Overview of Executive Compensation in United States

Overview of Executive Compensation in United States

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This paper will fundamentally provide a substantive evaluation of how executive compensation correlates with the firm’s performance in the listed corporate firms in the United States. Equally important, such firms which are the beneficiaries of the public funding are entitled to expressly owe the public authorities the obligation to regulate the executive compensation levels. The paper will also delineate the regulatory approaches in U.S. along with the issues facing the executive compensation since the start of the dramatic economic crisis. The impositions of legally specified levels of executive compensation have not been in place since the start of the economic crisis. Even though the French president Nicholas liberated for the placement of the limits upon the bonus issuance to the executives at the Summit G20 in 2009 in the United States, this model was never at all implemented. However, softer regulation as an approach to regulate the executive pay has been analytically useful in achieving better governance of executive paying levels. Subsequently, the paper will give a vivid description of economic development prior to the fore said crisis. The development of executive pay policies on executive compensation has been popular in many national economic contexts since the economic crisis began. For instance in 2008, the emergency Economic Stabilization Act established that they would provide leverage benefits to the firms in case of the financial crisis.
Accordingly, the firms which at that time owed the Troubled Asset Relief Programs (TARP), were legitimately requested to cleave to ‘’say to pay’’ resolutions. Further, on resolving the economic problem, in the year 2009, the united State house of Representative launched the ‘Corporate and Financial Institution Fairness Act, which fundamentally advocated for shareholders rights to vote for the executive compensation policies. The paper will equally give a clear explanation of the policy tools used to regulate the executive compensation in the last few fiscal years. For instance, the United State has come up with the Executive Pay watch, a website which monitors and publishes the actual rates of executive pay at various high profiled corporate bodies. With this kind of a system the U.S governance is able to have a clear comparative technique to evaluate the salaries and wages of the workers employed in these companies. Then the issue of the income tax will also be reviewed in this paper.

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The extent to which the income tax is used to control the rate of executive pay, as clearly noted, has internationally fallen in the recent past financial years. Income tax in addition acts as the slashing edge to the top workers earners is still an essential policy tool internationally for equal redistribution of the national wealth. The paper will conclusively analyze and explain the implications of the current national and international policy system that regulates and controls the executive compensation. The forecast for the effectual establishment of G20 level agreements on executive compensation will be highly regarded in the final recommendations of the regulation policy. The theory of ‘joint decision trap’ which was discovered and developed by Fritz Scharpf will be essentially important to consider on the issue related to international regulation on executive compensation. This scholar extensively described the governance complications in the federal Germany and the European Union and consequently gives the way forward to regulate such problem in regard to the executive pay. Also on enhancing the implementation outcomes, as the scholars of in the turf of the European governance depict, the Open Method of Coordination (OMC) is one of the models that have effectively made an the implication plans in the European members states.

