Calmerin, Shara Grace R. Che Kim, Isabelle M. Dulanas, Abbie Claire M.

BSA-3C ENGL23/ MWF 1:30pm 2:30pm J204 Salary Capping

Mrs. Ana Marie Matalines August 22, 2011

Should a mandatory maximum salary for CEOs be imposed by the government? I. Introduction A. The Chief Executive Officer is the heart of the managerial function of corporate

governance. B. Although CEOS are paid 90 times more than average blue-collar workers, there

should be a mandatory maximum salary imposed by the government because it promotes internal wage control system, emphasizes the business ethics of CEOs and promotes equity and fairness of executive compensation. II. Background A. In July 2006, Chief Executive Officers (CEOs) in the Financial Time Stock

Exchange (FTSE) companies earned an average of 98 times more than all full-time United Kingdom employees over the year.

B.

In the Philippine setting, executive compensation regarding Aurelio Montinola III

and Jaime Zobel de Ayala II. C. The challenges facing CEOs include Fiduciary duties, financial knowledge, and

understanding. III. Body A. CEOs are paid 90 times more than average blue-collar workers.

1. In 1990, the average pay for CEOs jumped almost 500% compared to an average bluecollar worker. 2. People need to understand what the CEOs have done for the company. B. Mandatory maximum salary promotes internal wage system. 1. Salary capping would divert more consideration towards vocation and job satisfaction than the money wage. 2. Pay must be tied to performance. 3. The argument is to place a cap on the amount that any person may legally make, in the same way as there is a floor of a minimum wage so that people cannot earn too little. 4. It diverts more consideration towards vocation and job satisfaction than the money wage. C. Mandatory maximum salary emphasizes the business ethics of CEOs. 1. Achieve reasonable performance targets based on reasonable assessment.

2. Salary restrictions will promote a fair and honest basis of providing benefits, motivating each and every worker to perform what really is expected from him or her, and to give what is really due to whom 3. Mandatory maximum salary for the executives will narrow down the extreme gap between the benefits provided to the bosses and to the blue-collared employees. 4. Salary capping will give companies with overpaid CEOs a more productive workplace. D. Mandatory maximum salary promotes equity and fairness of executive compensation. 1. The absence of fairness may cause the increase of employee absenteeism, turnovers, and a lesser capability of high productivity. 2. Salary cap will bring fairness and equity; more money can be allocated for the compensation
benefits of average employees and enough for the top officers.

3. A public company must serve the company trust, and that means fair compensation across the board. 4. When we put a cap on CEO compensation, we put into importance the belief that the best leaders are those who understand that what comes with their authority is the weight of responsibility, not the mantle of privilege. IV. Conclusion We, therefore, agree that the government should impose a mandatory maximum salary for CEOs in order to establish at least a minimum level of discipline, for wealth to be distributed equally, and to emphasize business ethics.

The Chief Executive Officer (CEO) is the heart of the managerial function of corporate governance. All other senior executives and managerial personnel look to the CEO for direction, guidance, and ethical conduct. The CEO sets the appropriate tone at the top by promoting effective functioning, ethical conduct, and professional behavior throughout the company. The long-term survival and success of the goal of sustainable and enduring stakeholder value creation are in the hands of the CEO. Because CEO salaries are chart toppers in most companies, they tend to attract the most media attention. Less widely reported is the significant salary gap between employees and lower-level executive salaries (Lyon, 2008). Although CEOS are paid 90 times more than average blue-collar workers, there should be a mandatory maximum salary imposed by the government because it promotes internal wage control system, emphasizes the business ethics of CEOs and promotes equity and fairness of executive compensation. In July 2006, Chief Executive Officers (CEOs) in the Financial Time Stock Exchange (FTSE) companies earned an average of 98 times more than all full-time United Kingdom employees over the year. The report is accompanied by the judgment that this represents the biggest pay gap recorded since the beginning of the decade. And in the same survey analysis, the consultants highlight an ever-widening pay gap between executives and other employees over time. Since 2000, FTSE 100 CEO total earnings have increased by 102.2 per cent, on average, compared to an average rise of 28.6 per cent for all employees in the UK working full-time (IDS, 2006). CEO compensation includes salary, stock option rewards, employment contracts, and stock ownership. In 1970, CEO salary and bonus packages were typically $700000 25 times the average production worker salary; by 2000, CEO salaries had jumped to almost $2.2 million on average, 90 times the average salary of a worker, according to a 2004 study on CEO pay

