Discusses Major Compensation Issues regarding Executive Compensation. Provides Justification for Unreasonable Executive Compensation and Outlines measures for Executive Accountability

1. Assignment: Question 4
It has been proposed that HR managers should be more involved with compensation
committees charged with determining executive pay packages. In light of this argument,
argue if executive pay levels are unreasonable. Use examples to illustrate your argument,
what measures are available to make executives more accountable? How HR should be
involved in determining pay levels?
The landscape of business and financial markets has evolved over the years. In particular, the
subject of compensation is becoming an issue prevalent across all spectrum of society. Thus, it
been proposed that Human Resource Managers should be more involved with compensation
committees charged with determining executive pay packages. For this reason, this essay shall
justify the argument of unreasonable executive pay levels. Secondly, outline the measures
available to make executives more accountable to stakeholders. Finally, to state the involvement
of HR in determining executive pay, bonuses, perks and so forth.
The issue of executive compensation is a very delicate subject with its own intricacies. To begin
with, it is important to understand the basic definition of who is an ‘Executive’ in organizational
context. Furthermore, to determine the basis by which these ‘Executive(s)’ are compensated for
their service. By understanding the background of Executive Compensation then and only, can
we provide support for the unreasonable executive compensation package(s). The term
‘Executive’according to Perkins (2009, pg. 149) ‘is someone in an organization’s senior
management group employed at corporate level’, more specifically pepper (2006, pg. 5)
describes executives as “responsible for defining and executing a company’s strategy, who
through their actions are capable of directly affecting (positively or negatively) the company’s
profits, share price, reputation, market position and so forth”.The aforementioned definition
establishes executives as Chief Executive Officers for which this argument will focus on.
Furthermore, there are five basic components of executive pay packages as stated by Milkovich
et al. (2011), these are; base pay, bonuses, perks, short term bonus and long term incentives. A
base pay is the established minimum salary that an employee receives for his/her designated
position although the base pay varies according to the position one is designated to. Exorbitant
compensation is largely recorded in CEO’s position, for instance, Milkovich et al (2011) noted
that Robert Iger, the CEO of Disney had total compensation of USD$51 million. The base pay
determined was USD$2 million and with a bonus of USD$14 million. In addition, he also

2. received a massive USD$34 million in stock options. The second component of compensation is
bonus package which exist in the form of indemnity, disability insurance, social security plans
and so on, and for this, executives typically receive higher benefit than most other exempt
employees. Furthermore, Perquisites or ‘Perks’ are becoming an evident part of compensation.
These perks according to Milkovichet al (2011) are designed to satisfy unique needs and
preferences. For instance, if James Bernhard CEO of the Shaw group dies, his family will receive
perk pays of up to USD$18 million. Equally, William Weldon, CEO of Johnson & Johnson, got
USD$154,000 of company jet use and USD$26,000 for a car and driver, (Milkovichet al,
2011.pg. 485). Another component of compensation is the bonus of executives which are
intended to stimulate better short term performance. For instance, American Airline executive
were paid as much as USD$2 million after its shares jumped from USD$1 to USD$20, owing
heavily to employee givebacks (Milkovichet al, 2011. Pg.482).finally, long term incentives in
the form of stock options have a built-in incentive for executives to strive for long term
success.These components are important as they form the foundation of executive pay.
The argument of unreasonable executive compensation is justified on the grounds that certain
payouts does not reflect Pay-on-performance, secondly, to a certain extent it does not mirror the
prevailing market value and/or profitability of the organization.Finally, it is most unethical and
inequitable in every respect for a single person to receive such payments under current economic
elements. Firstly, Pay-on-performance compensation is the linkage of wages to executive
performance. The idea is, if the company’s executive performance exceeds stakeholders’
expectations bonuses and stock payout will consequently follow. However, in recent decade
most payouts are done without proper justification; meaning that it is not reflective of their
performance which in this case is the poor performance of the company. For
example,EthicsWorld(Anon, 2008)reported that in 2007Countrywide lost $1.6 billion and its
stock lost 80% of its value. Merrill Lynch’s stock lost 45% of its stock worth $10 billion.
Citigroup also lost $10 billion and its stock lost 48% of its value. In spite of substantial losses,
the CEOs were still remunerated considerable amounts. Accordingly, in the case of Merrill
Lynch’s stock wipeout its then CEO Stanly O’Neal was reported to have been eligible to
USD$161 million in retirement package. Moreover, in 2007 the companyreportedly paid
USD$15.9 billion of compensation and benefits, exceeding the company's revenue by USD$4.6
billion. It is in this regard that such compensation was unreasonable and unsubstantiated and

