By Cara Chengalath
Instructor: Berhane Elfu
JRSB 309 - Corporate Governance
February 11, 2013
In the aftermath of major scandals and bailouts in the United States, the world`s and the public’s confidence in public corporations, has been shaken. With the publicized scandals of Enron and other corporations in the United States, the faith in public corporations fell as fast as the stock market. Investors had no confidence in corporations or in their boards. Measures needed to be taken to form regulations to provide stronger accountability, to prevent these types of scandals from happening and to rebuild the confidence of investors. Corporate governance of publicly traded companies was no longer an option, it became a must. The public and the media demanded laws to protect future investors and shareholders (Colley, Jr, Doyle, Logan, & Stettinius, 2005). With most of the world’s financial markets in crisis and recession, the public has become much more aware of corporate executive compensation plans. Executive compensation has been an on-going issue for many years. There has been a great amount of controversy over how executives’ pay structure is designed and who judges, oversees and determines executives’ pay. As the scales get tipped on what executives are getting paid versus employee standard wages, the public is always on the watch for the next corporate scandal. Boards are always challenged by what executives’ pay should be based off of; this could be performance, industry standards or percentage of revenue. Boards need to determine the base salary, benefits or short term and long term options that will be offered (Colley, Jr, Doyle, Logan, & Stettinius, 2005). This paper will look at the past trends of executive compensation that lacked disclosure and transparency, current trends that are being used today in pay in the United States and Canada and future trends that should be used when it comes to executive compensation and executive pay methods. This paper will also give some recommendations that Canada should adopt.
Past Trends in Executive Compensation
From the “original opening of the New York Stock exchange in 1792 executive compensation” (Bruvik & Whitney Gibson, 2011, p. 74) existed. In the early 1900’s stock options of stock awards, stock purchases, stock appreciation rights (cash bonuses) and freestanding dividend equivalents were formed (Bruvik & Whitney Gibson, 2011) and still exist today. During this time executive compensation was very private and did not have transparency or regulations. It was not until the market crashed in 1913 that the public was becoming more aware of executive inflated wages, and compensation for executives. In 1933 Securities Act legislation was passed that required disclosure of stock sales to the public. Then came the introduction of laws that limited “fringes” (perks) this made executive compensation more transparent and created more awareness for the public. But in 1983 Ronald Regan’s administration dropped regulations and this changed the level of transparency once again and this would eventually lead to indiscretions in executive pay. This caused an artificial rise in stock market values and increased misuse of stock options thus the elevation of executive’s salaries. The United States Government`s lower marginal tax to 33%, which changed the quality of management, because as long an executives increased shareholders wealth the salaries of executives had very little regulations (Bruvik & Whitney Gibson, 2011). In 2001 the Enron scandal, executives inflated their earnings and overvalued their stock prices when they knew the company was going under. Senior executives cashed their stock options profiting while investor and employees of Enron lost everything. The numerous corporate scandals such as Enron, Jack Welsh CEO of General Electric, TYCO, and WorldCom created distrust in public...