Analysis of a memo that was presented to the Board of Directors regarding compensation of the directors.

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Table of Contents

Executive summary
Introduction
References

Executive summary

Remuneration the executives of a company is an issue that sometimes raises a lot of controversy. This is because, sometimes, what the top executives are paid could be considered too high for the company to bear. Whenever the board of directors feels that what the Directors are paid is exorbitant, they are usually faced with a difficult task of investigating whether the executives are really over paid, and whether they should replaced or not.

This paper presents an analysis of a memo that was presented to the Board of Directors regarding compensation of the directors. The committee had requested research using a benchmarking study of peer competitor firms, as well as a review of best practices in the industry. The conclusion was that the director was highly overpaid, and hence should be replaced.

Introduction

This paper seeks to undertake a critical analysis on the memo that was presented to the Board of Directors by Mark Headlee, the Senior Vice President of Human Resources. The analysis will follow Browne and Keenley (2007) format of asking the right question.

Are the Issue and the Conclusion?

In his memo, Mark Headlee (Senior Vice President of Human Resources) has written to the Board of Directors Executive Compensation Committee, requiring them to consider whether the compensation level for PDQ’s CEO is appropriate to the position with respect to current industry standards. In his memo, Healee claims that the committee has requested research using a benchmarking study of peer competitor firms, as well as a review of best practices in the industry.

Ideally, the issues raised in this article demands answers as to whether the remuneration paid to the PDQ’s CEO is reasonable based on the performance of the company, and in comparison with what is paid to other CEO’s in the industry holding similar positions.

According to Browne and Keenley (2007), the nature of such a question, which seeks whether what is done is the right thing, is an ethical or moral issue and hence often referred to as a prescriptive issue. Certainly, deciding whether the pay that the CEO gets is right is difficult and hence requires critical evaluations. The author has reached a conclusion that the CEO is getting a remuneration that is over and above what he ought to have received.

What Are the Reasons?

The purpose of finding out the reasons is to seek whether the conclusion that has been made by the author is of any worth. The fact that the author makes us believe that the CEO does not disserve the amount of salary he is getting draws our curiosity to know why that opinion is held.

The author does not only express his opinion, but has also attempted to make some backing on it, so that the readers can be influenced to believe what he says. In reaching his conclusions, the author cites several reasons to back up his view, including the fact that CEO’s of the same level are getting less pay, that he has accumulated a lot of wealth and hence does not disserve this pay, and because his pay does not commensurate the performance of the company. The question we are now left asking ourselves is whether these conclusions make sense.

What Words or Phrases Are Ambiguous?

In deciding whether the author’s opinion is sensible, it is important to identify the exact meaning of the key phrases or words in the memo. This is in the realization that, failure to do that; we may be tempted to react to the author’s views in a manner that he did not intend – it is, therefore, very important to identify ambiguous phrases and words in the memo.

“A term or phrase is ambiguous when its meaning is so uncertain in the context of the argument we are examining that we need further clarification before we can judge the adequacy of the reasoning” (Browne & Keenley, 2007, p. 38). I may not be able to evaluate the essay until I identify the author’s intended implication, as well as the alternative meaning in the perspective of the argument. In this memo, I found the following phrases and words, from the conclusion and reasons, ambiguous.

Once the respect of the union workers is lost, there will be no stopping other groups of employees from losing faith in our CEO.
The average salary for a CEO of a company with similar characteristics in our industry for year 2007 is approximately $391,659.
personal wealth held by the CEO

The above three phrases are potentially ambiguous and I a clearer interpretation so I can assess this memo in an objective manner. For the first phrase, I do not clearly understand the meaning of the word ‘respect’ in this particular context. For the second sentence, I do not understand the ‘average salary is the base salary or allowances are included.

For the third sentence, I fail to understand whether the so called ‘personal wealth’ includes that which has been accumulated from the current job, or whether it is that which has been amassed through corrupt means or it is just any personal wealth. I also do not understand the criteria of assessing the level of wealth that should be considered too much in this context.

What Are the Value Conflicts and Assumptions?

In presenting his opinion, the author has taken for granted a number of hidden assumptions, which are influential in establishing the conclusion. These assumptions are potentially deceptive and can only be spotted if the reader is very careful and critical while reading between the lines. In reaching to the conclusion that the current CEO is overpaid and, hence, he should be replaced with another one, the author has given some reasons, which overlooks some critical assumptions as follows.

