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The Popular Press And Academic Literature Business Essay

According to the researchers there too many words used in the popular press and academic literature to describe an executive compensation in USA. Like what have they are stated in the researches as “shameful”, “soaring”, “exorbitant”, “excess” and “extraordinary”. From all of this word, none one of them are positive. From this kind of phenomena, the researcher said that it were drive due to the reaction because of the growth of the executive compensation over the past two decades. Some study were done by the other researchers found that the Chief Executive Officer (CEO) compensation are been increasing on average 146 percent from 1993 to 2003. The senior management compensation is increasing up to the 125 percent in the same period.

The researchers said that while the significant of an effort has been expended to understand what drives executive compensation and particular CEO compensation, there are still much less of the other research on the consequences of an executive compensation especially with the respect to employees’ attitude and reactions. That is possible to the employees working in the firm where the top management make the large amounts of compensation relative to the other similarly situated executives might respond with negatives attitudes toward the organization, management and others focal target but only the little work has analyzed this important possibility.

In the journal the researchers had been discuss about the relationship between the CEO compensations and employee attitudes. Based upon equity/organizational justice theories and the CEO compensation literature, hypotheses were developed which suggest that executive compensation and employee attitudes will be related. These hypotheses were tested by linking a large-scale survey of employee attitudes to CEO compensation data for public companies based in the USA.

In this research, they have been stated 4 hypotheses which are:

Higher levels of total CEO compensation will be negatively related to employee attitudes, including pay and benefits satisfaction, satisfaction with senior management and general satisfaction.

Higher levels of total CEO compensation will be positively related to employee attitudes, including pay and benefits satisfaction, satisfaction with senior management and general satisfaction.

Higher levels of compensation components that are not performance-dependent (e.g. salary) will be negatively related to employee attitudes, including pay and benefits satisfaction, satisfaction with senior management and general satisfaction.

Higher levels of compensation components that are performance dependent (e.g. annual bonus) will be positively related to employee attitudes, including pay and benefits satisfaction, satisfaction with senior management and general satisfaction.

For the data collection of this study originated from the WorkTrendse database, a worker opinion database compiled by Gantz Wiley Research. WorkTrendse draws its sample of adult workers from a National Family Opinion panel. A stratified sampling technique based on age, income and geography is used in order to closely replicate the adult worker population of the US Census. The data for this study came from the 2005 survey, which was administered in the fourth quarter of 2004. For the 2005 survey 10,000 surveys were mailed and of those 6,752 completed surveys were returned for a response rate of 67.5 percent. On average the participants were 46 years old. This sample was 47 percent male and 29 percent hourly workers.

On the finding, the researchers found that sometimes the relationship that was found was negative and sometimes it was positive, but in all cases the effect size was quite small. Specifically, change in CEO salary was negatively related to evaluation of senior management and general satisfaction. However, change in total CEO compensation was positively related to evaluation of senior management and general satisfaction, while CEO bonus level was positively related to general satisfaction.

The researchers said that the significant on the finding, negative relationships were found between percentage change in CEO salary and employee attitudes. Accordingly, when CEO salaries go up sharply, employee attitudes may decline. However, for overall compensation and other components of compensation, the relationships found with employee attitudes were positive with higher CEO compensation related to higher levels of employee attitudes. This pattern is consistent with the idea that the relationship between CEO compensation and employee attitudes depends upon the attributions that employees make. Employees may view changes in salary negatively because salary is not sensitive to company performance, and thus this component better corresponds to the rent extraction view of CEO compensation.

In contrast, the other components and overall measures of compensation are largely performance dependent and this better corresponds to the view that CEO compensation is efficient and implies a positive relationship between compensation and employee attitudes. However, they cannot rule out alternate explanations. For example, employee attitudes can only be affected by CEO compensation if employees know and understand the information. Of the components, salary is the most straightforward and most similar to what lower-level employees receive. It may be that employees would react negatively to other components of compensation and overall compensation if these components were easier to access and understand.

For the limitation, in clearly, there are many limitations of this study. First, they are unable to show a causal relationship as there may be variables omitted that explain the relationships. Second, the data is not representative of workers at all companies across all macro-economic conditions. The executive compensation database used to collect CEO compensation figures is skewed toward larger companies, so workers at smaller companies are under-represented, and in 2004 the US economy was growing rapidly, potentially reducing the focus on CEO pay. Third, the equations explain only a small amount of the variance. Fourth, this is not a test of equity theory, because measures of inputs employee output. Finally, the attitudinal measures are single source and not standard measures.

