The CEO Compensation Controversy
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ICMR HOME | Case Studies Collection
Case Details:
Case Code : HROB020
Case Length : 12 Pages
Period : 1998 - 2001
Pub Date : 2003
Teaching Note : Available
Organization : Varied
Industry : Varied
Countries : India, USA
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Background Note
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The owners and managers of a company shared a principal-agent relationship. In
the beginning, there was a conflict between the two as to who should own the
corporate resources of the company. To solve this issue, the owners devised a
'compensation package' for the managers. This package was thought to be a way of
achieving harmony between the managers and the owners of a company. CEO
compensation was the compensation package given to the CEO to manage the
company's corporate resources effectively. The primary components of a
compensation package included the salary, bonus and stock options4.
In some cases, it also included retirement benefits5,
incentive plans6 and gains from stock
grants7.
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The CEO compensation structure evolved over the years as a result of
committees set up to legitimize CEO compensation packages. Till the early
1980s, CEO compensation was not linked to the company's performance. It was
viewed only as an administrative function.
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The CEO's salary was fixed, depending on the
company's economic state during that time and the CEO's professional
experience in terms of the number of years. Salaries were
standardized, and very few top executives and CEOs received major
incentives for outstanding performance.
The high inflation rates in the mid-1980s forced the compensation
committees to raise the salaries of top executives and CEOs. During
this period, the compensation package was linked to the economic
performance of the company in terms of profits, revenues and growth.
It was thought that linking compensation to the performance of the
company would enable CEOs to focus more on maximizing shareholders'
wealth... |
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