Kevin J. Murphy and Jan Zabojnik. Toss in stock options and other benefits, and the salary of a CEO are nearly 500 times the average worker salary, the study says. In the Philippine setting, Aurelio Gigi Montinola III, Chief Executive Officer of Bank of the Philippine Islands, was rewarded P23.781 million in bonuses while receiving P73.085 million in salaries, as against the 2004 Jaime Augusto Zobel de Ayala II team bonuses of P10.505 million, but higher salaries of P96.695 million which gives us an idea that executives in the Philippines were also overpaid. Enron Corporation was an American energy, commodities, and Service Company based in Houston, Texas, becomes a popular symbol of willful corporate fraud and corruption. Due to Its complex business model and unethical practices, Its Chief Executive Officers used accounting limitations to misrepresent earnings and modify the balance sheet to portray a favorable depiction of its performance. The Company is related to the Philippines background regarding Executive Compensation because it owns 2 out of 38 electric power plants worldwide: Batangas Power Project and Subic Bay Power Project. The challenges facing CEOs include Fiduciary duties, financial knowledge and understanding, succession planning and duality. The CEO is very much in charge of the day to day operations and is accountable to the board and to the lesser degree the shareholder of the company. In that role, he is accountable for the credit for blame, the success or failure of the company. They also have the obligation to act adversely to the best interest of the company and its shareholders. CEOs are paid 90 times more than average blue-collar workers. In 1990, the average pay for CEOs jumped almost 500% compared to an average blue-collar worker. The ratio of the average CEOs compensation to the average worker compensation today is 150 to 1 from 35 to 1

during 1974. The salaries and bonus packages were typically about $ 700000 25 times the average production worker salary in 1970. In the year 2000, CEO salaries had jumped to almost $2.2 million on average that is 90 times the average worker, according to Kevin J. Murphy and Jan Zabojniks study in 2004. Extra money that are being paid to the CEOs in smaller firms with large shareholder appears to be much better investment and help the CEOs to do better which suggest that pay and performance are linked in some firms. In some firms, high payment to CEOs does not indicate a breakdown in the firms governance. They also found that investors would do well to pay attention to which firms are paying their CEOs commensurate with skill. When a firm hires a CEO worth to be paid a high amount of salary, it indicates that the firm is a good investment opportunity (Daines, Nair, & Kornhauser, 2005). People need to understand what the Chief Executive Officers have done for the company. Thus, understanding which firms are run by highly skilled CEOs could be highly lucrative for investors deciding which stocks to hold or sell. Mandatory maximum salary promotes internal wage system; it draws attention to more considerate vocation and job satisfaction than the money compensation. For Internal wage system to be effective, pay must be directly related to the quality of performance (Mott, 200). Various fringe benefits can yield the direct relationship between performance and compensation; they are not rightfully applicable to all occupations. Even though its relationship to performance may not be as noticeable as incentive compensation, a compensation that is correlated to the time can also motivate increased worker performance. Challenges arise in applying differential cash distribution systems from different perceptions in the evaluations of both jobs and workers (Billikopf, 2006). The issue of proper wage control system is critical to compensation administration. Also, almost in every phase of labor management it has its effects on the

performance of the company. Generally, wages should take into account the worker's preparation for the completion of the task, responsibility of his given-position, and performance differences or seniority. Employees are more likely to devote their efforts to one company for its fundamental traits, not switch for a higher salary, and this would boost productivity. The core point is to place a cap on the amount that workers may legally make out of their outputs. The idea of a maximum wage was enacted in early 2009 in the United States, where they capped executive compensation at $500,000 per year for some particular corporations, It is the same way as creating a floor of minimality to the wage distribution so that workers cannot earn too little (Johnson, 2007). Mandatory maximum salary for Chief Executive Officers promotes business ethics among the members of the corporations, from the top management members down to its staff and line personnel. CEOs have a tough job and they deserve a high compensation pay, however when CEOs are given guaranteed astronomical compensation arrangements or ones that pay out regardless of performance, there's something very wrong for everyone. Unfortunately, reality confronts us of the fact that solid ethical principles no longer enter into the thinking of thousands of people, especially when business and money is involved. CEOs are the first to say pay should be given for performance. Fairness demands it. And lack of fairness in pay is one of the most "dismal," destructive practices imaginable - so why should CEOs, Board Chairs or anyone else be exempt? For the past decades, there has been a rapid increase in the annual gross pay to CEOs, not just because of their good performance, but also because they have links to the corporations board giving them the opportunity to influence the board and the rest follows. This particular phenomenon basically touches the issue of the integrity of the people involved. Now, the objective of salary capping, just like any other well-designed compensation plan, is to

