MANAGERIAL DECISION MAKING AND BUSINESS BEHAVIOUR

(BUSE4031)
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Assignment 1

Name: Adrienne Smith

Student number: 2177587

Lecturer: Dr Emmanuel Nkomo

Date of Submission: 12 April 2023

Question: ‘Have they no shame? CEO’s have already shown that they can’t be
embarrassed.’ Discuss this statement in light of the ongoing debate and concern over
executive pay and the granting of generous compensation packages to departing
company executives, particularly in cases where the company has performed poorly.

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The issue of executive pay has been a topic of debate in the recent years. Executive
compensation can be referred to as the incentive offered to executives and businesses
leaders to encourage them to work in the best interests of their shareholders (Gordon,
2022). Many individuals are expressing their concerns over the granting of generous
compensation packages to company executives, predominantly in cases where the company
has underperformed. These concerns originate from the perception that executive pay
should be in line with the performance of the company, and that granting of generous pay
packages for poorly performing companies bring out a culture of greed and entitlement. In a
blog posted by Financier Worldwide Magazine (2020), it states that there has been an
exponential increase in executive pay in recent decades, and that CEO compensation is
extremely high when compared to typical worker compensation, with a ratio of 278 to 1.

Some CEOs have demonstrated a lack of concern over the public’s opinions towards their
actions, an example of this is John Stumpf, former CEO of Wells Fargo. In 2016, the Wells
Fargo fake accounts scandal came into light, and this entailed the company’s’ employees
creating fake accounts in the names of their customers without their knowledge or consent
(Meagher, 2023). These fake accounts were created in order for the company to meet
unrealistic sales targets. In this case, the CEO was not concerned about the opinion of the
public towards this particular action, as the company needed to meet their sales quota.
After this scandal was discovered, the former CEO John Stumpf retired with an estimated
$134 million retirement package, causing an outrage with regards to CEO compensation, as
it was seen as rewarding failure (Meagher, 2023). Although there are many cases of
excessive executive pay and lack of accountability, there are many CEOs and companies who
do strive for ethical leadership. Efforts should be made to increase transparency, hold
executives accountable for their actions, and strive for ethical leadership by placing the
interests of their company and stakeholders first.

There have been various arguments both for and against high executive pay. According to
Gee (2015), high executive pay is necessary in order to attract and retain top talent. CEO’s
and business executives have the responsibility of managing large companies, which

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requires a unique set of skills and experience in order to do so efficiently and effectively.
These unique skills are considered to be scarce, resulting in these executives being in high
demand. This results in generous pay towards these executives to ensure that the company
has the best possible leadership. High executive pay also ensures that companies can be the
best they can be being run by talented executives. According to Rhatigan (2016), a study
found that companies who pay their executives large amounts in compensations, tend to
outperform those companies who restrict high executive pay. Another argument for
executive pay is that there are many new jobs and career paths emerging, resulting in the
need for more individuals who have new levels of technological skills. Individuals with these
skills are in demand as they possess the skills that can meet the demand for the future of
work (Financier Worldwide Magazine, 2020).

Critics of executive pay argue that excessive executive compensation in not ethically
justifiable, and this contributes to the rising issue of income inequality; and top executives
are only interested in maximizing their personal wealth. According to Baker, Bivens, &
Scheider (2019) excessive CEO pay intensifies inequality as large amounts of money are
being paid to a very small group of individuals, affecting the pay structures in the firm and in
the economy. Another argument against excessive CEO pay is that there is no association
between high executive pay and increased executive productivity. This essentially means
that executives may not feel obligated to increase their productivity as they are being paid
irrespective. Many people also argue that executive pay should be linked to the performance
of the company. There are many cases where executives have been rewarded with high
compensation even though their companies have not performed well. An example of this is
the current CEO of Eskom, Andre de Ruyter, earns an annual pay of over R7 million according
to BusinessTech (2022). Some people may argue against this pay as the company is
underperforming and unable to provide the country with stable amounts of electricity. Some
individuals may see this pay as unjustifiable as in his first 3 months as CEO he was earning an
annual pay of just over R1.6 million. Although the company has not been performing as it
should, the CEO has still received a salary increase.