The author alleges that the salary for a CEO of a company with similar characteristics in our industry for year 2007 was less than that of Raymond, but the assumption that Raymond could deserve a high salary because of his family association with the company has been overlooked. In arguing that the increment of the CEO’S salary should go in line with the growth rate of the company is a sheer ignorance of the fact that the cost of living could be on the rise, hence necessitating high pay increment.

What Are the Descriptive Assumptions?

Descriptive assumptions are those believes, which are not stated, and related to how the world is. The author has stated that James has no financial incentive to work at all, yet there is no credible backing to connect his vast wealth with his performance. The author should have described more, how the wealth a CEO affects his performance negatively. Furthermore, wealth is insatiable and as people accumulate wealth, they continue to urge for more (Wan, 2003).

Are There Any Fallacies in the Reasoning?

While wooing the reader to accept his conclusion, the author has potentially used fallacies in the memo. If not careful, the reader can be forced to believe his opinion out of a fallacious statement. Fallacy in this context means the use of a ‘trick’ in an attempt to influence the reader to accept his conclusions.

The most prominent fallacy is where the author says that James does not disserve the high salary simply because he will benefit by inheriting the company – this is not related to his reasoning that the salary is too high based on the information from best practices and benchmarking.

How Good Is the Evidence: Intuition, Personal Experience? Testimonials, and Appeals to Authority?

Although the author has presented best practices and benchmarking to back up his conclusion, the evidence is not very convincing. First, I think the remuneration of the CEO of a particular company should be tied to the particular circumstances of the company, and not other companies out there.

For instance, James is the CEO of a company that was promoted by his own father and hence it is unique in its own way. Secondly, the author has presented best practices as an evidence and alleged that the pay should commensurate the performance of the company, however, I think performance alone cannot be fair enough to determine the remuneration.

How Good Is the Evidence: Personal Observation, Research Studies, Case Examples, and Analogies?

The author has not provided any authoritative source to back up his arguments regarding the evidence. It appears like the whole analysis is his personal opinion, which is poorly researched. The author should have conducted a more extensive research to find out the best determinant of CEO remuneration. He ought to have reviwed regional and national surveys data that shows compensations levels.

Seeking of help from peer companies could also have served the purpose. When comparing James’s salary to that of other companies, the author ought to have made comparisons and differences. For example, the community around which the company operates, the company’s missions, the scope and the size of the company, the job’s requirements and the net salary – this including all the allowances, are all critical considerations that were not paid attention to.

Are There Rival Causes?

Rival causes are very evident in this memo. A rival cause here means a reasonable alternative justification that can explain the occurrence of a particular incident. The author has alleged that remuneration of CEOs should be pegged on the performance of the company.

However, if we critically think about the effects of cutting down the salaries of CEO’s when the performance is declining, then we have all the reasons to distance the opinion of the author. When the company is performing poorly, then good management is critical and the CEO’s should be motivated to do so. One of the best ways to achieve this is my paying the CEO handsomely so they are motivated to get the company back on its track (Hartzell & Laura, 2003).

Are the Statistics Deceptive?

The statistics presented by the author, although they make some sense, are potentially inaccurate and hence misrepresenting overall the situation. Some figures have been calculated wrongly and hence deceptive.

What Significant Information Is Omitted?

As already discussed, the author has omitted very important information. For example, he has not cited sources for most the facts that he has used.

What Reasonable Conclusions Are Possible?

The author has presented his conclusion, but failed to provide reasonable evidence. Therefore, his conclusion that James is overpaid and hence should be replaced is not reasonable. Instead, an alternative conclusion could have been that the company set up a committee to carry out extensive investigations on the suitability of James’ salary, this time making sure that all aspects including the uniqueness of the company are considered (Guthrie & Jan, 2009).

References

Browne, M.N., & Keeley, S.M. (2007). Asking the right question: a guide to critical thinking. Upper Sandal River: Prentice Hall.

Guthrie, K., & Jan, S. (2009). CEO compensation and board structure revisited, Working paper. Michigan: College of William and Mary and University of Michigan

Hartzell, J., & Laura S. (2003). Institutional investors and executive compensation. Journal of Finance, 58, 2351-2374.

Wan, K. (2003). Independent directors, executive pay, and firm performance, Working paper. Dallas: University of Texas at Dallas.

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