LITERATURE REVIEW- COMPENSATION OF THE TOP MANAGEMENT AND ITS

STRATEGIC AND ETHICAL PERSPECTIVE

Definition of the topic:

“All forms of pay or rewards going to employees and arising from their employment”.

(Dessler 2009)

‘The best compensation policy is not based upon the organizational affiliation among the stake
holders and the administration, but also taking into consideration the difference of opinion which
give birth to conflicts in other constricting relationships which exist in the organization. In the
article the finest compensation plan is revised taking into the consideration the two most
important factors which are (1) equity and risky debt, and (2) equity and convertible debt. Future,
the benefits of making parallel administration compensation with the stake holders welfare are
discussed, that this action will reduce the cost of debt’. (John., John 1993)

‘The study shows that the control and the ownership of the firm play a vital role in determining
the compensation plan for the executives of the organization. The study displays that when a firm
is externally controlled by the shareholders than the company is more efficient in compensating
its CEOs and the top-management rather than the firm which are internally controlled by the
administration. One major reason for this cause is that the segregation of compensation plans and
the performance of the firm, on the other hand externally controlled companies have learned the
art of inclusion of the compensation of the top management and the performance of the firm in
terms of the profit.’ (Mejia, Tosi, Hinkin 1987)

‘Pay of the skilled and experienced employees and the top management has a connection with
the performance of the company. In a more structured way we can say that a company is a

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system in which the input is the skills of the employees which is organized and controlled by the
top management, and the output is the overall performance of the company. Managerial activities
and the compensation are linked to each other. If the relationship between the compensation and
managerial activities is weaken than it will affect the relationship of the input and the output of
the company as this (compensation and managerial activities) link is the connecting chain
between the input and the output of the company.’ (Harris, Helfat 1997)

‘This paper discusses the compensation structure of skilled workers in a hierarchical firm.
Promotion depending upon the compensating the employee is a systematic process. The
appraisal process takes a long period of time and do not serve its purpose as the workers use their
shrewdness techniques showing that they are among the skilled workers. On the other hand, the
manager can also show unacceptable behavior, sometimes by not providing the incentives that
the employee really deserves. Usually the managers appraise the the educated workers despite of
the fact that two workers are working on the some level and even though the uneducated worker
is more skillful the promotion is given to the educated and less skillful person. The paper
discusses the action plan of providing promotion plan that are efficient and effective at the same
time’. (Bernhardt 1995)

‘There are many studies conducted in the field of compensating the employees of the business
but a little is known by the strategic compensation system and that is aligned with the company’s
strategy. Previously all research conducted on this topic are limited to only the American
companies and there are still many things that are unclear about the topic. It was found out that
the pay structures are connected with the divisional strategic orientation, and there are missing
gaps in the previous studies conducted. More over, it was found out that the position that the
employees hold in the company hierarchy is one of the most important variables affecting the
compensation system. The position of employee in the company affects the reward structure, and
the consequences of the performance on the strategically formed goals.’ (Boyd, Salamin 2001)

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‘Many financial scandals in the cooperate world are associated with the employee compensation
especially the reward structure of the top management. One of the model is presented discussing
the compensation procedure of the business executives, it is stated that the executives must act
on be have of the shareholders and for their benefits, this will result in two ways first will be the
increased performance of the company as the executives managing the business are working for
the mutual benefit of the company and the shareholder and secondly the reward system which is
based on the performance and the profits of the company. Executive’s compensation is linked
with many ethical issues in the cooperate world, reforms in the executive’s compensation are
discussed along with there intended and unintended consequences. Three of the most effective
recommendations are discussed.

1. Independency given to the compensation committees must be increased so that there

work is more transparent.
2. The executives must hold the shares of the company for which they are working for, so
that they can work for the benefit of both the company and them selves.
3. Greater acknowledgment should be provided to the executives for there performance.’
(Matsumura, Shin 2005)

‘The reward and salary system of the Chief Operating Officer (CEO) is a debatable topic for
many years now. The question arises that whether the high amount of the reward system is
ethical as depending on the performance of the company or the CEOs are over paid as they
determine the compensation structure of the workers of the company (sometimes including them
selves). I many cases there are low amount of evidence that the compensation of the CEO is
supported by the performance of the company. Conversely, the relationship between the board of
director and the CEO is complex and also affect the compensation strategy of the CEO.
Recommendations of the problem includes formation of just and transparent system that support
the high compensation of the CEO like the matrices systems etc. This will also bring positive
feedback in terms of the shareholder trust to the company and making the relationship of the
CEO and board of directors more obvious.’ (Perel 2003)

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‘Compensation is the one of the most vital factors that constructs the relationship between the
company and its employees. For a long period business researchers have came up to the thought
that reward system is the best plan to substitute labor inside the organization. This point of view
supports that only the economic factors affect the compensation design. Fresh studies in this field
supports the idea that the compensation must be bonded with the fairness and just procedures and
not only the economic factor must be taken into consideration but psychological, social and
moral effects should also be apart of the compensation decision.’ (Bloom 2004)

‘Studies extended and implicated of facts that develop a theoretical framework recognize and
comprehending the executive compensation under the roof of ethics and moral values.
Importance is given to the ethical standards set in the light of liberty and equality. Study
conducted emphasizes on the need on clearly defining the rules and procedures that formulates
the compensation for the top management of the business.’ (Rodgers, Gago 2003)