3. comes at a time when New York based companies were cutting back on job due to the collapse
of the US mortgage market. Secondly, exorbitant compensation may fail to reflect the conditions
of market forces as such presents a degree of unreasonable compensation package. Certain
organizations align their internal pay structure according to competitor’s decisions based on the
market. Milkovichet al (2011) presumed that fairness is echoed by market rates. However, the
bone of contention lies in the question of whether an executives pay is truly reflective of the
company’s market value and/or the profitability of the company. For instance, Intel’s CEO Paul
Ottelini’s compensation doubled in 2007 and his salary capped at USD$770,000. This is despite
the dramatic drop in Intel’s stock by $9 per share to $25 per share (Milkovichet al, 2011. pg.
478). In addition to that, the company’s earnings and market shares have also declined.In light of
this supporting argument it should be made certain the degree by which compensation proves
unreasonable, so that the organization can align its priorities and better reflect value created for
money. Failure to do this can have serious implications to the organizations success. Finally, it is
most unethical and inequitable for executive to be paid so much at the expense of others. This is
Unethical in the sense that, executives like the CEO is paid ‘top money’ in the midst of the
organizations restructure plans or downsizing period. An example would be the Pacific Brands
Crisis in Australia that led to the sacking of 1850 Australian workers. According to
schermerhorn et al (2011, pp. 55-56), Pacific Brands is an Australian Company that
manufactures international brands like bonds, berlei, hard yakka, holeproof, firefighters uniform
and so forth. Its values as stated in their annual report are flexibility, quality, speed and ‘ethical
responsibility’. Moreover, schermerhornet al (2011, p. 56) went on to state that the company
was moving its manufacturing plants to china, where cheaper labour is readily available. In the
midst of this entire furor, its CEO Sue Morphett’s pay rose from AUD$680,000 to AUD$1.8
million but although it does not register in the league of highly paid executive. It nonetheless,
sparked outrage among Australians due to the loss of significant number of jobs. In analyzing
this case, the value of ‘ethical responsibility’ has been ignored. There is no way to ascertain the
validity of her pay increment in light of the sacking of 1850 workers. As such it is argued that
there was a high degree of unethical responsibility displayed regarding compensation as such,
warrants justification of unreasonable compensation awarded to the CEO Sue Morphett.
Nevertheless, there are measures which are available to make executives more accountable to the
public and to its key stakeholder(s). Accountability as a vital element of trust can be addressed

