1. IntroductionExecutive Compensation is a composite phenomenon.
It is an facet of executive hiring that includes salary. hard currency. fillips. stock option. pension contributes and other constituents that create the net incomes of a top executive ( Finkelstein & A ; Hambrick. 1989 ) . This paper focuses on supplying an analysis of statements in a argument whether the executive compensations the chief public presentation thrust and the ground for the fiscal crisis 2007-2009 because over the past three decennaries.
the degree of the executive compensations raised overly. ( Frydman & A ; Jenter. 2010 ) . “From the mid?1970s.
compensation degrees grow dramatically. differences in wage across directors and houses widen. and equity inducements tie managers’ wealth closer to tauten performance” ( Frydman & A ; Jenter. 2010 ) .
Particularly after the fiscal crisis of 2007-2009 many had the sentiment that this type of payment to the executives “might hold encouraged inordinate risk-taking” ( Bebchuk. Cohen. & A ; Spamann. 2010 ) . First. this paper will show how executive compensations at Lehman Brothers lead to the bankruptcy of the bank during the fiscal crisis.
Second. this paper will research how Apple utilizations executive compensation to see that executives focus on long term profitableness of the company. Finally. there is an account how the two illustrations fit in into the empirical research rhythm. 2. Executive compensation at Lehman BrothersA well-known illustration where executive compensation came under examination from the wide populace and governments is the failure of Lehman Brothers during the fiscal crisis of 2008.
The compensation showed increased over the back-to-back old ages as deregulating in the United States enabled Bankss to take more hazard. Following 9/11 the involvement rate from the Federal Reserve Bank ( FED ) had decreased to merely 1 % . which besides made Bankss more eager to loan money to people who beforehand were unable to make so.
Banks were allotted more freedom by the FED under the leading of Alan Greenspan. a house truster in the self-regulation of free markets. In 2005. Greenspan went on the record claiming that the private sector had done a better occupation than ordinance would hold of all time done.
He withdrew this sentiment after the crisis in 2008 and called upon his replacement Ben Bernanke to modulate the market ( Lanman & A ; Matthews. 2008 ) . This steadfast believes of Greenspan turned out to be wrong and the US authorities finally had to step in as Bankss had been taking excessively great hazards. Even recognition evaluation bureaus such as Moody’s and S & A ; P rated these types of mortgages as AAA.
intending the safest possible investing ( Van Voris & A ; Hurtado. 2012 ) . Lehman Brothers went bankrupt during the fiscal crisis in September 2008. after many sub-prime mortgages became worthless. because people couldn’t afford them.
They would ne’er pay back what was loaned to them. taking to foreclosures. Between 2003 and 2008 the bank awarded over $ 700 million in executive compensation to its top 50 executives ( Hamilton.
Tangel & A ; Pfeifer. 2012 ) . This of all time increasing compensation caused executives to concentrate on short-run ends instead than the long-run ends that were in the involvement of the company. The barbarous circle that Lehman Brothers kept paying higher compensation was the desire to accomplish higher net incomes in the short-run. The higher compensation would do the executives more motivated and would besides maintain endowment within the company. The belief within the bank was that these high pay-outs would enable the bank to do more net income.
The bank’s desire to maintain endowment would take compensation to degrees to unprecedented degree. with the highest single compensation being over $ 50 million in 2007. The inquiry is whether this barbarous circle is within the involvement of the company.
In hindsight. it can be said that the of all time lifting compensation would merely involvement executives in net income in the short tally. and non as to in what form they would go forth the company buttocks. The of all time higher compensation would besides convert the executives that they were making the right thing. with stockholders satisfied and of all time rising net income.The doctrine fits within the traditional theoretical account of scientific discipline.
where Lehman believed that the higher compensation leads to higher net income ( Ten causes Y ) . Initial observations between 2003 until the first jobs started to emerge in August 2007 when the first two Bear Stearns hedge financess folded ( Investopedia. 2009 ) . The company nevertheless still achieved $ 885 million in net incomes between June and August 2007 ( BBC News. 2007 ) . Lehman Brothers became victim to its ain executive compensation strategy. The executives were encouraged to accomplish high net incomes in the short tally and were rewarded for this without maintaining in the head that the hazards would jeopardize the company in the hereafter.
Lehman Brothers could hold prevented this by presenting fillips in a manner that would promote employees to believe about the long term hereafter. This can be seen in our following illustration. Apple.