‘Research has been conducted over past 30 years on the reward system of the executives by
many economists and researchers. Many consider it as a fragile connection between the
executive’s compensation and the performance level of the company. It is explained that politics
in the organizational behavior is one of the element that is making this relationship between the
top management pay and performance weaker. It is difficult to only say that monetary rewards
are the main source of motivation, there are number of ways to motivate the employees to
achieve high level of performance.’ (Ungson, Steers 1984)

Primary objective must be to examine the outline of monitoring and incentives of the employees.
The firm must check in detail all the linked internal and external factors involved. Examination
of the internal factors is cost effective as compared to the examination of the external factors. In
the light of the previous studies two models are built up to increase the understanding of the
topic. 1). A wholesome incentive world in both internal and external scene where everything is

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controlled by incentives. 2). A combination of monitoring, where internal factors are controlled
by monitoring and the external are controlled by incentives. (Joseph, Thevaranjan 1998)

Extensive research has been conducted in the area of the relationship of executive’s
compensation and performance. But the research has always been limited and did not cover
many areas of the study. Research has been done in the area to highlight the importance of the
executive’s compensation and its effects on the performance of the organization. (Barkema,
Mejia 1998)

Although there are many legal laws and ethical standards of the equal employment opportunities
but still we see that there is a discrimination in the cooperate sector especially between male and
female employees. This fact is clear from the compensation structure of the employees. Further
laws and standards need to be formed in this area so that equal employment opportunities can be
constructed. (Braskamp, Muffo, Langston 1978)

Alternative compensation plans are discussed in the roof of social welfare. There are many issues
that cause conflicts with the compensation issues of the top management, looking in the light of
production uncertainty ever level of employee compensation is dominated by a set of
independent contracts; optimal welfare is a product of equity and incentives. (Meyer,
Mookherjee 1987)

Using the concept of expectancy and discrepancy theories, the relationship of compensation,
motivation and job satisfaction is checked. a). Individualized compensation of employees, in
certain conditions can cause work motivation increase. b). Flexible pay of non excepted workers
neither motivates nor increases job satisfaction. c). benefits are not a good motivator. (Igalens,
Roussel 1999)

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BIBLIOGRAPHIC REFERENCES

1. Dessler, G. 2009. Human Resource Management. 11th edition. New Dehli: Prentice Hall
2. John, A. T., John, K., 1993. Top-Management Compensation and Capital Structure. The
Journal of Finance, 48 (3): pp. 949-974
3. Mejia, L. R., Tosi, H., Hinkin, T., 1987. Managerial Control, Performance, and Executive
Compensation. The Academy of Management Journal, 30(1): pp. 51-70
4. Harris, D., Helfat, C., 1997. Specificity of CEO Human Capital and Compensation.
Strategic Management Journal, Vol. 18 (11): pp. 895-920
5. Bernhardt, D., 1995. Strategic Promotion and Compensation. Journal of The Review of
Economic Studies, 62 (2): pp. 315-339
6. Boyd, B. K., Salamin, A., 2001. Strategic Reward Systems- A Contingency Model of Pay
System. Strategic Management Journal, 22 (8) :pp. 777-792
7. Matsumura, E. M., Shin, J. Y., 2005. Corporate Governance Reform and CEO
Compensation -Intended and Unintended Consequences. Journal of Business Ethics,
62(2):pp. 101-113
8. Perel, M., 2003. An Ethical Perspective on CEO Compensation .Journal of Business
Ethics, 48 (4): pp. 381-391
9. Bloom, M., 2004. The Ethics of Compensation Systems. Journal of Business Ethics,
52(2): pp. 149-152
10. Rodgers, W., Gago, S., 2003. A Model Capturing Ethics and Executive Compensation.
Journal of Business Ethics, 48(2):pp. 189-202
11. Ungson, G. R., Steers, R. M., 1984. Motivation and Politics in Executive Compensation.
Journal of The Academy of Management Review, 9(2):pp. 313-323
12. Joseph, K., Thevaranjan A., 1998. Monitoring and Incentives in Sales Organizations: An
Agency-Theoretic Perspective. Journal of Marketing Science, 17(2):pp. 107-123
13. Barkema, H. G., Mejia, L. R. G., 1998. Managerial Compensation and Firm Performance:
A General Research Framework. The Academy of Management Journal, 41(2):pp. 135-
145
14. Braskamp, L. A., Muffo, J. A., Langston, I. W., 1978. Determining Salary Equity:
Policies, Procedures, and Problems. The Journal of Higher Education, 49(3):pp. 231-246

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 15. Meyer, M. A., Mookherjee, D. 1987. Incentives, Compensation, and Social Welfare.
Journal of The Review of Economic Studies, 54(2): pp. 209-226
16. Igalens, J., Roussel, P., 1999. A Study of the Relationships between Compensation
Package, Work Motivation and Job Satisfaction. Journal of Organizational Behavior,
20(7):pp. 1003-1025

Danish Sultan

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+92 312 51100 56

In case of any mistake or omission please let me know.

mrk56 is used by Danish in the documents written originally by him.

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