Government regulation is necessary to limit excessive CEO compensation in the UK. To what extent do you agree? IntroductionThe topic of immoderate executive payment is becoming controversial in the business press and the media coverage. Government regulation is a rule or directive made and maintained by the government which controls the operation of a business. A chief executive officer (CEO) is the highest-ranking position in a firm whose principle responsibility is making significant corporate decisions. Executive compensation includes financial and non-financial awards from the company for their service to the organization. It is composed of salary, bonuses, shares on the stock market, benefits, and perquisites. CEO pay in the United Kingdom has inflated considerably within the past decades due to changes in policy, culture and the globalisation effect on the economy. While some in the UK believe that spending a large amount of money on executive payment might have some adverse effects, it is generally accepted that it has more advantages financially, ethically and socially; therefore, it should not be limited by the government.Financial perspectiveFrom the economic perspective, a serious downside is the firms might getinto financial crisis. Executive compensation takesa notable, perhaps most influential, part in financial crisis and recession byemboldening extravagant risk-taking and short-term strategies (Kay, 2009, p. 2). As CEOs earn so much within oneyear, they do not have to care about how much they lose if the company getsinto trouble. The amount of money they possess is extravagant, consequently,they do not mind taking risks. Risks can lead to a huge success; however, itcan also result in recession. Greenberg (2010) states that owners ofbanks and workers claim the benefits if the business goes well and the economyis supportive, but if things go poorly and the economy is unhealthy, communityfinances the failures. Since the owners and employees of financial companies donot have not have to take full responsibility for their losses, they are morelikely to take more risk than others. This grows the number of bank failures,systemic risk and taxpayer costs. While that statement is true in some cases, it can be strongly arguedthat executive pay increases productivity of the company. According to Herzbergs two-factor theory, both intrinsic andextrinsic factors are important. However, extrinsic factors are considered tobe more fundamental as they are core human needs. Incentives might be fruitful at boosting performance in somecircumstances. It, for example, might help people accomplish projects theywould not otherwise want to carry out (Delves, 2011, p. 9). Delves (2011, p. 9)also showed that extrinsic rewards are necessary in getting people to do workwhich is well-defined or involves repetition, or especially tasks they cannotfind personal meaning or value in undertaking. Many work for money and enjoyspending it so a combination of monetary remunerations and the intrinsicmotivators may be most effective. CEOs can feel motivated whengetting paid highly, thus, the productivity of corporates increases.Ethical perspective on workersIt is almost always stated that immoderateexecutive remuneration is not ethical for workers. The poverty rate in the UKmay decline but the inequality is bigger than ever. According to Sky News(2010), it has been presented in a research that the link between executivehigh pay and company performance is totally negligible. In the last 10 years,executive pay has risen by 80% in contrast with the return on investment hasonly increased by 1% (Sky News, 2017). As stated by the TUC analysisof FTSE 100 directors pay in 2016, the annual salary for average UK workersequals to just how much Martin Sorrell, the Britains highest paid chiefexecutive, earns in less than three quarters of an hour. The company WPP paid Mr. Sorrell £70 millionin 2015, which is over 2,500 times the median UK salary (TUC, 2016, p. 2). While millions of UK families have their living standardssqueezed, directors pay has reached stratospheric levels, as a consequence, those who are at the lower end of the wage scaleare unpalatable to hear that bosses are being paid imprudently. If shareholderspay chief executive a lot but pay those at bottom very little then it isactually the taxpayers who end up paying for it. Nevertheless, executivecompensation should not be capped as they deserve it. Company shareholders havethe right to decide how much should they pay for the CEO. In the past, a chief executive could usually keep the positonfor years despite lacklustre results. Today, a CEO who fails to attainachievements is often dismissed in a short period of time. When executives are capable, they can addvalue to their firms much more than they are being compensated. In bigcompanies, even minor differences in managerial talent can have an enormousimpact. Considering the scenario when a company with yearly earnings of $10billion and has only two finalists in executive search, if one makes just a fewmore better decisions per year than the other, the firms earning might easilybe 3 percent, which equals to $30 million, higher than that under thecandidates management (Frank, 2009, p. 7). The same executive cannot make asmuch difference at a company with only $10 million in earnings every year(Frank, 2009, p. 7). A gifted executive from oneindustry, in addition, can also bring about proficient performance in others. Therefore, employees would want to have bestleaders in charge of the firms so that they can be globally competitive andsucceeding on a global level (Sky News, 2017). For instance, Samsung decided tomake smart phones and is now much more successful than SONY. All because ofthat strategic decision they made. Firms need to have the best talent