A Report On Executive Compensation Business Essay


The presentation is on the contentious subject of executive compensation as it relates to total shareholder return. The presentation is for the 1993 compensation data on the top 200 CEOs. The presentation's introduction should conceptualize the framework of the data being analyzed. The first part of the slide makes reference to the compensation paid in 2008 when the data refers to 1993. This has a possibility of linking the 1993 data to the current practices in executive compensation. The introduction should have been about putting the presentation into context and identifying that this was the data for 1993 and hence related to CEO compensation practices for that time.

Presentation sample selection

While there is a mention of the sample coming from data of the Fortune 500, there is no detailed presentation or sufficient explanation of the sample, i.e. that it is a sample of the top 200 CEOs in the Fortune 500 company index. This means that this sample is not representative and this obviously means that its results cannot be applied to the general population that is to the full Fortune 500 companies. This is a significant piece of information for the presentation. There are limitations to the sample and to the way it is being applied. It only measures one year's compensation and links this to 5 year return without explaining whether the compensation being paid is a once off one year payment or partly vested payments such as non monetary benefits, pension, share options and profit sharing schemes. The sample could be improved by selecting a representative sample of the Fortune 500 rather than selecting the top 200. As mentioned, the sample will not lead to have general conclusion of the whole population. Reaching general conclusions in the presentation is therefore not appropriate.

Suitability of data set to objective of the presentation

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The presentation is attempting to demonstrate the relationship between compensation and return as measured by a five year total return to shareholders. The main weakness with this is that the compensation is for just 1993, yet the return is for 5 years preceding that. The tenure of office of the CEOs for the full dataset is not revealed. As seen in some of the companies, some CEOs had just joined the organization and therefore directly linking their compensation with the five year return of the company will yield erroneous conclusions about the link between executive compensation and five year total shareholder return. Although later in the presentation, the outliers were explained by CEOs who had taken over struggling companies, the dataset was not adjusted for all the 200 companies for CEOs who had served at that position for less than the 5 year total shareholder return period being considered. Therefore the validity of the relationship is brought into question as to its suitability in this study. The dataset could have been controlled by introducing a presentation about tenure of office and limit the study to CEOs who have actually been with the company for five year or more. In addition to that all outliers are explained by the fact that the CEOs were first year CEOs of non performing companies. In the case of IBM CEO, he led one of the most successful strategic transformations at IBM by deploying a new strategy and turning around the company from a loss maker to a profit maker and a leading solutions and technology companies. These outliers show that the dataset is not suitable to analyze appropriately the relationship between the preceding 5 year total shareholder return and the 1993 executive compensation level for the company's CEOs. The explanations given for the outliers show that executive compensation is affected by several factors, and might have very little link at all with the five year total shareholder return.

Data analysis critique

The histograms presented in slide 8 to 10 do not specifically show how they actually help the audience to understand the objective of the presentation. Generally histographs are not good diagrammatic presentation to show linear relationships. The presentation does not explain what a positive skewness in the total compensation means for the relationship under consideration.

Critique of conclusion and results, limitations

The limitations in the data and analysis should be presented at the beginning of the study as the parameters and the objectives of the study are presented. The limitations have been appropriately explained and presented, however an analysis of whether these limitations makes the data unsuitable all together to make general conclusions about the relationship between CEO pay and the five year return in the 200 companies of the Fortune 500.

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As indicated above the correlation between five year total shareholder return and CEO compensation is 0.153. This just a slight positive correlation and is closer to zero than it is to +1. This would lead to a greater extent to the conclusion that there is no strong linear relationship between company return and compensation of CEOs. The presentation does conclude that there is a general positive trend, without qualifying that even with the removal of outliers, the correlation is just 0.200 which is a very low positive correlation and would not generally lead to the conclusion that there is a general positive trend. The most likely conclusion is that there is a very weak to no relationship between executive pay and total shareholder return.

Positive points of interest

The presentation and explanations on the outliers is an informative part of the presentation. It exposes important information about executive compensation. The key aspect is that executive compensation in the 1990s was not linked to total shareholder return, but that companies in trouble would head hunt for trophy CEOs such as IBM's Gerstner who then lead a successful strategic change in IBM. "When Lou Gerstner took over in 1993, the services unit was 27 percent of revenues and the software unit didn't even exist. In 2001, services and software were $35 billion and $13 billion businesses respectively and combined represented 58 percent of total revenues"(Harreld, O'Reilly and Tushman, 2006 pg.3). In this case Gerstner's compensation in 1993 represented the cost of getting him on board at IBM to lead the necessary strategy changes. While outliers can sometimes distorted studies, in this case, highlighting them would lead to better understanding of how executive compensation relates to shareholder total return.

The structure of the presentation was excellent, including an introduction defining the purpose of the presentation a data illustration leading to findings and conclusion and an explanation of the limitation of the analysis. The scatterplots were a good and understandable presentation showing the concentration of the data and the outliers clear and also showing the correlation between compensation and total shareholder return. Overall this was a well presented presentation structured appropriately and discussed the key issues in executive compensation; the conclusions followed a logical supported conclusion. In addition graphic illustrations were used to make the presentation clearer.