As a conclusion, they are said, there are lot of smoke in the press, but not much fire among workers. Only changes in CEO salary were negatively related to employee attitudes, while the other relationships that were found were positive. In addition, all of the relationships that were found were small in terms of effect size. This helps explain why employees have not reacted, except in extreme situations, to increases in CEO compensation even though these increases may appear to be “shameful” and “extraordinary” to outsiders.

Review

As a Chief Executive Officer (CEO) compensation is an important governance mechanism that helps align the interests of agents with those of principals. In order for this convergence of interests to occur, the compensation of CEOs has to be linked to performance outcomes that are of concern to shareholders. However, the relationship between managerial rewards (as measured by salary and cash bonus versus stock incentives) and firm performance (as measured by accounting earnings or market-based measures) is also influenced by managerial labor market norms linking compensation to other individual, firm-specific, and industry level variables (Rajaram Veliyath, James W. Bishop, 1995).

However for the employees views, the perception of fairness is important to all human resource decisions and processes is particularly important to compensation decisions, such as pay, pay raises and benefits. Indeed, perceived fairness of compensation, the procedures used to make compensation-related decisions, and the manner in which compensation-related information is communicated play an integral role in shaping reactions to critical elements of the compensation system. Yet, the literatures on attitudinal reactions pertaining to compensation and fairness perceptions have evolved independently. Even though most would readily acknowledge that fairness is important to compensation decisions.

In simple ways that means the pay and satisfaction with pay is of great importance to employees and to organizations. Pay satisfaction is a multidimensional construct. Pay level refers to the individual’s current direct compensation in terms of wages and salary. Raises refer to change in pay level. Benefits reflect indirect pay to the individual in the form of health, retirement and payment for time not worked, and other non-financial returns. Pay structure and administration refers to the hierarchical relationships created among pay rates for different jobs within the organization and procedures by which the pay system is administered.

Researchers have argued for incorporation of organizational justice into the study of pay satisfaction. Although several researchers have speculated about the relations between justice perceptions and pay satisfaction, the role of justice constructs as antecedents or consequences of pay satisfaction has not been clearly described. However, the preponderance of research on pay satisfaction has focused on pay level satisfaction to the exclusion of satisfaction with the other dimensions of pay satisfaction: satisfaction with benefits, satisfaction with raises, and satisfaction with structure and administration. Consequently, a recent meta-analysis of pay satisfaction was restricted to only one dimension of pay satisfaction, satisfaction with pay level. In addition, previous research has related one or two dimensions of justice perceptions, but not all four, to one or two dimensions of pay satisfaction to the exclusion of other dimensions. Research has shown the four dimensions of pay satisfaction are correlated with each other. Therefore, cautioned that tests of models including only one or two, but not all dimensions of pay satisfaction might be miss specified and consequently, their results suspect. Because the four justice dimensions are also correlated with each other the same criticism is applicable to studies that examined relationships between justice constructs and pay satisfaction but failed to include all four dimensions of justice (I.M. Jawahar, Thomas H. Stone, 2011).

Furthermore the authorities have been accepted that pay is one outcome of high importance to satisfaction. However, in recent years union contract negotiations have focused on other key issues as the major contract concession sought. In particular, job security provisions have become a major focus of union representatives during contract negotiations.

Procedural justice takes on different forms, depending on the underlying allocation process. The criteria used by individuals in judging procedural justice are a function of the process itself, and can vary from one process to the next. Researchers have thus started to conceptualize procedural justice for different allocation processes. Examples in the field of HR management include research within the contexts of performance appraisal, personnel selection, internal mobility and promotion and layoffs. Nevertheless, the research is still considered to be in its early stages. In compensation policy, Scarpello and Jones (1996) considered procedural justice standards using a summary measure of compensation policies. When analyzing the observed compensation policies independently, some of researches showed that justice standards varied from one policy to another, even within the narrow field of compensation policy.

In particular, they observed that individuals used different justice criteria to evaluate, respectively, the process determining pay rates (including job evaluation), the process used to determine wage and salary increases, and the appraisal process used for incentive pay. Because what makes a compensation practice fair is different from one to another, researchers have worked to identify the procedural justice standards specific to a number of practices: Skill based-pay plans pay raises, pay-for-performance plans and employee benefits plans. Little is known, however regarding the justice standards with regards to the salary determination process (i.e. job pay rates). However, their results with respect to job evaluation are not conclusive: given the set of standards studied, the perception of procedural justice with respect to job evaluation is not well explained. The standards were more strongly correlated with other practices linked to compensation, such as pay raises and performance appraisal (Julie Cloutier, Lars Vilhuber, 2008).

