The Debate on Executive Compensation Essay Example | Topics and Well Written Essays - 2250 words

The Debate on Executive Compensation - Essay Example Instead of the inverse proportionality of their pay to the performance of the firm, it should be such that the relationship is directly proportional to each other. Usually, the executive pay is a combination of the salary, extra bonuses, reimbursements, and shares on the company stocks. The compensation is given a stringent configuration to comply with the necessary legal requirement, which includes tax law, regulations of the government, the desires of the company as stipulated by the executives and the organization itself, and of course the reward and performance. Most important is the fact that the executive pay is always a subject of approval from the board of directors and meanings that the salary is predetermined before the actual performance of the executives is noticed (Bertrand and Mullainathan 2001, p.62). Different schools of thoughts have thus arisen over the executive pay by hypothesising on the motivating factor for the increasingly rising pay for the CEOs and two schoo ls of thoughts have been brought forth. ... The other thought process perception is rather opposed to the compensation level and asserts that it is a socially unaccepted phenomenon that is largely fuelled by the social and political order that allows the executives to self-determine their own pay and have absolute control over it (Chen, Liu and Li 2010, p.54). Thus, the payment of the executives is not a covert that is whimsically decided by the CEOs themselves but is also approved by the board of directors who also determine and give consent to the figures. Despite this, the economists are not persuaded by this and therefore maintain that the executives’ pay must be aligned to the performance of the company, without which it is irrational and unjustified (Bruce, Buck and Main 2005, p.41). In reference to the objective brought by the economist over the hefty pays that go to the executives even during the period of economic crunch, this paper critically examines the agency theory and explains why it is impossible to expl ain the compensation of the executives with the provision of the theory. Besides that, the paper also gives comparative approach of evaluation from other theoretical sources that consider the relationship between the principal and the agents apart from the agency theory. The Agency Theory This theory shows the connection that exists between the principals and the negotiators in a business scenario through managing the business affairs to the best interest of each. The principals in the case companies are the shareholders while agents are the executives; in this relation, the agency theory tackles any problem that may arise between the principal and the agent in the course of running the business. Thus, the agency theory is known to be instrumental