Executive Compensation fundamentally defined as economic compensation and non-financial awards. It is typically described as a combination of salaries, incentives, bonuses, perquisites and corporate stocks such as shares of all calls options and benefits. Amicably, the U.S. field of governance has ideally configured the regulations on issuing of such benefits and stocks. For the three consecutive decades there has shown dramatic increase in executive pay comparatively to that of average employees’ salary in the United State. Most of the problems associated with employment emanates initially from the adverse economic crisis, social injustices so to include corruption and fragile financial governance. The criticisms of existing executive compensation regimes have mainly focused on the social-economics issues that included the salaries of the most top earners and actual implications of good corporate governance. Particularly, compensation involving assured multi-year bonuses and multi-million dollar compensation for executive of deteriorating firms. In fact firms that received public finance have always been perceived as excessive and inefficient. Although there has been controversial debate of inconsistencies with the corporate capital bases and insufficient executive compensation playing as the key precipitating element of the economic crisis, there are defenders of the existing executive compensation regimes. Consequently, through consensus the corporate governance has always defended the existing executive pay and has formed international policy community that requires serious attention and adherence to the existing regulation policy.
In addition to numerous state policy initiatives on the economic issue, the executive compensation regulations was the supreme subject of discussion and subsequently lead to agreement at G20 summits in the year 2009. The traditional means of regulation had hardly any sediment regarding the executive compensation framework. In the past decades, not only were labour markets subject to limited grade of nationalization, but the phases in which elevated degree of executive compensation would come in, for example the financial sector, were never expanded to the same degree as they would be in the coming years. The degree of income tax in capitalist nations was equally in history high. In the United States, the standard level of global capitalism, in the past decades, the highest rate of income tax was 91.0% between 1946 and 1963. The liberation of the Soviet Union and the Chinese Revolution in the same period ideally meant that the entire regions of the world placed themselves to an ideology that suggested to high degree of interpersonal compensation. Equally, the social and economic change and recession that occurred after the year 1973, as scholar Binder articulates, led to a legacy that had a strong liberal regulation of economies and labour market greatly escalated the United States economic prestige. Across the capitalist nations, labour markets, taxation regimes and social security systems became regulated on economic liberal basis. This had evident implication of income tax and executive compensation policies. In year 1982 the highest level of income tax rate in United States was 50.0%. The collapse of Soviet Union in 1991 and economic liberation that had occurred in 1979 also led to high degree of liberal amplitude to individual wealth accumulation in these states of the world. The subsequent rise in globalization in the year 1992 to 1997 also made the issue of executive compensation to be a sensitive economic debate. The internationalization of the labour market translated to emergence of innovative forums of talent search for talent in myriad sectors. This had an inflationary impact upon high levels of executive compensation.

