Executive Compensation and the Dramatic Increase in Corporate Accounting Scandals

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Executive Compensation and the Dramatic Increase in Corporate Accounting Scandals

According to one estimate, the total median CEO pay at the nation’s 350 largest publicly-owned firms grew from $2.7 million annually in 1995 to $6.8 million in 2005. The overall increase in CEO pay has outstripped inflation and the growth in non-managerial pay over the same period. Equally important is the trend in the composition of CEO performance-based pay which includes stock and stock option grants. Median pay grew from $1.3 million in 1995 to $4.4 million in 2005 (Labonte, & Shorter, 2008).

At Enron executives had incentives to achieve high-revenue growth because their salary increase and cash bonus amount were linked to reported revenues. “In the proxy statement filed in 1997, Enron wrote that “base salaries are targeted at the median of competitor group that includes peer group companies…and general industry companies similar in size to Enron. Employees had incentives to achieve high revenues and earnings targets because of the shares of stock they held” (Thibodeau & Freier, 2009).

Executive pay has been under the microscope. Shareholders’ interests are represented by a board of directors. However, critics of executive pay have argued that boards are no longer negotiating pay packages that are in the best interest of shareholders. Critics argue that excessive pay can be traced to the fact that the members of corporate boards and compensation committees are not sufficiently independent of managerial influence (Labonte, 2008). A case in point has been taken from our textbook “Auditing After Sarbanes-Oxley. Authors Thibodeau & Freier (2009) quote the following excerpt: In the proxy statement filed in 2001, Enron wrote “The [Compensation ]

Committee determined the amount of annual incentive award taking into consideration the competitive pay level for a CEO of a company with comparable revenue size, and competitive bonus levels for CEO’s in...