at thetop because the strategic decisions that those CEOs make can have a huge impactnot just on whether the firm is profitable or not but on the life and death ofthe firm. Consequently, businesses where managerial decisions have substantialeffects tend to outbid others in recruiting the most skilful executives.Social perspectiveOn the one hand, executive remunerationshould be controlled by government regulations as firms can retain more moneyto spend on corporate social responsibility (CSR), which involves actions thecompany takes to pay back for the its impacts on the environment and socialwellbeing. Businesses often spend a large amount of money for CEO compensation.Figures for annual total remuneration minus pension contributions from FTSE 100companies have been shown in annual reports at the end of May 2016 (TUC, 2016).Sir Martin Sorrell from WPP ranked first place with almost £70 million in 2015,following by Tony Pidgley from Berkeley Group Holdings PLC and Rakesh Kapoorfrom Reckitt Benckiser Group PLC at roughly £23 million (TUC, 2016). Hence,reducing executive compensation can help save a lot for CSR spending.Investment of the company into local communities, namely building schools,offering medical services or improving irritation and sanitation equipment, candeduct the detrimental effects their operations may cause. Additionally, acompany can invest in environmentally-friendly technologies and have moreeco-friendly projects. These might not lead to increased profitability but theypay for the externalities. For today firms, CSR is an essential way toincrease competitive advantage, protect and raise brand awareness and buildtrust among stakeholders such as customers and employees. As a result,regulating executive pay not only help the society but also the company itself.On the other hand, offering a large amount of CEO compensation can help attracttop talents at executive level. The competitiveness of the labour market forqualified executives helped enhance their pay packages in past years (Kay,2009, p. 5). It is believed that a suitable chief executive can add billions ofdollars to shareholders but an expert CEO is a scarce commodity most of thetime (Kay, 2009, p. 5). CEOs might work elsewhere which offers more financialincentives. Although every company wants a talentedchief executive, there are not so many options to choose from. If salaries werecapped, candidates would have fewer reasons to seek employment that maximisethe use of their talents (Frank, 2009, p. 5). Furthermore, if executive paywere capped and salaries for other jobs was not, many potential managers wouldchoose to become lawyers or hedge fund operators (Frank, 2009, p. 6). The survey conducted by Donatiello,Larcker and Tayan (2017, p. 4) states that almost all (98%) directors are convinced that the CEO job isreally challenging and only a small number of executives are capable of leadingcompanies in their industry. It is also estimated only fewer than fourexecutives can meet the requirements to replace and perform at least as well asthe current CEOs (Donatielloet al, 2017, p. 4). This concludes that the supply of outstandingCEO talents is becoming more intense than ever (Donatiello et al, 2017, p.8). Offering more incentives to the executives, hence, is an important strategyto develop the business.ConclusionTo summarize, the UK governance experts havevigorously discussed the properness of executive remuneration in recent years.While negative effects of not regulating CEO compensation are visible, it isprobable that it benefits more than harms, which has been clearly demonstratedfrom three viewpoints: fiscal, social and ethical. Although excessive compensationpaid to chief executives can lead to inequality and financial crisis, theydeserve it due to the scarcity of CEO talent and the value they contribute tothe company. Wage gap should be focused but not by trying to decrease theearnings of the top because it is a very dangerous and counterproductive way.It is recommended to protect core incentives and minimize irritants. REFERENCE LIST Delves, D. (2011, February 16). Is Incentive Compensation aTrue Motivator? Retrieved May 14, 2018, fromhttps://www.forbes.com/sites/donalddelves/2011/02/16/is-incentive-compensation-a-true-motivator/#7b3d600c7904Donatiello, N.,Larcker, D., & Tayan, B., (2017). CEO talent: A dime a dozen, or worth itsweight In gold? European Financial Management. Retrieved 20 February 2018 from:http://onlinelibrary.wiley.com/doi/10.1111/eufm.12158/epdfFrank,R. H., (2009, January 03). Should Congress Put a Cap on Executive Pay? RetrievedMay 2, 2018, from: https://www.nytimes.com/2009/01/04/business/economy/04view.htmlGreenberg, M.,(2010). Regulation of Executive Compensation in Financial Services. GreenbergCenter for Geoeconomic Studies. Retrieved 01 March, 2018 from: https://www.cfr.org/report/regulationexecutive-compensation-financial-services Kay,I., (2009, June 8). Regulating CEO Pay Is Not the Answer. Retrieved May 2,2018, from: https://hbr.org/2009/06/ceo-pay-regulation-can-do-real.htmlPepper, A., (2016,March 07). Time for change in executive pay? LSE Department of Management.Retrieved 01 March 2018, from: http://blogs.lse.ac.uk/management/2016/03/07/time-for-change-inexecutive-pay/SkyNews, (2017, February 17). Debate: Are executives paid too much? Retrieved May2, 2018, from: https://www.youtube.com/watch?v=GjEZVQrlC-kTUC,(2016, September 11). The UKs highest paid CEO earns the average annual salaryin under 45 minutes, TUC analysis finds. Retrieved May 2, 2018, from: https://www.tuc.org.uk/news/uks-highest-paid-ceo-earns-average-annual-salary-under-45-minutes-tuc-analysis-findsGet Help With Your AssignmentIf you need assistance with writing your assignment, our professional assignment writing service is here to help!Find out more
