How much did your CEO get paid this year? What did any CEO get paid? You may not
ID: 379703 • Letter: H
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How much did your CEO get paid this year? What did any CEO get paid? You may not know the exact amounts, but you probably think the answer is, “Too much money.” According to research from 40 countries that probed the thoughts of CEOs, cabinet ministers, and unskilled employees, we all think leaders should be paid less. Beyond that, we are clueless.
Where we err can be calculated by an organization’s pay ratio, or the ratio between CEO pay and average worker pay. In the United States, for example, the average S&P 500 CEO is paid 354 times what the lowest-ranking employee makes, for a ratio of 354:1 (eight times greater than in the 1950s). U.S. participants in the study estimated that the ratio between CEOs and unskilled workers was only 30:1! Americans are not alone in making this gross underestimate: Participants from Germany, for instance, estimated a ratio of around 18:1 when the actual is closer to 151:1.
In general, people worldwide are unhappy with—and demotivated by—their perception of inequity, even when their estimates of the ratios are far below the reality. Taking the German example further, the ideal ratio of CEO pay to unskilled workers as judged by study participants was around 7:1. To put it all together, then, people think the ratio should be 7:1, believe it is 18:1, and don’t realize it is actually 151:1. For all the countries worldwide in the study, the estimated ratios were above the ideal ratios, meaning participants universally thought CEOs are overpaid.
How does this affect the average worker’s motivation? It appears that the less a person earns, the less satisfied the person is with the pay gap. Yet virtually everyone in the study wanted greater equality. The ideal ratio, they indicated, should be between 5:1 and 4:1, whereas they thought it was between 10:1 and 8:1. They believed skilled employees should earn more money than unskilled individuals, but that the gap between them should be smaller.
No one in the United States would likely think the 354:1 ratio is going to dip to the ideal of 7:1 soon, although some changes in that direction have been suggested. Other countries have tried to be more progressive. The Social Democratic Party in Switzerland proposed a ceiling for the ratio of 12:1, but putting a cap into law was considered too extreme by voters. No countries have yet been able to successfully impose a maximum ratio.
Therefore, the job of restoring justice perceptions has fallen to CEOs themselves. Many CEOs, such as Mark Zuckerberg of Facebook and Larry Page of Google, have taken $1 annual salaries, though they still earn substantial compensation by exercising their stock options. In one extreme recent example, Gravity CEO Dan Price cut his salary by $1 million to $70,000, using the money to give significant raises to the payment processing firm’s employees. Price said he expects to “see more of this.” In addition, shareholders of some companies, such as Verizon, are playing a greater role in setting CEO compensation by reducing awards when the company underperforms.
Q2: There are two viewpoints for application of equity theory to executive compensation. First, the executives themselves will have a perspective based on their compensation in comparison to executives in similar-sized companies and industries. The second view reflects the opinion of the employees in the executive’s company and their perceptions of equity. There is a potential disconnect between the two. How does the executive compensation issue relate to equity theory? How should we determine what is a “fair” level of pay for top executives based on these two perspectives? Discuss why.
Explanation / Answer
) Usage of Internet for Competitive Advantage in Business
At its most fundamental level, competitive advantage is a measure of the value that a firm
is able to create and transfer to its customers. Essentially, a firm can create value for its
customers in one of three ways:
1.By providing their products and/or services at a lower price than its competitors;
2. By differentiating its products and/or services from competitors through the
provision of unique benefits which offset a premium price;
3. Through a combination of both a low price and differentiation strategy which is
focused on a particular market or segment .
Information and networking technologies are creating a new marketing paradigm, this new paradigm is described as 'one-to-one marketing', where greater emphasis is being placed on individuality and customisation.
The Internet, as an interactive medium, offers the capability to support the emerging business ethos more completely than traditional communication media. Empirical surveys show that the majority of businesses using the Internet have a passive presence, suggesting that strategic business use of the World Wide Web is still in its infancy.
Information technology will render rivalry between competitors more intense, yet also create additional opportunities to develop competitive advantage such as ,
i) the creation of new business interrelationships within the value system,
ii) the expansion of industry scope, and
iii) the increased ability to co-ordinate value activities regionally, nationally, and globally.
Porter and Miller suggest that IT will create competitive advantage by providing
companies with new ways to outperform their competitors.
IT can have a powerful effect on the cost structure of a business, can increase opportunities for differentiation, and can alter a firm's competitive scope.
Examining the impact of the Internet in relation to this proposition, there are a number of competitive advantages to be realised at each stage of the value system. These include,
i) process inputs from suppliers (upstream value),
ii) internal operations (value chain), and
iii) customer relations (downstream value).
b) Firms that use Internet
Travel Industry:
Travel and Tourism is one of the highest revenue-generating sectors of the internet, The rapid growth of the internet is having an impact on the distribution of travel services and has heightened speculation about the potential for disintermediation of the travel agent.
Banking Sector:
Nearly 57 percent of the Indian commercial banks are providing transactional Internet banking services. The univariate analysis indicates that Internet banks are larger banks and have better operating efficiency ratios and profitability as compared to non-Internet banks. Internet banks rely more heavily on core deposits for funding than non-Internet banks do.
E-commerce:
Today millions of users access and use the internet for various purposes throughout the day. They use the internet for searching, browsing, writing & communication, listening, watching news, videos, publishing copying, printing, discussions, trading and selling etc. The list of activities and choices that the internet has got to offer to individuals is ever expanding. With millions of users actively looking for various products, information and services, there is a huge opportunity for the businesses to jump on to the internet bandwagon and cash in on the business opportunity that is presenting itself every minute.
c) Internet an Essential Tool
Whether we like it or not, the internet is rapidly becoming a necessary part of life.
If we want to maintain a decent quality of life, attract visitors, encourage businesses to be established or have citizens move within the Blue Line, it is imperative that everyone has decent access to this amazing tool.
Electronic Communications:With the introduction of the Internet, we now have the ability to send and receive messages through electro
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