Case Study 3

With the coverage of the CEO’s compensation package that brings into light the inequities between different management levels, it is prudent for Don to first identify additional information about the CEO’s pay package to share with the employees so as to clear up the misunderstanding.

The first thing that the other employees should understand is that executive pay packages are usually different from the typical salaried employee compensation. This is because, unlike the typical employee compensation, most of the CEO’s or most of the executive’s payment is contingent compensation that is made to reward the CEO/executive for actual company performance as well as growth in shareholder value. In this case, the executive compensation package generally encompasses six compensation components which are: base salary, short term incentives, long term incentives, employee benefits, perquisites and severance or change in control payments. Base salaries entails the CEO getting relatively higher salaries irrespective of how the company is fairing so as to offer incentives for he executive to work harder and make strategic and smart decisions. This is the reason why many CEO’s base salaries are over $1million. Bonuses on the other hand are made to reward CEOs on their performance hence they also work as an additional incentive for the CEOs to work harder (Baker, Jensen, & Murphy, 1988). Short term and long term incentives as well as employee benefits are made link the CEO’s financial interests with those of the company hence they too are made to make the executive focus on continual growth for the company. In essence, a company’s compensation committee structures its executive’s pay package while utilizing the mentioned components so as to achieve its pay for performance objectives or its retention objectives.

The second aspect of CEO compensation that Don can share with the other employees is fact that cash payments only make a small fraction of the actual earnings. According to a survey done in 2015 on fifty major companies, only 37% of CEO salaries were given in cash while 54% came from stocks and options and the remainder was made up of perks and pensions. In this case, the CEO compensation package is likely to look astronomical to the common employee but this is not the case since the package is tied to concrete results and long term incentives (Wade, O’Reilly & Pollock, 2016).

There are also additional factors that stipulate on how a company should pay its CEO. Those factors include peer company comparisons whereby the company’s CEO compensation packages are benchmarked against its industry standards, the brand which the CEO represents since its common knowledge that some CEOs are branded as exceptional executives and the fact that the company sits on the shoulders of the CEO hence it is imperative to compensate him/her well so as to make sure that he/she feels encouraged to strive for the best for the company (Wiseman & Gomez, 2002).

While presenting the above facts to the other employees, it is prudent for Don to be careful when explaining the pay disparities to the employees to ease their concerns about the fairness of the CEO’s pay. First, Don should understand the basis of the employee’s outrage. The first question to ask is whether the employees’ outrage is caused by ignorance or whether they have a basis on why they are angry. In this case, Don should first listen to what the employees have to say on the issue so as to be able to present his information in a better manner. It’s imperative for Don to present facts and not opinions on the issue while demystifying the issue of the CEO’s package (Tosi & Mejia, 1994). While explaining the disparities, Don should talk in a simple and concise language that can be understood by any employee. In this case, he should avoid using executives’ words such as stock incentives but strive to use a language that can be understood even to the employee who does not have any knowledge on the business aspect of the company. Open and effective communication can be the one tool that Don can use to make sure that his information is received by the employees in the intended way and hence in ascertaining that the employees are satisfied with the situation.

From the above discussion of the case study, it can be ascertained that disparities in compensation packages between CEOs and the employees which they lead often leads to discontentment and outrage among the employees. Failure to address the issue effectively leads to low morale among the employees hence this leads to unproductivity for the affected company. Therefore, it is prudent for the company to employ methodologies of making sure that there is open communication between the employees and the executives of the company and that the employees understand the dynamics behind the compensation package for their CEO (Bebchuk & M., 2003).