Apple, one of the most successful advanced companies in the whole universe, announced its fiscal consequences in the first one-fourth in 2010. In the first one-fourth, 3.36 million Macintosh, 8.7 million iPhones and 21 million iPods were sold, which makes Apple receive 15.68 billion dollars gross revenues gross and 3.38 billion dollars net net income. At the same clip, Tim Cook, CEO in Apple in the first half of 2009, was awarded 500 million dollars for one clip and 75,000 portions of stock ( Diaz, 2010 ) .
On the other manus, in the economic recession in the U.S. between 2008 and 2009, the value of stock decreased well by 62 % , the gross dropped dramatically by 31 % and companies lost $ 1.1 billion. Consequently, the gross of CEO in the companies in the U.S. went down by 11 % . However, Jeff Bewkes, the CEO in Time Warner, still obtained 1 million dollars as an end-of-year fillip ( Dvorak, 2009 ) .
From these two illustrations, a inquiry is needed to be taken consideration: what is the relationship between wage of CEO and organisational public presentation? Is the relationship is positive? That is, CEO merely can have fine-looking payment when there is a good public presentation in a house. But, from the Time Warner illustration, the positive relationship seems incorrect. Therefore, in the essay, this relationship will be discussed.
The construction of this essay is as follows: subdivision 2 is literature reappraisal. In this subdivision, the definition of CEO and organisational public presentation will be introduced foremost. Then, three different sorts of relationship between CEO compensation and organisational – no, weak and strong relationship – will be discussed. The decision in subdivision 3 will sum up the literature mentioned and suggest some factors which have influence on CEO compensation.
2.0 Literature Review
2.1 Definitions of CEO Compensation and Organizational Performance
McNamara ( 2008 ) explains that CEO ( Chief Executive Officer ) is a remarkable place in an organisation. The duty of CEO is to put up the strategic ends, programs and policies to steer the organisation into the right way and oversee the operations in the organisation. Harmonizing to the description about CEO, it is obvious that CEO plays a polar function in an organisation. An first-class CEO has an ability to guarantee the house to obtain competitory advantage in its mark market and gain a mammoth sum of net income. Conversely, an atrocious Chief executive officer is a incubus of a house, which may do a bankruptcy of the house.
Since CEO is critical in an organisation, how to pay for CEO to promote he/she to work efficaciously and expeditiously? Ozkan ( 2009 ) references there are two types of CEO compensation. That is, pecuniary and non-monetary wagess. As to the pecuniary wages, it includes salary, fillip and stock. In non-monetary wages, a broad office and being treated reasonably belong to this class.
With regard to the definition of organisation, it is a society entity which is undertaking oriented and good structured ( Samson and Daft, 2009 ) . As to the public presentation of an organisation, there are two sorts of standards. The first 1 is fiscal consequences, such as the entire net income, the monetary value of stock and so on. This essay will concentrate on fiscal standards to measure the public presentation of a house. The other standard is the influence on a society and the public assistance of employees, no affair a net income or loss made by a house.
As mentioned before, this essay will utilize fiscal consequence to measure the public presentation of a house. In the fiscal facet, there are several ways to cipher the fiscal consequence. For illustration, Finkelstein and Hambrick ( 1989 ) use return on equity ( ROE ) as fiscal index. They find that in UK the value of a company in stock market – stock market capitalisation – shows stock public presentation of a house. In Japan, stockholder ‘s return is an of import signal of organisational public presentation ( Kubo, 2001 ) . Chalmers and his spouses ( 2006 ) use one-year stock market return consisting of capital gross and dividend at the terminal of twelvemonth to depict the public presentation. Jones and Kato ( 1996 ) combine return on assets and net income border to mensurate steadfast public presentation.
2.2 Relationship between CEO Remuneration and Organizational Performance
Subject about relationship between CEO compensation and organisational public presentation is heated and controversial in both academic circles and practical exercising. Some people believe that this relationship is positive. That is, a higher payment to CEO can perfectly guarantee a better public presentation of a house. However, on the other manus, some people argue that this relationship is weak or there is no relationship. They insist that addition the compensation to CEO blindly will non ensue in an expected public presentation of a house. Peoples who hold the different sentiments about the relationship between CEO compensation and organisational public presentation can barely make a consensus. In this essay, three classs of relationship – no, weak and strong – will be introduced severally in the undermentioned subdivision.
2.3 No Relationship between CEO Remuneration and Organizational Performance
Fleming and Stellios ( 2002 ) happen there is no relationship between CEO wage and organisational public presentation. In the top 500 publically treated houses in Australia, they apply a quota trying method to randomly choose companies with different size – measured by market capitalisation – in the population of 500 houses. They explore how steadfast size, house hazard and house public presentation have an influence on CEO compensation. CEO compensation includes salary, fillip, stock and non-cash entitlements.
