening gap between the executives and employee compensation has been termed as unethical since it is perceived as an act of violation of their rights. The gap is so huge that most of the employees are highly under- compensated (Advameg, n.d). In fact, most of these employees end up working under harsh conditions for long hours yet do not receive any severance packages. Another concern relates to the argument that such compensations have encouraged the executives to formulate decisions that aim to suit their desires at the expense of the employees’ interest and organizations gains (Jerry, 2007).
How to Revise Executive Compensation
This unethical excessive compensation has incited outrage from both the shareholders, salaries and remuneration commissions and community. From a personal perspective, the concept of equity should be exercised in compensation. In particular, the executives’ rewards and compensation should be based purely on performance. Also, the directors have a moral obligation not to pay excessive compensation to the executive relative to their performance. I would urge the executives to have an ethical obligation by not accepting such compensation willingly. I would also recommend the directors to assess clearly the performance goals and achievement before granting compensations and incentives to the executives through stock options.
Role of the Government
Most fundamentally, the government has a significant role to play in revising this unethical compensation system. It should call for improved transparency and accountability to their shareholders. Also, legislations and reforms can be adopted to curb the excessive executive packages and to keep the executives in check (Martocchio, 2004). Through the establishment of the Federal Securities Law, the government has established measures that deter such unethical practices (Jerry, 2007).
Section 2
Sarbanes-Oxley Act
The need to strengthen the accountability and transparency of the corporate governance in U.S companies was affirmed following the enactment of Sarbanes-Oxley Act (SOX). In essence, the act stipulates that no different ethical standard for the corporate America will be constituted other than the standard that applies equally to all (Nielsen, 1989). To assess the magnitude of the stringent rules outlined in the Act, we examine various measures and provisions outlined in the Act.
Primarily, SOX requires the executives to verify the authenticity of their financial statements and rewards and prevent the access availability of corporate loans to the senior executives. It also obliges the executives to return the incentive-based compensation and profits realized from the stock sale. It prohibits the executives from transacting in their companies’ equity securities during the blackout period of the employee fund. Moreover, it grants the Security and Exchange Commission (SEC) the power to freeze and confiscate the corporate assets as a way to prevent the access to bonuses to executives through financial frauds. Fundamentally, it prevents the executives from holding positions through administrative proceedings (Krolikowski, 2016).
The Level of Strictness of Sarbanes-Oxley Act
Notably, though the measures in SOX Act seem just right in controlling the conduct of the executive compensation, there has been a limited influence as well as the lack of enforcement mechanism. In fact, since its enactments, numerous restatements have been reported, but very few of these cases have been implemented by the SEC (Galindo, 2009). In other cases, the measures seem to be enacted on a very aggressive approach, which may affect the role of the executives and lead to low organization performance.
References
Advameg, (n.d). Executive compensation - strategy, organization, levels, type, company, business. Retrieved May 1, 2016, from http://www.referenceforbusiness.com/management/Em-Exp/Executive-Compensation.html
Galindo, R. (2009). The echoing effects of the Sarbanes-Oxley act: Are the high costs of its implementation worth it? SSRN Electronic Journal, (21)3, 17-284.
Jerry, W. (2007). Markham, Regulating Excessive Executive Compensation— Why Bother? , Journal of Business & Technology Law. 35(3), 277- 284.
Krolikowski, M. W. (2016). Incentive pay and acquirer returns – the impact of Sarbanes–Oxley. The Quarterly Review of Economics and Finance, 59, 99–111.
Martocchio, J. (2004). Strategic Compensation: A Human Resource Management Approach 3rd ed. Upper Saddle River, NJ: Pearson Prentice Hall.
Nielsen, R. (1989). Changing unethical organizational behavior. Academy of Management Executive, 3(2), 123–130.