achieve reasonable performance targets based on reasonable assessment, which is basically an aspect of being ethical in the business world. Basing compensation pay accordingly to an employees performance and contribution to the organization, and not just merely focusing on the CEOs alone, indicates how they give emphasis to their integrity as whole, which would basically affect how other private and other public sectors view their company (Ellig,2011). Imposing compensation restraints and to make CEO salaries public, which was designed to create openness with checks and balances where shareholders could see how their money is spent, limits signals a push for greater corporate accountability and prudence. Salary restrictions will promote a fair and honest basis of providing benefits, motivating each and every worker to perform what really is expected from him or her, and to give what is really due to whom (Leybovichulation,2009). Lastly, mandatory maximum salary for the executives will narrow down the extreme gap between the benefits provided to the bosses and to the bluecollared employees. In the long run, however, only one effort can insure profitability and prosperity: reliably providing to others some good or service which they need or want, and for which they are willing to pay with the fruits of their own labor and not being overpaid (Perel,2009).Hence, salary capping will give companies with overpaid CEOs a more productive workplace because the more lower employees feel secured and not being abused by these higher officers, they will somehow be motivated to perform well, resulting to a more progressive and peaceful work environment. Employees really do care about this issue, and a smaller gap makes for greater solidarity, and as a result better performance, throughout the workplace. Mandatory maximum salary promotes equity and fairness of executive compensation. All theories of fairness share two underlying assumptions. First, they all assume that the impact of

incentives in corporations comes from social comparisons. That is, theories of equity depend on the basis that in order to determine how a person evaluates a proper incentive, he must first compare his own quality of performance with others (O'Reilly, Pollock, & Wade, 2006). Second, these theories assume that evaluations of fairness have a great impact in determining workers responses to these comparative evaluations. The absence of fairness may cause the increase of employee absenteeism, turnovers, and a lesser capability of high productivity (Lyon, 2005).The CEO Salary cap will bring fairness and equity. Salary cap, this will bring fairness and equity, more money can be allocated for the compensation benefits of average employees and enough for the top officers. CEOs they can go up just as fast as the people at the bottom. If they want more, they can always try to take the company private. But a public company must serve the company trust, and that means fair compensation across the board (O'Reilly, Pollock, & Wade, 2006).Thus, the valued-function of fairness can have a significant influence on the overall output of the worker. When we put a cap on CEO compensation, we put into importance the idea that the best leaders are those who understand that authority is to responsibility and not authority is to the abuse of their privilege. We, therefore, agree that the government should impose a mandatory maximum salary for CEOs in order to establish at least a minimum level of discipline, for wealth to be distributed equally, and to emphasize business ethics. In smaller firmsparticularly companies with a large shareholderextra money paid to the CEO appears to be a much better investment. While highly paid CEOs appear to do better, suggesting that pay and skill are linked in such firms. In such firms, high compensation does not indicate a breakdown in the firm's governance. More specifically, we find that when lower-level managers are underpaid relative to the CEO--that is, underpaid more than the CEO or overpaid less--they are more likely to leave the organization.

Supporting CEO salary capping will provide better ethos in the corporate world not only because it values equality but also applying a reasonable action and proper system of reward.

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http://www.gsb.stanford.edu/news/research/compensation_daines_ceopay.shtml

Eloi,D.(2009,June). Should there be a maximum limit that businesses can pay their CEO. July 06,2009, from http://www.helium.com/items/1488451-should-there-be-a-maximumlimit-that-businesses-can-pay-their-CEO

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