In the literature review: The organization of the executive compensation policies, it has been prevalent in many nations since the start of the economic crisis. In 2009 the Australia government specially made the shareholders the controller of the executive pay. The shareholders were able slash off the executive sitting allowances and the consultant fees to the management. Moreover, they have also opted to introduce the two strikes proposal which would be implemented if 75% of board of directors proposes on the new compensation package. If 25% of the board members opposes on the principle, definitely the firm’s board will be obliged to venture onto the traditional way of regulating this executive compensation principle. In the United Kingdom, Say on Pay regulation of year 2006 has persistently continued to be in operation since when the economic crisis began. In 2009 the Germany the stock Corporation Act was reviewed to include several important measures intended to strengthen the ability of the investor to regulate the rates of executive compensation. The Act revealed its actual intention to ensure that there is appropriate relationship between the salary management board of the public limited company and management board of performance. The Act clarified that the remuneration of the management should not exceed the country specific level of remuneration. The remuneration for the board of members must be securitized by the supervisory board instead of the committees alone. The executive right of share must not be implemented until the end of three to four financial years after the option of executive share was granted.
Moreover, the Act also provided that the non-binding votes of the shareholders for the incorporated companies should extend the right of the supervisory boards to ensure significant resolution to all levels of executive compensation on the occasion that the economic situation of thee firms declines unexpectedly. Other rational approaches in regard to the executive compensation say moral pressure have immensely proliferated in many countries internationally. Moral pressure is a principle which has been developed by the government firms to disclose the details of salaries or to the frequent compensation rates. For instance, in 2009 the China government enforced some of the listed firms in the country to publish the details of the executive salaries. Actually, Guotai Juan, a security firm whose services are in financial sector in this country was compelled to publish the details of their executive pay by the Chinese Government and the Chinese public. In India, the prime minister, M.Singhn issued a Charter to the Indian industries where each of those industries had to include the details of the executive. On other national context, the workers have autonomously settled on employer oriented measures to regulate the executive compensation.
In Norwegian and Dutch corporate workers made a decision to embrace on the joint guidelines to limit rates of executive compensation within the financial sectors. The bonuses of for executive boarders of directors, in Dutch banking sector should be limited to 100% perfection of annual wage. Employees in other national sectors have come up with the strategies to regulate the executive pay. In France, following the 2009 executive committee meeting with the national banks, an agreement was reached to enforce the executive pay to be patient for three financial years before they receive the bonuses and to permit such bonuses to be retractable for two more years should there be evidence of poor performance. Banks who do not comply with these regulations are deemed to be blacklisted by the French authorities. In the United Kingdom, also here the conformity was reached between five largest banks within the country in 2009 to publish the weighted executive pay of the most senior staff and to spread bonuses payment in more than three year period. This consensus was reached in the face of high public anger over the degree of executive compensation in the segment.
On evaluation of the statistical data collected over the years, the United State growing prestige of the Anglo-Saxon model of corporate governance moreover led to the developing emphasis on short-term compensation schemes and the escalation of the bonus payments. Regulatory approaches towards the executive compensation likewise became as well liberal. In a series of economic evaluation and analysis the rate o income tax continuously declined as the globalization intensified compensation between national tax regimes. Around 2003 and 2008 as per the statistics and evaluation from Economic Policy institute, State of Working America (EPISWA) the average fall of income rate declined from 31.3% to 28.8%. The rates of executive compensation of different nations globally as in the year 2003 to 2004 are tabulated in the table one. During the period of economic crisis in 2007, the rates of executive compensation had reached historic point. Besides to the salaries framework, executive compensation packages normally came to include incentives, stock awards, bonuses and pension benefits procedures. The total remuneration for thee executive rose significantly to an average of one million per year. The phenomenon of that financial multi-annual placed an assurance for yearly bonuses, incentives and awards irrespective the overall performance. From the above analysis in the table, it is apparent that the rates of the executive compensation were highest in the countries in the west. This is the same case that was evident in the United State as articulated by James Reda & associates of year 2009 whereas the study conducted by Economic policy Institute in 2003 reviewed that the average rate of chief executive officer pay was $2,249,080. The subsequent nation on the list on average rate internationally was in Switzerland with $1,190,567. Therefore we can reasonably conclude that the high rates of executive compensation were fundamentally a western economic trend.
The next table 2 shows and depicts the modest rates of executive compensation in the state like china. In spite of ICBC and CCB banks having the highest rates of market capitalization in the international finance sector in the year 2008, the degree of executive compensation at the these banks were below fifty more times compared to specific Western banks with relatively worse rates of market capitalization. The rates of executive compensation were similarly high within the monetary sector. As the above table shows, the highest compensation level within the sector started to receive annual compensation packages of above $10 million and the compensation practices also came to allocate large bonuses payments to executives.
Consequently, there rose allegations that the bonuses rewarded were of high risk taking and thus were disconnected from the bank’s actual rates of capitalization. Earlier before the crisis a number of approaches were utilized to have the controls of the executive pay. Despite the fact that these mechanisms were frequently tentative and there was no international level approach to the issue, the ways utilized to regulate the issue in the years preceding the crisis are valuable taking for they assist to explain the development of the ethos and policies on the executive compensation issue. Actually in many countries the levels of compensation for executive were sometimes above forty times higher than the average employees.
Table1: The rates of international Chief Executive Officers in year 2003
Country Average executive compensation/CEO pay ($)
United states $2,249,080
United kingdom $830,223
Australia $694,638
Spain $620,080
Sweden $700,290
France $735,363
Japan $456,937
Belgium $697,030
Netherlands $675,062
New Zealand $449,414
Switzerland $1,190,567
Italy $841,520
Canada $889,898
Germany $954,726

