Joined: 31 Dec 1969
Location: United States
Concentration: Leadership, Strategy
WE: Accounting (Accounting)
, given: 80068
AWA Issue - Please provide input [#permalink]
06 Oct 2010, 10:34
Any input would be greatly appreciated. Taking the GMAT in less than a week and feel that this essay is generally decent, but would like to know what score it would warrant. Thanks!
"Some have argued that the salaries of corporate executives should be linked to those of their lowest-paid employees. This, they argue, will improve relations between management and workers, reducing costly labor disputes and increasing worker productivity. What these people overlook, however, is that these high salaries are necessary to attract the best managers, the individuals whose decisions have the greatest impact on the overall well-being of the company."
The issue of compensation is one that has persisted for quite some time and likely will not dissipate in a capitalist economy. Unions were established to protect workers from being exploited by the industrialists and while working conditions for all employees, including the lowest-paid, have improved dramatically, the sentiment has not shifted. Those employees at the bottom of the ladder perceive inequality in compensation and believe that they are ill-treated in comparison to the executives. On the other hand, executives often feel that their compensation is below that of their peers and inadequate for the value they provide to the company.
While employees at both ends of the spectrum harbor feelings of resentment on the issue of compensation, creating a direct link between executive pay and that of the lowest-paid employees will do nothing to change this belief. As long as their remains a difference in pay, there will be feelings of resentment toward those employees who receive higher pay, independent of the linkage. The more important metric is the value added by an individual employee. Although the contribution of all employees is valuable and often critical to the overall success of an organization, the contribution of the top executives is vital in steering the course of the company. It is through the decisions and actions of these executives that the company either succeeds or fails.
Executive compensation needs to account for the value that executives provide. In an age of global competition and transparency, companies need to work hard to attract and retain the best and brightest. This can be accomplished through a wide array of mechanisms. One such way is to benchmark executive compensation to peers and/or competitors. Many metrics can be factored in to the analysis of what constitutes a peer, but the objective is to provide competitive pay that prevents the loss of talent due to a clear disadvantage in compensation versus the competition.
Another way in which companies can properly incentivize executives is by tying compensation to the results of the company. This method, especially in the public company arena, is an effective way of aligning executive interests with those of the shareholders. Alignment of interests helps ensure that executives make decisions that benefit the company, and thereby, the sustainability of jobs for those employees at the lower end of the pay spectrum. Furthermore, compensation that is tied to the long-term performance of a company, such as stock options or grants, creates a disincentive for the executive to leave, for fear of forfeiting pay.
Although there are no perfect answers to the issue of compensation, it is quite clear that the primary objective needs to be the proper alignment of all interests. This is best accomplished through providing competitive pay to executives in the form of performance-related compensation, rather than by tying executive pay to those of their lowest-paid employees.