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Chief Executive Officer Compensation In The Financial Industry

2272 words - 10 pages

The issue of chief executive officer compensation is the subject of dilemma in the United States. This dilemma often triggers questions as to who decides what compensation is rewarded, as well as how compensation is rewarded. The government strongly resents the current pay-ration between CEOs and the average salary of American citizens. Since the financial crisis, people have shown their displeasure with the hefty compensation chief executive officers receives. But when stunning management failures and unprecedented destruction of shareholder value are brought into the light, it becomes increasingly difficult to defend current executive remuneration policies with these economic ...view middle of the document...

In the wake of the financial crisis, the Dodd-Frank reforms were developed in hopes of confronting CEO compensation, however it has failed to do so because of the reforms’ indecisiveness and lobbying efforts.
The arguments for the current status of large bank’s chief executive compensation are often overlooked since the pay-ratio gap is so wide. The argument for CEO compensation is integrated within the growth opportunities within the firm. For one, there is evidence, which supplies the idea that large compensation provided to CEOs for performance has increased the performance of the firm and the return to shareholders. In a large bank, publicly traded bank the shareholders are considered owners. The wealth conceived by the shareholders is often argued to be paramount for the success of the bank. This importance is contrived by the dividends the shareholders will receive if the bank is profitable. In terms of being profitable, large banks’ CEOs have felt the pressure of pleasing shareholders after the financial crisis. For example, J.P. Morgan, a large publicly trade financial firm, compensated its CEO Jamie Dimon with 20 million dollars. However, Jamie Dimon felt pressure due to the 20 billion dollars in fines because of the financial crisis and other securities trading issues. Even with these losses, Jamie Dimon was given a raise because of the growth of the company. In a CNN money article, Stephen Gandle justified the ride in Jamie Dimon’s compensation, “Most studies show that CEOs are paid based on what investors think their company is worth, or market capitalization, not actual earnings or stock price movement. At the end of 2011, JPMorgan had a market cap of $136 billion. The company now has a market cap of $212 billion. Based on the 2011 ratio (market cap to salary), Dimon should get paid $35 million this year” (Gandle). The argument for the bank’s growth justifies J.P. Morgan’s decision in giving Jamie Dimon a raise in compensation. The board members of J.P. Morgan argue that the basis for Dimon’s compensation is correlated to the growth of the company, as well as the lawsuit negotiations for the fines that occurred. Often times, bad public relations, life the 20 billion dollars in fines will shed light on the problems with the method of using the firm’s growth as a compensation benchmark. However, history argues that when a bank shows profit and economic growth the chief executive officer is compensated.
In light of the financial crisis, many have argued for large executive compensation in banks, however not strictly based on the efficiency of the firm and its shareholders. Essentially, the argument holds large CEO compensation is justified when the economy is efficient. In the Electronic Journal for Business Ethics and Organization Studies, Scott Elaurant wrote on the predicaments where large CEO compensation is justified, “An important qualification on the economic efficiency theory is that high executive salary needs to result in a...

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