Question

Is Chief Executive Officer (CEO) compensation aligned with the interests of all shareholders? Support your answers with the findings in the articles or journals.

Answer 1

Ans. Yes CEOs can truly have their interests tied with shareholders when they own shares, not options. Ideally, that involves giving executives bonuses on the condition they use the money to buy shares. Let's face it, top executives act more like owners when they have a stake in the business.

As per Article publish is Harvard Business review about the compensation to CEO

With respect to pay for performance, CEO compensation is getting worse rather than better. The most powerful link between stakeholder wealth and CEO wealth is direct stock ownership by the CEO. Yet CEO stock ownership for large public companies was ten times greater in the 1930s than in the 1980s. Even over the last 15 years, CEO holdings as a percentage of corporate value have declined.

Compensation policy is one of the most important factors in an organization’s success. Not only does it shape how top executives behave but it also helps determine what kinds of executives an organization attracts. This is what makes the vocal protests over CEO pay so damaging. By aiming their protests at compensation levels, uninvited but influential guests at the managerial bargaining table (the business press, labor unions, political figures) intimidate board members and constrain the types of contracts that are written between managers and shareholders. As a result of public pressure, directors become reluctant to reward CEOs with substantial (and therefore highly visible) financial gains for superior performance. Naturally, they also become reluctant to impose meaningful financial penalties for poor performance. The long-term effect of this risk-averse orientation is to erode the relation between pay and performance and entrench bureaucratic compensation systems. Hence we can say that compensation to CEO is directly aligned with Interest of all the share holders

Are we arguing that CEOs are underpaid? If by this we mean “Would average levels of CEO pay be higher if the relation between pay and performance were stronger?” the answer is yes. More aggressive pay-for-performance systems (and a higher probability of dismissal for poor performance) would produce sharply lower compensation for less talented managers. Over time, these managers would be replaced by more able and more highly motivated executives who would, on average, perform better and earn higher levels of pay. Existing managers would have greater incentives to find creative ways to enhance corporate performance, and their pay would rise as well.

These increases in compensation—driven by improved business performance—would not represent a transfer of wealth from shareholders to executives. Rather, they would reward managers for the increased success fostered by greater risk taking, effort, and ability. Paying CEOs “better” would eventually mean paying the average CEO more. Because the stakes are so high, the potential increase in corporate performance and the potential gains to shareholders are great.

How Compensation Measures Up

Shareholders rely on CEOs to adopt policies that maximize the value of their shares. Like other human beings, however, CEOs tend to engage in activities that increase their own well-being. One of the most critical roles of the board of directors is to create incentives that make it in the CEO’s best interest to do what’s in the shareholders’ best interests. Conceptually this is not a difficult challenge. Some combination of three basic policies will create the right monetary incentives for CEOs to maximize the value of their companies: