Alternative Approaches to Executive Compensation Essay

Alternative Approaches to Executive Compensation - Essay Example †¢ ïÆ'Ëœ Limitations of Optimal Contracting ïÆ'Ëœ Agency problem experienced by managers ïÆ'Ëœ CEO can influence the nomination process for the board directors ïÆ'Ëœ The directors may never challenge the CEO’s pay, as they may want to please the CEO. ïÆ'Ëœ Market forces are not strong enough to assure optimal contracting outcomes ïÆ'Ëœ Failure of maximizing the shareholder value ïÆ'Ëœ Directors’ interest in the firm is nominal and therefore may not be serious with the company management. ïÆ'Ëœ Some agreements of the directors may be affected by market forces especially those affecting capital. †¢ Managerial power approach ïÆ'Ëœ The Managerial power approach gives managers an opportunity to camouflage especially when extracting rent, ïÆ'Ëœ The approach may lead to the use of structures unfavorable to the firm performance and managerial incentives. ïÆ'Ëœ The compensation arrangement design depends on the perception of the outsiders ïÆ'Ëœ The manager ial power approach may influence the relationship between power and pay without considering performance ïÆ'Ëœ The CEO’s compensation may be influenced by transparency and salience disclosure. †¢ Power and Camouflage at Work Practices explained by power camouflage include ïÆ'Ëœ Power Pay Relationship ï‚ § Pay is higher in if managers have higher power ï‚ § The board is ineffective ï‚ § There is a small outside shareholder ï‚ § Fewer institutional shareholders ï‚ § Managers are protected by antitakeover arrangements ï‚ § Managers with antitakeover policy compensate themselves more ïÆ'Ëœ Compensation consultants ï‚ § Employed to provide advice on executive compensation ï‚ § May increase their incentive to please the CEO ï‚ § Used to justify executive pay instead of optimizing it ï‚ § Provides compensation data, which favors the CEO ïÆ'Ëœ Stealth Compensation ï‚ § This is where a firm may use camouflaging practices to enable them to pay the executives large sums of money. ï‚ § Payments include deferred compensation ï‚ § Loan forgiveness and consultation contracts ï‚ § Use of executive loans with favorable interest rates