3. Executive compensation at AppleExecutive compensation can change well between different companies. A immensely different illustration compared to Lehman Brothers is Apple.
Apple is one of the largest companies in the universe with over $ 100 billion of gross and 28. 3 billion in net income in 2011 ( Golson. 2011 ) . In the late 90s. Apple was about belly-up when Steve Jobs returned to Apple after he was before fired. From at that place. the company saw lifting gross and net income. Steve Jobs was good known for his $ 1 dollar wage ( he took extra compensation in fillips and stocks.
but didn’t take any after 2003 ) . While there’s an obvious difference between laminitiss and appointed CEO’s in footings of their relationship with the companies. even after Steve Jobs decease Apple tends to hold lower than mean wages for its executive squad. The basic wages of Apple executives tend to be lower than their opposite numbers at other houses. Tim Cook earned $ 4. 2 million ( all compensation included ) in 2012 while Meg Whitman ( CEO of HP ) earned $ 17 million. Besides the compensation Apple tends to give wagess that require the executive to remain for a longer period clip.One illustration of this is the compensation that was awarded to Tim Cook.
In 2011. he was given a erstwhile $ 376 million stock grant which in order for him to roll up it would necessitate him to remain with Apple for at least 10 old ages. This type of compensation is basically different from as seen with Lehman Brothers. The 10 twelvemonth term requires Tim Cook to concentrate on the long-term aims of the company instead than concentrating on the short-term net income. In that sense. Tim Cook’s wages is straight tied to the public presentation of the company over the long term. In contrary to first illustration Apple had a different scheme to value his executives. The method ties the wagess of executives and company public presentation for a longer period of clip.
However. Apples scheme proved to be better in maintaining endowments for longer clip and for good of the concern. 4. The empirical rhythmThe empirical rhythm of research is the rhythm of Observation. Induction. Deduction. Testing and Evaluation which can be used to pull decisions from observations.
The illustrations of Lehman Brothers and Apple tantrum within the empirical rhythm of research. We observe the bankruptcy of Lehman Brothers and happen that executive compensation soared in the last old ages prior to the eruption of the fiscal crisis. From there conclude through inductive logical thinking that extra executive wage leads to poorer public presentation and perchance even bankruptcy.
From this general statement. we look through deductive logical thinking to use the general theory to a specific company ( Apple’s bonuses lead to poorer public presentation of the house ) . This is a questionable hypothesis and can easy be proven false by comparing the Numberss. which show an addition in net incomes for Apple. In Apple’s instance big stock grants ( Tim Cook’s $ 376 million ) do non take to taking excessively much hazard. Through proving the hypothesis we conclude that our hypothesis is non right and that we’ll need to measure our hypothesis to come up with a new hypothesis that better suits the world of the assortment of houses and the assortment of corporate civilizations.The nature of the compensation could assist us in polishing the hypothesis we antecedently made.
In Apple’s examples the largest portion of the fillip can merely be collected in 10 old ages. while in the instance of Lehman Brothers compensation was largely instantly or within the short term. We could polish the hypothesis as “Long term executive compensation leads to better public presentation of the house ) ” . Through inductive logical thinking we so can sort what would be considered ‘long term’ and ‘short term’ given that these are instead obscure rules that can non be tested decently.
By continuously utilizing the empirical rhythm of research we can better hypotheses and in the terminal come up with better consequences in our research. This is non merely done by faculty members. Companies like Apple attempt to larn from errors made by other houses.
This can besides be seen as an empirical rhythm where Apple observes the behavior of other houses and uses this information ( such as the inordinate executive compensation in the instance of Lehman Brothers ) to better their ain executive compensation to do certain that the jobs that they faced won’t occur at Apple. 5. DecisionHigh executive compensations are non the lone ground for the fiscal crisis 2007-2009. The really low FED involvement rate and insufficient creditworthiness cheque allowed people to borrow more than they could afford. However. this high hazard loans plus the manner to high compensations are the chief causes of the mortgage crisis.
The Lehman Brothers ruin showed that invariably increasing compensation does non better the CEOs public presentation in the long-run. In this instance the CEOs aspiration is to demo better public presentation in the short tally. at the disbursal of long-term indispensable value. Unfortunately. this led to highly high loses for peculiar house. On the contrary the manner Apple tends to give fillips requires the main executives non merely to execute in a high degree but besides to remain longer at the company.6.
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