High level of CEO pay has urged a strong argument on the pay‐setting process and the outcomes it produces. Statistic shows a dramatic rise in CEOs salaries in Australia over the past 10 years, estimation of annual salary is AU$83,287 –AU$323,051 (Chief Executive Officer Salary, 2012) . The purpose of this report is to determine whether Australian businesses should pay their CEOs more by analyzing the advantages and disadvantages that it could bring to the business and to determine the recommendations that could be applied.
CEO compensation can motivate executives to work harder in maximizing the company profits. Contracts are design to produce optimal incentives, therefore motivates CEO maximize shareholder wealth (Conyon, 2006, p. 28). Successful CEOs demonstrated through superior performance that they are commodities that receive larger pay compensation (Hermalin and Weisbach, 2003).
CEO pay is an indicator of how well a company performs and can be considered as a measure to negotiate employee benefits and bonuses (“Why do CEOs make big bucks?”, 2011). An establish pay structures to executive can give a good reputation to the company. Looking at the competitor, American Red Cross has compensation and management development committee to make sure executives compensation is reviewed and approved. Their CEO is paid $500,000 a year, a fair amount considering it’s a non-profit organization.
Some CEOs are clearly overpaid, it represents self-dealing of a magnitude that has crossed the threshold of what is morally defensible (Harris, 2009, p.4). According to Annet (2006) overpayment may be indicative of a badly functioning company, a shifting product market, scarcity of resources, or corporate governance failure. The average CEO’s total pay package in Australia is now worth almost 100 times...