Pay for performance is a standard in many companies. Compensation packages for upper level executives rely heavily on large bonuses and valuable stock options. This is meant to give the executives a vested interest in the company’s performance.
But there are many critics of compensation plans that are performance-based. There is the possibility that management will make cuts in order to achieve earnings targets, and this may unfairly affect lower-level employees. Front-line employees lose their jobs while executives get big bonuses, or so it seems
Do these high bonuses and lucrative stock options automatically mean that the pay for the executives is excessive? If a company is doing well, showing positive earnings growth and a rising stock price, it doesn’t seem so crazy that those in charge of the company should be rewarded.
If pay for performance isn’t the right way in the eyes of the critics, what is? A fixed pay structure sounds great, but the critics will surely come calling when a company does poorly and the executives still receive their full fixed pay packages.
It’s clear that this issue is very subjective, but it’s not clear who is qualified to judge what is excessive and what is not. Some think that disclosing more about executive pay will help keep the compensation packages in check. Others say that the free market decides what executives are worth, and if their worth is high, so too their compensation will be high. Some believe that shareholders and boards of directors must take a more active role in determining executive pay and making sure that it isn’t off the charts. Still others think that executive pay is out of control and nothing will reign it in.
It is easy for economists and reporters to criticize the pay of executives who receive millions of dollars. But the issue is complex and won’t be solved quickly. I hope that the free market system will decide what the executives are worth and what the companies must pay to attract, retain, and motivate management. If executives aren’t performing, they will lose their jobs. If they are doing well, they will reap the rewards of a job well done.