After analysing the collected informations, they find there is a strong positive relationship between house size and CEO compensation. CEO in houses with larger size can have more gross than that in smaller size house. Besides that, they conclude that there is a strong positive relationship between house hazard and CEO compensation. CEO in a house with higher hazard can gain more than that in a risk-adverse house. However, non all CEO prefer to work in a high hazard house, because the possibility of failure in this sort of is high excessively. Once failed, the repute of CEO will be threatened. What ‘s more, Fleming and Stellios reveal that there is no relationship between CEO wage and organisational public presentation based on the analysis of collected informations.
Izan, Sidhu and Taylor ( 1998 ) besides discuss this relationship harmonizing to the informations collected from 500 publically treated houses in Australia. They come to the same decision as Fleming and Stellios ( 2002 ) . That is, there is no relationship between CEO wage and organisational public presentation. In their paper, they use two different sorts of standards to measure the public presentation of a house. That is, accounting and marketing-based manner. As to the CEO compensation, they merely see hard currency compensation and disregard the value of stock they having.
They find that no affair the signifier of organisational public presentation – accounting or marketing-based manner, there is no relationship between CEO compensation and organisational public presentation. Therefore, they point out that the compensation for CEO in Australia may be inefficient. Then, they proposed some grounds to explicate why CEO compensation in Australia is inefficient. They believe the inefficiency CEO compensation is caused by the lacking of inexplicit agreement and the importance of big stockholders. Besides that, they notice that pretermiting deferred compensation is the other ground to explicate the inefficient compensation.
2.4 Weak Relationship between CEO Remuneration and Organizational Performance
Unlike the decision proposed by Fleming and Stellios ( 2002 ) and Izan et Al. ( 1998 ) , some plants show that the relationship between CEO compensation and organisational public presentation is weak.
Jensen and Murphy ( 1990 ) interview more than 2000 CEO during a period of five decennaries and find that there is a weak relationship between CEO compensation and organisational public presentation. Furthermore, they besides come to some of import decisions. The compensation of CEO will travel up by 2 per centum in this twelvemonth and the following twelvemonth if the stockholder wealth is changed every one thousand dollars. What ‘s more, among the inducements provided to CEO, the ownership of the house ‘s stock can promote CEO to work efficaciously and expeditiously to the largest extent. However, the retention of stock is reasonably little and it is diminishing. Furthermore, CEO compensation includes 50 per centum of fillips. However, these fillips have small relevancy to the organisational public presentation.
Tosi, Werner, Katz and Gomez-Mejia ( 2000 ) take good advantage of meta-analysis, a method which is scientific asperity and small prejudice, to exemplify two sorts of relationships – the relationship between CEO compensation and house size and the relationship between CEO compensation and organisational public presentation. In CEO compensation, salary, fillip, and value of short term and long term inducements are mentioned.
As to the house size, they use the figure of employees hired, gross revenues of merchandises, market value and value of stock to mensurate the size of a house. As to the organisational public presentation, stock public presentation and fiscal public presentation are considered. After analysis, they find that there is a strong and positive relationship between CEO compensation and house size. Specifically talking, the house size can explicate more than 40 per centum of alteration in CEO compensation. However, as to the relationship between CEO compensation and organisational public presentation, the relationship is non important, or weak. Organizational public presentation merely accounts for less than 5 per centum of the discrepancy in CEO compensation.
2.5 Positively Strong Relationship between CEO Remuneration and Organizational Performance
The research mentioned above suggest that there is no or weak relationship between CEO compensation and public presentation of a house. Nevertheless, Kren and Kerr ( 1997 ) find that this sort of relationship is positively strong in their research. They consider 50 transit companies, 50 retail merchants, one 100 companies which provide services and five hundred companies listed on Fortune between 1987 and 1989. In their research, they use hard currency, stock, the value of short term and long term inducements and pension programs to measure CEO compensation.
As to the organisational public presentation, two different indexes are mentioned. That is, return on assets – gross before revenue enhancement divided by the mean entire assets, and return on common stock – the entire figure of monetary value of stock and dividends divided by the stock monetary value in the old twelvemonth. In their decision, they mention that, when the foreigner boards are higher and the shareholdings of boards are manifest, the relationship between CEO compensation and public presentation of a house is positively strong.
The relationship between CEO compensation and organisational public presentation is controversial. Different bookmans come to different decisions. From the portion of literature reappraisal, there are three chief grounds to explicate this difference. First, different states have different state of affairss. Datas collected from different states may take to the opposite consequence. Then, there are legion ways to mensurate CEO compensation and organisational public presentation. The integrity of mensurating method may cut down this disagreement. Last, in some state of affairss, other factors may hold important influence on CEO compensation, such as house size, CEO term of office, power determiners, and so on.