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To What Extent Does Executive Pay Influence Company's Performance

668 words - 3 pages

Executive pay is often perceived by large as an excess of company compensation. But does it generally provide better results? It is evident that executive pay plays a role in a company’s performance, however the extent of its influence depends on the company’s policy on executive pay. In the essay I will examine how executive pay is dependent on company performance and whether this will affect future company development.

The most basic concept is that the amount that executives are paid has a definite effect on performance. If an executive is paid a enormous amount of compensation, he is likely to be overconfident of his business decisions and is likely to take higher risks. This is due to his past performance that led to such high compensation. With such high compensation under the public eye, executives would feel compelled to perform better to live up to his expectations. But firstly, we have to determine if executive pay is performance based. The idealistic policy is to ...view middle of the document...

Some even receive benefits such as the “gold coffin” which is independent of performance. But this is not true in all cases, because when base salary is low and bonus is versatile, it allows the overall compensation to fluctuate more, hence executives will be more cautious of their decisions and less willing to take risks.

Another aspect of executive pay is government’s involvement. Caps that are imposed on executive pay will be detrimental to a company’s future performance because executives that are not paid sensibly will be discouraged and are likely to leave the market. However, executives can be awarded with share options or other benefits that will not result in tax payment. Whether the addition of caps benefit the company in the long term or not is still in question.

The boards that dictate executive pay also indirectly influence company performance. With a board selected by executives, executive pay is likely to be more generous. Moreover, executives will still be awarded when executives fail to perform well. Executive pay is no longer performance based, as executives will be paid more than they should be. This does not contribute to the increase in executives’ long-term incentives. Also, if the board consists of a large amount of people, executive pay also tends to be more lenient because each member of the board does not feel as significant. For performance-based pay to work, the board has to be unbiased and perhaps should be constantly under scrutiny by shareholders. If shareholders get a say in pay arrangements, making the board provide justification on their policies, executive pay would be of a more reasonable amount. This generally results in better company performance, as executives wouldn’t be reward an abnormal amount for failures.

All in all, executive pay does influence company’s performance, but to what extent mostly depends on how much and how it is paid. This generally varies with compensation policies, which may or may not reward executives based on their performance. In general, a performance-based policy that is linked to share prices is favoured since it gives executives motivation to perform well.

"Attacking the Corporate Gravy Train." The Economist. The Economist Newspaper, 30 May 2009. Web. 07 Sept. 2014.

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