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Should Ceo's Make Such Exorbitant Salaries?

1445 words - 6 pages

In the media recently, there as been much said of many of today's executives receiving pay and compensation packages that are often too excessive and the disparity between CEO's and the average worker pay keeps widening. To many people, the continuing explosion in the pay of chief executives seems little short of obscene, reflecting the arrogant use of power by top executives to enrich themselves at the expense of stockholders and workers. To others who defend the trend, it represents just rewards for successful efforts to enhance shareholder wealth. To determine which view is more accurate, this paper will provide answers to the question, should CEO's make such exorbitant salaries? Information will on the different influences of CEO pay, how have they varied from the average worker and do they deserve it? This paper will reflect the position that CEOs do not deserve such exorbitant salaries.In a study by Graef Crystal done in 1973 on CEO's of major companies found that CEOs earned about 45 times that of the average worker. The pay gap continued to rise in 1990 to 140 times and today it is just below 500 times that of the average worker (Executive Excess, 2002). It is the position of Bob Kievra (2003) that corporations need to supply large compensation packages to attract and retain good management personnel. This is often negotiated by forecasting compensation packages that are based on the projected increases in shareholders' wealth as a result of the anticipated increase in management performance. If stockholder wealth is a result of management performance then shareholders should be able to justify high executive pay. However, recent studies have suggested that CEO pay is not linked to performance (Gomez-Mejia, Luis Wiseman, Robert M. 1997) but rather their influence over the board of directors, as well as a strong relationship between a company's size on executive pay.In a study, Sridharan (1996) proposes CEO influence on his board of directors is a major factor in determining executive pay. Results from her study have suggested that CEOs with higher influence over the board of directors receive more compensation than a CEO with less influence. In many cases CEO's and their subordinates are also members of the organization's board of directors. Graef Crystal stated in an interview, "in many companies, Enron for instance, the CEO's handpicked board of directors is made up of CEOs of other firms, each of whose own future pay hikes may depend on how big a raise he gives the CEO whose board he sits on" (Executive Excess 2002). One study of executive performance found that 20 percent of firms are interlocked, which means that there is at least one executive on a board of directors that sits on his board. The study showed that salaries of CEOs in interlocked firms are higher than those who are not (Hallock 1997).Sridharan (1996) also found a positive relationship between CEO pay and the value of the firm's assets. A meta-analysis by Tosi, et al....

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