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A Solution to CEO Compensation

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Congressman Barney Frank introduced H.R. 42918, "The Protection Against Executive Compensation Abuse Act" to address concern over escalating CEO compensation. The legislation doesn't set any limits on individual CEO compensation but increases the requirements for the amount of information that needs to be provided to shareholders about management pay packages and thereby empowers shareholders to take action against management abuse and self-dealing.

1. Should there be legislation that goes another step beyond what Congressman Frank has introduced and caps CEO compensation so that it will be more in line with compensation levels throughout the organization? Why or why not?

2. What should be the determinants for a CEO's salary? List and describe at least three.

3. Does public awareness of the CEO's salary influence the branding of an organization? How? Give two examples, one negative and another positive.

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A company's success is not just determined by the CEO, it is determined by the input of all the executive team, the middle managers and the frontline workers. According to Robert Samuelson, 'In 1995, the median CEO pay was 94 times median worker pay.' (Samuelson, 2006)

Lawrence Mishel states that by 2005, CEOs were paid more than 262 times median worker pay. (CEO to Worker Pay Imbalance Grows, 2006) CEO pay should be related to experience, risk and results. CEOs should not be provided with 'golden parachutes' that save them when they mismanage the company.

Many CEOs get millions of dollars in the form of a signing bonus, as if getting the job isn't lure enough. (Covin, 2005)

Some of the remaining compensation is often based on stock performance. This has led CEOs to influence the situation through profit manipulation via inaccurate financial reports and cutting necessary overhead in advertising or R&D to meet profit requirements set for their pay. (Samuelson, 2006)

CEOs are also provided with stock options, car allowances, club memberships and other luxuries, all at the expense of the company.

Public awareness of CEO salary does influence the brand. Most of us are disgusted by the domestic automakers plea for a bailout when they ...

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The solution discusses CEO compensation.

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CEO Compensation Case

Read Case 7, "CEO Compensation" (pages 254-255 in the Greer text), then answer all five questions on pages 255-256.

1. Explain the potential adverse impacts on strategy implementation when the CEOs of companies receive extremely high compensation.

2. Discuss the merits of the various recommendations for solutions to the problem of extremely high CEO compensation.

3. What non-regulatory pressures are most likely to bring excessively high CEO salaries more in line with realistic levels?

4. Evaluate the argument that pay for performance justifies the level of compensation paid to the CEOs noted in the example.

5.Evaluate the argument that the problem of excessive CEO compensation should not addresses through legislation.

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