Original question.How do organizational decision makers align compensation strategies with shareholder interests? Defend your answer.
Respond to students 1 and 2. Each response must have 200 word count and cited with scholarly sources using apa format.
Student 1- Walter
An aspect of operating a successful business is ensuring that compensation strategies are aligned with shareholder interests, and more specifically, aligned with the organization’s competitive strategy. Compensation design is a form of management control that can be used to align the interests of corporate managers who typically define the strategic business unit’s mission and strategy and those of strategic business unit managers who execute the strategy. There is no single answer to compensation design and that effective design depends on the strategy being pursued by the strategic business unit (Fisher & Govindarajan, 1993, p. 130). Internal objectives, along with external factors such as taxes, regulations, and general labor markets characteristics, are predicted to drive an organization’s pay strategy, which represents the broad guidelines for making the compensation decisions that are critical to achieving the desired objectives and improving organizational performance. Key elements of pay strategy include positioning pay levels relative to the organization’s labor market, the use of fixed versus variable pay, short-term versus long-term pay, and cash versus non-cash pay; and, the proportion of the workforce eligible for different forms of compensation (Gerakos, Ittner, & Moers, 2018, p. 105). Developing the right type of compensation package is critical for an organization, as it strives to get the most from its employees and align with shareholder interests. One specific example is the compensation of an organization’s executives. As an incentive, deferred compensation is supposed to create a sense of ownership, aligning the interests of the executive with those of the owners or shareholders of the company over the long term (Martocchio, 2013, p. 257). From an agency theory perspective, performance-linked compensation provides incentives for executives to take actions for the best interests of shareholders, therefore, it is not surprising that many firms link their compensation packages with firm objectives (Chen & Jermias, 2014, p. 114).
One of the fundamental issues connected with corporate governance is the alignment of shareholders’ interests with those of the executive management of a public corporation. Typically, this is accomplished with a compensation plan that recompenses executive management for good financial performance. Furthermore, firms need to make certain that executive leaders’ incentives are aligned with shareholder interest in long-term value creation. In general, there appears to be a substantial popular concern as to whether existing executive compensation agreements are consistent with shareholder and societal interests (Conjon, 2011). Unfortunately, executives who are not hired by shareholders may operate in ways, which do not maximize shareholder wealth. For instance, executives may hold opposing views from shareholders in their outlook towards risk. With that being said, shareholders can lower the risk from any one investment by spreading their investments over many firms. On the other hand, shareholders may require executives to commit to added risky projects that result in higher returns. Conversely, executives cannot differentiate their risk because of their close association with the firm (Ray, 2007).
With that being said, alignment is attained when components of the compensation package are linked to wealth creation, and in the end, long-term share price performance (Dow & Raposo, 2005). Thus, if wealth is generated, in time, shares rise, and so does the executive’s personal recompense. Nevertheless, actions need to be in place to avert irresponsible actions by executives simply to affect share price spikes for shorter-term gain. If at all possible, all actions should be focused on long-term benefits for the firm, the shareholders and the management team, as a whole. Therefore, executive compensation is a very significant matter for investors to contemplate when reaching decisions. Unfortunately, an inadequately compensated executive can cost shareholders money and can create an executive who lacks the incentive to increase profits and boost share price (Dow & Raposo, 2005).