Theory Testing Article - Alec Korogodsky - "Executive Perquisites, Excess Compensation, and Pay for Performance

                It’s no secret that the general public feels the majority of top executives are vastly overpaid. One aspect many relate to excess executive compensation is executive perquisites. An executive perquisite is a benefit given to an executive which is not included in their compensation package. Examples of executive perquisites are the use of a company automobile or aircraft for personal reasons, various club memberships, services such as legal, financial, and tax, and other expenses not related to business matters. But do executive perquisites really contribute to excess compensation? The article reviewed attempts to answer the matter using statistical sampling and testing of three hypotheses to see whether or not executive perquisites really are associated excess executive compensation.

                As mentioned, the authors developed three hypotheses to test in their search to find whether executive perquisites are related to excess compensation. The first hypothesis is that executive perquisites have a positive relationship to the level of executive compensation. The second hypothesis is that executive perks have a positive relationship to relative executive compensation. The difference in the second hypothesis than the first is that it tends to deal more with the compensation of other executives in the same industry. The third hypothesis formulated is that executive perquisites have a positive relationship to the performance of the firm, as is argued by many of the firms themselves.

                The sample of firms was taken from a list of firms whose sales revenues equaled at least six billion dollars, as it is expected that these firms will give higher perquisites. The authors then focused on CEO compensation only, and eliminated firms with changes in CEOs and firms with missing variables. They then divided the firms into two categories, perk firms and other firms. They then input various data including salaries, bonuses, and any other total compensation. Using a regression model, they then compared the inputs of firms that offered higher perquisites to those who did not offer so many perks. They also tested relative pay and perquisites to test the second hypothesis. A separate model was used to test for the third hypothesis using performance measures.

                The results proved hypothesis one to be correct, and hypotheses two and three were rejected. The study found that firms with higher CEO compensation also tend to offer higher perquisites. The average compensation for all firms was $6.3 million total compensation. When separated into perk firm and other firms, perk firms averaged $12.6 million as opposed to the $4.8 million average of other firms. It was also shown that there was no difference between perk firms and other firms in residual values, indicating that CEOs of firms which offer higher executive perquisites are not overpaid in relation to other CEOs. When studying the measures of performance such as return on assets and stock returns, it was shown that there is also no relationship between higher perquisites and higher performance.

                Based on these results one can conclude that there is no relation between executive perquisites and excess compensation. The rejection of the second hypothesis tells us that CEOs who receive compensation in excess to other CEOs do not receive more perquisites than the others. I believe this article can give executives under pressure from their shareholders to relinquish some of their perks a sigh of relief. This study clearly indicated that perquisites offered to executives are in relation to their total compensation and therefore firms should continue offering the same perquisites they were before the publishing of this article.

WORKS CITED:

Liu, H., & Yin, J. (2009). Executive perquisites, excess compensation, and pay for performance. Journal of Academy of Business and Economics, 11(3), 260. Retrieved from http://libproxy.uhcl.edu:5879/global/article/GALE|A272484654/e9ae96da67eddb1bf6347b0bf802f820?u=txshracd2589

                

The Strategy Seminar: Business Leaders -Virgil Cammack

Houston, we have a problem.

The space shuttle Endeavour arrived at Edwards Air Force Base on route to its final resting place as an exhibit at the California Science Center. The winding down of the space program is deeply felt. The Endeavour’s passing symbolized that Houston, the home of Mission Control, was no longer the hub of space exploration. California, the final resting place for the Endeavour, was also a hub of space innovation. It was where the shuttle’s main engines were manufactured, its heat shields were designed, and “fly-by-wire” technology was developed (Endeavour’s Journey: For Giffords, a shuttle salute from the sky. Sept. 21, 2012. Houston Chronicle. Associated Press).

Space exploration is being decentralized with more work given to private companies which for perhaps political reasons are geographically dispersed throughout the country. Industries such as the space industry are best managed when they are centralized geographically. There is the tendency to conglomerate when downstream industries are heavily dependent on upstream input (Ellison, Glenn and Edward L. Glaeser. Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach. University of Chicago). As Michael E. Porter put it, “Geographic, cultural, and institutional proximity leads to special access, closer relationships, better information, powerful incentives, and other advantages in productivity and innovation ….“ Porter states that competitive advantage is found in concentrations of highly specialized skills, institutions, and related businesses (Porter, Michael E. Clusters And The New Economics Of Competition. Harvard Business Review. vol. 76, issue 6, pp. 77-90. Nov/Dec 1998).

There is a bill being introduced to aid congress in taking the administration of NASA away from the president, the Space Leadership Preservation Act. Stated by Rep. John Culberson, “. . . to restore the NASA we know and love. The NASA that we know is capable of maintaining that world leadership in space exploration . . . .” This bill is designed to counter the emerging space programs of other countries, particularly China, by allowing a concentration of effort at the traditional NASA sites (Campbell, Kyle. Bill seeks to alter how NASA is led. Sept. 21, 2012. Houston Chronicle). The hope is that if NASA is taken away from one party and shared by both parties, the management of the program can be left in the hands of the scientists. Funding would not be cut, and the program would not be micromanaged at the whim of sitting a president.