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According to Elson (2003), some of the major issues regarding the notion of executive pay
include the following:

 Excessive pay: many view executive pay as excessive as these executives receive
extremely high salaries and bonuses, which are not in line with the company’s
performance nor the average pay of employees.
 Performance-based pay: in many cases, executive pay is not linked to the overall
performance of the company, and it is often unrelated to the long-term success of
the company.
 Transparency: there is a lack of transparency with regards to executive pay, and this
lack of transparency can lead to negative public perceptions regarding the company.
 Corporate governance: executive pay can bring about issues relating to the corporate
governance of a company as it may be seen as there being a lack of input from
shareholders as well as insufficient oversight by the board of directors.
 Short-termism: executive pay can encourage companies to focus on short-term
benefits and gains rather than long-term sustainability.
 Inequality: excessive executive compensation contributes towards income inequality
between company executives and employees, leading to negative social and
economic consequences.

The issue of executive pay will remain a controversial issue and it can be said that current
executive compensation practices are considered unsustainable, and they need to be re-
evaluated to ensure that they are in line with the long-term interests of the company and its
stakeholders. Efforts need to be made to increase transparency, encourage ethical
leadership, and hold executives accountable for their actions. In order for executive pay to
be economically effective, it must be such that high executive pay increases the efficiency of
the firm, and that the high executive salary needs to result in a benefit to society and its
stakeholders (Elaurant, 2008). CEOs and other high-ranking executives have shown that
regardless of public backlash and shareholder criticism they cannot be easily embarrassed.

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Moreover, the granting of generous compensation packages to departing company
executives can negatively impact the reputation and profitability of the company.
Shareholders and stakeholders of the company may view these practices are unfair and
unjustifiable, leading to a loss of confidence in the company, potentially affecting its bottom
line (Okah-avae, 2019). Companies who excessively compensate their executives may have
difficulty attracting and retaining customers who prefer ethically and socially responsible
companies.

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References in APA System

Baker, D., Bivens, J. & Scheider, J. (2019, June 4). Reining in CEO compensation and curbing
the rise of inequality. Retrieved from https://www.epi.org/publication/reining-in-ceo-
compensation-and-curbing-the-rise-of-inequality/

BusinessTech. (2022, May 23). Here’s how much Andre de Ruyter and other top Eskom
directors are paid. Retrieved from https://businesstech.co.za/news/energy/589344/heres-
how-much-andre-de-ruyter-and-other-top-eskom-directors-are-paid/

Elaurant, S. (2008). Corporate Executive Salaries – The Argument from Economic Efficiency.
Electronic Journal of Business Ethics and Organization Studies. 13(2), 35-43. DOI: ejbo.jyu.fi/

Elson, C.M. (2003, January). What’s wrong with executive compensation? Retrieved from
https://hbr.org/2003/01/whats-wrong-with-executive-compensation

Financier Worldwide Magazine. 2020. Getting it right – the challenges of executive

compensation. Retrieved from https://www.financierworldwide.com/getting-it-right-the-
challenges-of-executive-compensation#.ZBQv93ZBzrf

Gee, S. (2015, June 26). Six arguments for executive pay. Retrieved from
https://www.hrzone.com/perform/business/six-arguments-for-executive-pay

Gordon, J. (2022, April 16). Executive compensation – Explained. Retrieved from

https://thebusinessprofessor.com/en_US/employment-law/executive-compensation-defined

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Meagher, P. (2023, January 6). The Wells Fargo Fake Accounts Scandal: A Comprehensive
Overview. Retrieved from https://www.learnsignal.com/blog/wells-fargo-fake-accounts-
scandal-overview-2/

Okah-avae, T. (2019). High Executive Compensation: are Current Pay Levels Evidence of
Avarice or Just Reward for Performance?
https://eprints.lancs.ac.uk/id/eprint/133737/1/2019Okah_avaePhD_f_.pdf

Rhatigan, C. (2016, November 16). The arguments for and against CEO compensation.
Retrieved from https://www.tinypulse.com/blog/argument-for-and-against-ceo-
compensation