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Compensation Plans for Private Sector CEO're in North America

The private sector in North American refers to companies that are owned by shareholders, and their stocks are traded on stock exchanges. In North America, there are compensation plans for chief executive officers who differ from other workers regarding laws and regulation. However, in the last three decades, there has been an argument whether it is reasonable or not to have compensation plans for the chief executive officers in the private sector in North America. In my opinion, I support the argument that. Therefore, it is reasonable and justifiable for chief executive officers in the private sector in North America to have compensation plans. The paper is for the thesis statement or argument. The executive compensation plan refers to an agency contract between the company and the leader or manager taking into consideration the interest of the manager and owners.

Compensation packages for the CEO consist of four basic components: base salary, annual bonus plan, stock options, and additional compensation such as retirement plans, long-term incentive plans, and restricted stock. The higher the pay, the higher the quality of work. Therefore, “what you pay is what you get.” When a company offers high salaries to the employees, there is high performance and high quality of work because workers are motivated (Bradley 12). Likewise, compensation plans will motivate chief executive officers thereby putting more efforts in accomplishing the company’s goals and objectives. The poor you pay, the poor services you get. Top quality chief executive officers work at a high price. Hence, a company needs to have the well-educated, trained, skilled, and motivated personnel to succeed in having an effective policy and gain a competitive advantage in the given industry.

 High compensation packages will attract and retain high-quality chief executive officers as well as employees (Edmunds 23). Since pay is linked to performance, money is one of the incentives that motivate workers in an organization thereby working hard to improve the performance of the organization. According to Fredrick Taylor, workers are mainly motivated by pay. When employees are paid according to work done, they are encouraged and tend to work hard thereby maximizing productivity. Thus, compensating the chief executive officer in the private sector will increase productivity. It is imperative for the private sector in North America to have compensation plans for their chief executive officers. Money is an incentive that enhances productivity in the company (Bradley 12). Private firms in North America operate in a highly competitive environment. Thus, they require chief executive officers who are intelligent, hardworking, sharp-minded, and brilliant decision makers.

Also, employees need to be highly-skilled, talented, and hard-working. Hence, compensation plans will attract the best senior level managers who will make the company achieve its objectives in the competitive arena. As a result of high competition, many companies tend to employ high-skilled personnel so that the given company can gain competitive advantage. Executives who are properly compensated got the morale and encouraged, thus, working hard in the best interest of shareholders. Some of the compensation plans for executives include cash compensation, option grants, retirement packages, deferred compensation, long-term incentive schemes, and executive perks. Benefit plans will enable the shareholders examine and determine the performance of the managers as well as the company. Executives are usually paid according to the performance of the organization.

Hence, compensation plans are imperative to the company’s success because they shape how chief executive officer behaves as well as determine the kind of personnel a firm attracts. Managers who are well paid perform better compared those who are not well paid. Thus, having reasonable compensation plans will make executive have greater incentives and find creative ways of improving the performance of the company. Executives who are given better rewards or well compensated after showing excellent performance, the potential increase in an organization’s performance will be great. Also, the shareholders will benefit greatly. Since CEOs are responsible for making and implementing policies, they should be compensated so that they can adopt better policies. Long-term compensation plans or package are the best because they keep a CEO from looking elsewhere or diverting attention thereby helps in improving the chance of having a stable and committed CEO.

Compensation includes both monetary and non-monetary items. Many companies offer compensation regarding money and additional benefits such as retirement benefits, performance bonuses, and health insurance. The compensation plan that a company offers to its CEO affects retention rate, recruitment rate, and employee satisfaction. Thus, the compensation packages play a crucial role in an organization because it attracts top talent CEOs. The top performing executives often have a positive impact on the competitiveness and productivity of the business. It is imperative for the owners of the businesses in North America to adopt compensation plans and understand the prevailing laws so as to remain competitive in the market. Payment systems have a positive impact on the CEOs’ performance since they feel motivated to help the companies succeed. For instance, when a CEO has a knowledge of receiving a bonus after achieving the set goals will likely to motivate him to increase productivity.