4. by the organization. To begin with accountability according to the Oxford English Dictionary
(2002) is defined as someone who is responsible for or required to account for ones’ conduct. It
is simply referring to someone in a position where he/she is answerable to a group of people.
Since executives like the CEO’s are involved in the strategic planning and direction of the
company. They must fully disclose the details of company’s expenditure and justify provision of
Compensation so that the company’s stakeholders are fully aware on how their money is spent.
The disclosure of organizations operational, financial and quality performance as Robert and
Conners (1998) put it; can be achieved through, town meetings, focus groups and use of the
media to disseminate important updates regarding projects that the organization has or is
planning to undertake. Secondly, the composition of board executives should reflect a
representation of the diversity of the social, political, gender, age, and economic background of
people so that a balanced community-wide perspective is considered during the decision-making
process. Thirdly, the implementation of ‘Clawbacks’ provision, which requires executives to pay
back excessive incentive pay in the event of an accounting restatement, where more recently
board executives are trying to prevent fraud and other accounting errors by tying pay to
performance (DeHann, E. et al,2011). Accordingly, DeHann et al (2011) concluded in their
analysis of 300 firms that Clawbacks develop the accuracy of financial statements and increase
investor trust. Any accounting misstatement intentional or not sends a firm’s stock price
tumbling and for this, Clawbacks provision ensures a reduction in the risk of restatement by
making executives repay fraudulent performance-based compensation, thereby decreasing the
expected benefit to executives from overstated financial statements. Finally, for effective
accountability of executives, firms should compensate top executives according to a value based
system; whereby they are paid on the basis of ‘flow on return’ achieved by the executive
concerned.
Human Resource personnel play a key role in organizations work processes. In light of this
perspective, Human Resources should be involved more in the determination of executive
compensation. However, according to CNS (2008) too much emphasis is placed on the softer
sciences of Human Resources selection, recruitment, training and development rather than
determining the wages of executives. Their work in this area as stated by CNS (2008) is very
much limited to helping consultants with the paperwork. To mitigate this weakness, HR could
play a vital role in assisting executives understand how their compensation is being determined,

5. that’s if the company’s compensation policy is determined on a subjective criterion rather than
objective performance goal. This subjective basis is one way in which goals are set so that they
can be easily achieved by the organization. Secondly, Human Resource Managers can aid their
company determine the type of performance metrics to use, to better evaluate executive
performance. By not getting involved in executive compensation. Human Resource executives
are losing the opportunity to influence the company’s strategy in a key area they could
understand completely; leadership development and succession planning. Thirdly, According to
Meisinger S (2006), Human Resource professionals could provide compensation boards with
figures on the company’s overall compensation structure, examining industry best practices, and,
inmost instances, develop pay philosophies and designing executive compensation plans. Finally,
HR professionals according to Meisinger S (2006) are referred for the purpose of incorporating
the various strata of executive-level compensation, compensation-legal compliance, uniformity
in pay philosophies, benefits and perks-to ensure that it is on par with the organizations
performance objectives and ethical standards. Equally, Meisinger S (2006) added that the debate
over disproportionate executive compensation and the condition for greater financial
transparency have led organizations to depend on Human Resource personnel for this critical
function. Therefore HR as a critical component of organizations success must be more proactive
in the determination of executive compensation. By failing to do this, HR is ignoring a major
part of its role.
In Conclusion, it can be argued that executive compensations are unjustified in many respects.
The exorbitant compensation packages as seen in the case study examples are not reflective of
the performance of executives, however lacking it may be. In spite of this, there are always
measures of accountability for which this essay has provided in the form of disclosure of
executive interests and so forth. In addition, Human Resource professionals should be more
involved in the formulation of executive pay and bonuses to ensure accountability and
transparency in the running of the organization and more importantly, the determination of
compensation at all levels of the organizations hierarchy. It is therefore recommended that any
such compensation should be subjected to a set of stringent guidelines that ensure a pay-for-
value package. Moreover, executives and top level managers must be held accountable in the day
to day affairs of the organization. By failing to take heed of this arguments organizations are
paving the way for corrupt practices and other dishonest behaviors. (word count: 2062)

6. BIBLIOGRAPHY
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<http://www.crainsdetroit.com/hr-must-play-key-role-in-executive-pay-insiders-say.htm.
[Accessed on 29 April 2012]
DeHann, E., Hodge, F. and Shelving, T., 2011.Clawbacks make CEOs more accountable for
firm's financial reporting. [Online] Available
at:<http://www.foster.washington.edu/clawbacks.aspx.htm. [Accessed on 30 April 2012]
EthicWorld, 2008. U.S. House committee holds hearing on CEO Pay. [Online] Available at:
<http://www.ethicsworld.org. [Accessed on 30 April 2012]
Meisinger, S., 2006.Good things comes in three’s for HR. Alexandria: Society for Human
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