Case Study 3
Running head: CASE STUDY 3
Abstract
As the human resource director, Don must analyze the compensation package of the CEO to ensure that all employees are being paid fairly. Outlining all factors that are considered when creating the compensation package is vital for all employees. Frontline staff is very important to an organization, but the success of an organization can depend on the retention of the CEO. The compensation package can determine the retention of the CEO.
There are many components that make up executive pay and it is the responsibility of Don, the director of human resources to summarize each component. Based on the criteria to establish the pay rate for the CEO, it may be required for Don to collect additional information. Three prominent theories describe the processes related to setting executive compensation: agency theory, tournament theory, and social comparison theory (Marticchio, 2017). If the agency theory is used, Don may want to stress the CEO’s ownership within the organization. However, if the social comparison theory is utilized to outline the CEO’s salary, he may want to get information on the market rates of the CEO’s in the similar industries. It is also important for Don to identify the parts of the CEO’s salary that are associated with their performance. Although the company is not financially secure, Don should point out information that show the success that the CEO has accomplished in leading the company. With this information, Don may be able to show that although the organization is struggling financially, the state of the organization could be worse if it was not for the leadership of the CEO.
Don, the director of human resources, must navigate between adopting standardized “best practices” for their CEO’s pay plans, on the one hand, and customizing their CEO’s pay to align their particular CEO’s goals with those of shareholders, on the other (Hou, Priem, & Goranova). It is expected that Don will encounter difficult situations about the logic and fairness of a profitable compensation package for the CEO. Don should outline the pay differences to Oakwood employees by highlighting the connection with the CEO’s pay and performance. The skills, knowledge and expertise that is required by the CEO should be explained as they are greater than frontline employees and makes it necessary to offer a higher compensation package for the sake of retention. Organizations that pay higher equity-based compensation to executives should have a lower incidence of managerial decisions that are non-value maximizing because such actions would reduce the manager’s own personal wealth (Brisker, Colak, & Peterson, 2014). The contributions and professional milestones of the CEO that has helped the organization grow or sustain should be presented to the employees so they are able to recognize the ability the CEO has to continue to more the company forward, especially during a time when the organization is struggling financially.
The CEO’s salary is directly related to the success of the company and it is Dan’s responsibility to ensure that all employees are aware how the compensation package is created. Since 2007-2008, CEO compensation has drawn a great deal of attention and scrutiny from academics, regulators and the general public at large (Harper & Zin, 2016). Many scholars have researched the inequality of CEOs pay compared to other employees within the organization. After accounting for economically drivers of pay, such as size of the company, industry affiliation, and macroeconomics conditions (Gupta & Wowak, 2017) they were not able to determine the pay is always fair. The inconsistent findings on the extent to which CEOs are rewarded or penalized in response to their companies’ performance have been a particular source of controversy (Gupta & Wowak, 2017). The majority of the employees will not be rewarded or penalized in the same manner as the CEO based on the success or failure of the organization. The compensation package for the CEO of an organization is designed to reward the CEO for leading the company in a direction the is profitable, however if the CEO makes decisions that will cost the organization resources they will be penalized in their salary and bonus pay.
Don must decide the best method to explain the pay disparities to the employees within in the organization. One approach he could use to defining how the compensation package is created for the CEO for the organization. All factors, such as benefits, pay for performance, vacation, and retirement benefits, that are used to create the compensation package for the CEOs and other employees. As we know, the compensation package for the CEO will be different from other top executives due to the CEO is ultimately responsible for the success of the organization. Market-based theories predict that differences in CEO skills lead to potentially large differences in pay, but it is challenging to quantify the CEO skill premium in pay (Falato, Li, & Milbourn, 2015). Although all employees will have similar benefits, due to the hierarchy of the CEO they will have a much higher compensation package than executive leadership within the organization. In some industries, the CEO has skills that are very rare which would require the organization to create a more competitive compensation package. In any organization, the goal is to have a high retention rate in the CEO position. Although the frontline employees are the backbone of any organization, the CEO is the major decision maker for the organization. The CEO is responsible for making decisions that would move the organization forward.