Three other space shuttles have been retired: Enterprise at Intrepid Sea-Air-Space Museum (New York), Discovery at the Smithsonian Institution’s National Air and Space Museum (Chantilly, Virginia), and Atlantis at the Kennedy Space Center (Merritt Island, Florida) (Endeavour: Last journey, through contentious space. Sept. 23, 2012. Houston Chronicle, taken from the New York Times). The space shuttle program is retired, but NASA need not be retired (or minimized) or spread to the far winds.

The Strategy Seminar: Business Leaders-Henry Vargas-Practitioner article-Say no to Excessive Executive Compensation: Remedies and Reforms

Say no to Excessive Executive Compensation: Remedies and Reforms

            The issue of excessive executive compensation has been around for many years. Different countries are affected by it. In recent years the issue has been more looked into not only by shareholders but by the media, courts, critics, etc. Although many methods have been created in order to control this issue, it is still uncertain that each approach would make a significant improvement to completely solve the problem. This article attempts to bring an input to create a solution.

            Currently, one of the practices to decrease excessive executive compensation is the aim to promote transparency in the policies of compensation. Exposing executive compensations is believed to make a change in how boards would contemplate each part to have a more balanced compensation and take in consideration any problems with the company. This would improve the way committees deal to decrease costs. Disclosure would also benefit investors from any fraud. It would have standards to make the information available and understandable to shareholders. Some countries like the US, Australia and the UK, require companies to have compensation disclosure. Some states do not have full disclosure. Full disclosure also has been seen to have negative effects, executives may request higher pay if they see other executives earning more. The US Congress also intervened by creating the Internal Revenue Code, whose purpose was to increase the benefits for the shareholders by decreasing compensation to executives and to promote measures that would benefit the business in general. However, it did not bring about the desired results as compensation had increased in the form of stocks. Thus, this shows that implementing tax legislation may not bring about solutions if it is not well planned.

            Proposals from this article focus in having an independent quality compensation committee, improving policies and pay principles, adopt self-regulation and improving board responsibilities. If a committee is truly independent it should have qualitative independent directors, this is necessary to avoid control or influence from executives the company should make clear to the executives that no burden or seeking personal benefits are permitted to influence members of the committee and if so, the committee has the right to reprimand or remove the offender. The second one, focused in improving policies and pay principles focuses in paying for performance of executives and economic fairness. A standard should be made to come up with a fair compensation package that an independent committee in charge of compensation should plan for; taking in consideration the efficiency of the executive, the company, its profits, company’s strategies, stock price, etc. The thirds proposal is self-regulation in which it encourages the company to create its own regulations rather than depending on government regulations. Self-regulation allows for flexibility, it is personalized to the company and improves working productivity. The last proposal is improving board responsibilities and accountability, where the board and the shareholders have a share of control.  Shareholders could participate in removing directors that are not beneficial for the company or that attempt to influence the compensation committee for his/her own interest.

Work cited

Dao-yum, Liu. Say no to excessive executive compensation: remedies and reforms. US-China Law Review. 6:55.Jun. 2009.  Retrieved from       <http://libproxy.uhcl.edu:2057/ehost/pdfviewer/pdfviewer?vid=3&hid=10&sid=71ad34bc-a95c-4d35-8f54-00f2a4c8b975%40sessionmgr15>

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Introduction

Hello bloggers,

My name is Henry Vargas, I work as a bookkeeper and sale coordinator for a firm. I will be looking for another job once I finish this semester. I intend to graduate this semester with a MBA degree.

My expectation for this blog is to learn and correct the mistakes I make while working in this blog. Feel free to criticize my writing as I always try to improve in what I have done wrong.http://strategyseminarleaders.blogspot.com/

Introduction

Hello everyone, my name is Alec Korogodsky. This is my 3rd semester as a graduate student at UHCL. Due to certain conflicts that arose with scheduling I was given approval to take this course a semester early. I am working towards my Master of Science in Accounting. Starting in January I will begin an audit internship at a medium-sized CPA firm in downtown. I hope to pursue a career in public auditing. I have never blogged before and have never really been into it but am open to the idea and looking forward to learning new things and and hearing others opinions. I think it's important to hear as many different viewpoints on various issues to get the best understanding possible.

The Strategy Seminar: Business Leaders- Virgil Cammack Introductory Post

My name is Virgil Cammack. I am a first time blogger. This is my last semester at UHCL. I will be receiving a Master of Science in Accounting. I am currently working an unpaid internship at a small tax firm and am looking for a paid position. I am hoping to land a position in tax accounting; however, I would be open to other opportunities.

I am looking forward to this blogging experience. I believe that social networking is something that I have neglected so far. I hope that this class helps to change that.