As the above table depicts, rates of income tax persistently continued to decline as the globalization intensified competition between national tax regimes. Between the year 2003 and 2008 the average top rate of income tax in the world’s most developed economies by 2.5%.
Table2: Relative Executive compensation level
Bank Level of CEO compensation in 2008($) Market capitalization of bank( in billions) Nationality of bank
JP Mogan Bank $19,651,560 $158.60 U.S.
Bofa Bank $9,959,080 $129.80 U.S.
Wells fargo Bank $13,782,430 $123.90 U.S.
ICBC $235,700 $250.20 China
OCB $229,720 $190.90 China
Bank of China $229,720 $147.70 China
HSBC Bank $2,800,000 $188.10 UK
Barclays $1,800,000 $68.10 UK
Santander $13660,000 $127.00 Spain
BBVA $6,800,000 $67.00 Spain
Commonwealth Bank of Australia $8,045,000 $62.60 Australia
Westpac $7,426,000 $61.80 Australia
Royal Bank of Canada $9,563,500 $70.00 Canada
MUFG no disclosures $69.70 Japan
BNP Paribas $1,570,000 $67.40 France
UBS $1,766,000 $64.00 Switzerland

As the table 2 depicts the levels of executive compensation declined for normal employees while the highest paid executives within the sector commenced to receive yearly pay packages of above ten million dollars. The source research of this statistical data is from Reuters’ Journals.
Table 3: Comparative Ratios of Executive Officers Internationally
Country Ratio of chief executive officer pay top average worker pay
United States 475:1
Canada 20:1
UK 22:1
Japan 11:1
Germany 12:1
France 15:1
Mexico 47:1
Venezuela 50:1
Hong Kong 41:1
South Africa 21:1
Italy 20:1

As table 3 depicts, the rates of income tax have declined internationally in previous financial years.
Table 4 shows the rates of income tax across the world’s developed economies
Country Rate of income tax in 2008
Russia 13%
Mexico 28%
India 30%
United state 35%
U.K 40%
France 40%
South Africa 40%
Italy 43%
Germany 45%
Japan 50%

The income tax across the world’s most developed economies is utilized as the means of distributing the national wealth and cutting down the top salary earners.
The economic crisis struck in America in 2007, this is the time when the liquidity level in credit market across the world dropped. This led to global recession that many economists agreed that it was the worst of all since 1930s.Consequently, this resulted to high levels of unemployment and adverse growth rates in the financial markets. Many financial institutions for example the bank of America and Citi group were bailed out with the shareholders stocks. And as the recession escalated the public anger worldwide which was fundamentally due to firms which had received the civic funds on which the executive continued to benefit from the executive pay. In order to resolve this misfortune several policies were put in place at the national level, which generally included: the policies of ‘softer’ which gave the shareholders the rights to determine the compensation levels, policies of ‘hard-form’ which basically sought to cap the degree of executive pay and the international phase of policies.
In the analysis and on policy recommendation the United States had to appreciate the following mechanisms. The regulatory approaches have established the resolution of executive compensation through the empowerment of public, the application of civic pressure on financial institutions to set reasonable rates of executive compensation, and the legal limitation of practices. It is also essentially important to acknowledge that this principle of regulation is likely to have a crucial strong effect upon the behavior of firms and their setting of executive compensation rates. The fundamental recommendations made by G20 members for resolution of executive pay issue included; the firms were to have consistent frameworks on the level of executive compensation rates with prudent risk taking. Secondly, it was decided that in order to promote incentive for prudent risk-taking, each financial institution had to review its practice principles developed by the FSB which included the wards of incentives to the executives which are consistent with the corporate long time-term goals. Eventually, they stated that there had to be prudential supervisors who will enhance their oversight of compensation schemes by designing of remuneration framework into the risk management practices.
Conclusively, with the regard to some theories from reputable scholar, Dr.Olson, has mentioned the model of collective action problem which, as he explains, has the potentiality to resolve the international governance forums. The theory stipulated that when two or more actors are striving to achieve a goal that is beneficial to the public, then it is likely that the collective action on the issue will be difficult to achieve high standards of change. The theory of ‘joint decision trap’ recommended by the scholar Fritz Scharpf is another essential way to consider the issues relating to the international regulation executive pay. On the Empirical point, many factors also stand in a way of effective compensation. This is the highest level of diversity in national political named corporate governance structures and fiscal principles regimes. Therefore due to this extensive design it defined that it is difficult to achieve uniform worldwide regulation of a problem such as executive Compensation.

Works Cited

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