Compensation packages will enable the company to retain the top talent executive thereby saving the company a lot of money used training, recruiting new chief executive. Benefits such as health insurance and retirement packages are benefits that CEOs desire and businesses that offer the benefits have a better chance of retaining the top leader or executive. When chief executive officers get generous rewards, they become happy with their jobs which result in job satisfaction. A happy COE will not be absent from work because he loves the job and would work hard to achieve the company’s goals so as to continue getting rewards. Businesses that has adopted compensation plans experience little turnover compared to those who lack benefit plans. Also, the companies can retain high-quality workers. The private sector in North American should have a well-designed compensation plan that can motivate the employees, ensure equity and control costs related to compensation. The compensation plans should mirror the culture of the company.

According to governance theory, CEOs are required to pursue strategies that will provide long-term value to the shareholders. Hence, it is important that they receive rewards by their performance or paid salaries according to the revenues of the company. Marginalize and agency theories state that CEOs will act in the interest of the shareholders as well as the owners of the companies if they are well compensated and involved in decision making (Shearer 515). Compensation plans that are structured in accordance to marginalize and agency theories encourage executives to work hard and increase the company’s revenues so as to get more rewards. Agency theory states that there is a relationship between pay sensitivity and marginal productivity of the executive actions. When a company increases marginal profit retention rate, the marginal productivity of the CEO action will also increase thereby raising the performance sensitivity of the CEO pay.

When the performance sensitivity of the CEO pay is high, the product market in which the company operates will be more competitive. Thus, good compensation plans will enable the firm’s products to become more competitive leading to more revenues for the enterprise. The reinforcement and expectancy theories state that high CEO performance followed by a monetary reward will make the future executive performance more likely. When managers receive enough compensation, and there is equity, the result will be high productivity, lower absenteeism, and lower turnover (Bruce 513). Companies that have a solid incentive plan for their executives has proper stretch performance and drive annual performance without sacrificing objectives and long-term goals. Hence, CEO pay creates shareholder value and drives the company’s strategy. The compensation for CEO in private enterprises is directly related to the company’s success and size. In agency theory, shareholders determine the pay or rewards of the CEO.

 A stock option is often used as a reward, whereby CEOs buys shares or stock of the company at lower prices to motivate executive to maximize the firm value. Compensation policy is essential to the firm’s success, and it shapes how CEOs behaves. When an executive is paid or get additional benefits, their behavior changes such as working hard, avoiding absenteeism, and working as a team to achieve the organizational goals. According to needs theories of motivation, the satisfied need will stimulate an individual to attain particular goals. Expectancy theory states that the reward or pay influence worker's behavior. For instance, the CEOs who get paid enough salary meet performance expectations. Thus, it is important for the CEOs in the private sector in North America to have compensation plans. Payment methods are also imperative because they keep labor costs within the capabilities of the company thereby reducing wastage of resources (Gomez-Mejia 381).

Furthermore, the efficiency and effectiveness of the organization will increase leading to accomplishment of the firm’s goals. Executives who are given rewards and other compensation packages are committed to their work compared to those who are not compensated. Compensation plans enhance commitment in the organization thereby improving the company’s performance (Hernan 45). Likewise, employees who are not paid well, lack commitment or show little commitment to their jobs. Compensation plans for CEO in the private sector reduce and control risks while maintaining motivation on the executive. Some of the risk-reducing approaches under payment plans include: using relative performance evaluation, having more than one performance measure, using stock options that lower the downside risk, having compensation committee for the review of set-off for the manager, and adding a bogey to the bonus plan.

A bogey is an example of payment that exempts CEOs from paying the company if it suffers a loss thereby reducing the executive’s downside risk. Compensation plans for CEO are important because it improves the proper operation of managerial labor markets, capital markets. It also enhances efficient use of available resources and allocation of scarce capital in the economy. In conclusion, compensation plans for CEOs in the private sector will improve the performance of the company and retain top talent executives as well as employees.