Actually the labor cost is often the single largest expense in most organizations. As competitive pressures continue to escalate, less money is available for compensation and compensation professionals have the daunting task of designing or redesigning compensation systems most likely to attract, motivate and retain the best talent in order to help the organization accomplish its goals and objectives.

Since pay dissatisfaction is significantly related to numerous employee outcomes and attitudes toward pay meditate the relationship between compensation and work outcomes, understanding the role of perceived justicemay facilitate managers’ ability to influence pay satisfaction. HR policies and managers’ behaviors can influence pay satisfaction as much or more than actual pay (distributive justice).For example, results for informational justice suggest pay satisfaction can be increased by clearly and candidly explaining and communicating the organization’s procedures and processes (I.M. Jawahar, Thomas H. Stone, 2011).

Starting initially with Adams’s well known equity theor, it is proposed that individuals form perceptions and beliefs about the relative nature of their inputs and outcomes compared to other referent sources in an organization. Individuals who perceive their input to outcome ratio to be small when compared to others develop feelings of inequity or injustice and are motivated to reduce this state of inequity. In contrast, when the ratios are in balance, they are relatively satisfied with the situation.According to the main research has confirmed that individuals in various states of “under-reward” inequity exhibit lower levels of pay and job satisfaction, higher levels of absenteeism and turnover, lower performance levels and more deviant behaviors such as theft.

In the equity theory would suggest a negative relationship between CEO compensation and employee attitudes if employees believe that CEOs’ outputs have grown more quickly than their inputs, but would suggest a positive relationship if employees believe that CEOs’ outputs have grown in relationship to their inputs, assuming an initial state of balance between CEO and employee output to input ratios. Interestingly, these contrasting attributions mirror the current literature on CEO compensation, where there are divergent views about the determinants of CEO compensation. In contrast, if total CEO compensation is believed to be efficient, then equity theory would suggest a positive relationship between CEO compensation and employee attitudes. This is because CEOs are receiving outputs based upon their worth and performance, employees would perceive an equitable and distributively just workplace which would be reflected in their evaluations.

In addition to looking at total CEO compensation, employees may evaluate distinct components of CEO compensation separately and may make different attributions depending upon which component is being evaluated. One distinguishing characteristic that employees may consider is whether the component is contingent upon performance. For non-performance dependent components, like salary, employees may attribute high levels and large changes to CEO power and ability to control negotiations. This corresponds to the rent extraction view. Thus, employees would believe that CEOs are receiving outputs that are not related to their inputs and would perceive overpayment inequity and distributive injustice for these components.

As a conclusion we cannot rule out alternate explanations. For example, employee attitudes can only be affected by CEO compensation if employees know and understand the information. Of the components, salary is the most straightforward and most similar to what lower-level employees receive. It may be that employees would react negatively to other components of compensation and overall compensation if these components were easier to access and understand. Interestingly, the negative effect sizes for CEO salary change and evaluation of senior management and general satisfaction were 40 times larger than the positive effect sizes for CEO total compensation change and evaluation of senior management and general satisfaction, and nearly twice as large as the positive effect size for CEO bonus level and general satisfaction (Elizabeth T. Welsh, Deshani B. Ganegoda, Richard D. Arvey, Jack W. Wiley, John W. Budd, 2012).

References

Elizabeth T. Welsh, Deshani B. Ganegoda, Richard D. Arvey, Jack W. Wiley, John W. Budd. (2012). Is there fire? Executive compensation and employee attitudes. Personnel Review, Vol. 41 Iss: 3 , pp. 260 - 282.

I.M. Jawahar, Thomas H. Stone. (2011). Fairness perceptions and satisfaction with components of pay. Journal of Managerial Psychology Vol. 26 Iss: 4 , pp. 297 - 312.

Julie Cloutier, Lars Vilhuber. (2008). Procedural justice criteria in salary determination. Journal of Managerial Psychology, Vol. 23 Iss: 6 , pp. 713 - 740.

Rajaram Veliyath, James W. Bishop. (1995). Relationship between CEO compensation and firm performance . International Journal of Organizational Analysis, Vol. 3 Iss: 3, pp. 268 - 283.

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