Introduction
Sustainable development is vital in business environment. Reflectively, this concept defines feasibility of a company and its solvency within a specified period of time, as part of the pillars of the organizational corporate governance. In the business environment, sustainability is affected by forces in the market, decision science, corporate structure, and real financial management. In the recent past, the Securities and Exchange Commission (SEC) proposed the CEO-to-Worker Pay-Ratio Disclosure. As a litigation strategy, the SEC proposed the use of simple estimation methods, such as sampling, to ensure that the process of compliance among organizations is less costly (Colley 21).
Thus, the sampling procedure may generate the median workers’ pay as a fraction of the CEO pay. The objective of this research paper will be to explain to CEOs of companies on how to implement the CEO-to-Worker Pay-Ratio Disclosure. Besides, the benefits of implementing the CEO-to-Worker Pay-Ratio Disclosure are explored and related to the pillars of corporate governance such as transparency, accountability, leadership, and strong standards of governance (Solomon 34).
The CEO-to-Worker Pay-Ratio Disclosure proposed by SEC
The CEO-to-Worker Pay-Ratio Disclosure proposed by SEC is a statistical method of estimating the pay of employees of an organization as a fraction of the CEO pay. In the past years, the ratio between the earnings of ordinary employees and CEO had been unrealistic. For instance, by the end of the year 2009, the Bloomberg established that “the average multiple of CEO compensation to that of rank-and-file workers is 204” (Deloitte Development LLC par. 8).
In fact, some companies such as Nike, Ralph Lauren Corp, and Oracle Corp had an average multiple of more than 1000. This variance is very abnormal, considering the fact that the ordinary employees are part of the overall production in such companies. This abnormal variance may limit the performance or motivation level among other employees, especially when they are aware of the variance (Flamholtz & Randle 34).
As argued by Mr. Richard Trumka, the AFL-CIO Labor Federation, “when the CEO receives the lion’s share of compensation, employee productivity, morale and loyalty suffer” (Deloitte Development LLC par. 11). He further notes that “reasonable CEO-to-worker pay ratios send a positive message to the workforce that the contributions of all employees are important to running a successful company” (Deloitte Development par. 11). Thus, it is important to balance the average multiplier to ensure equal participation between the CEO and other workers. This paper supports the implementation of the CEO-to-Worker Pay-Ratio Disclosure. It explores the successful implementation process and its benefits towards improving corporate governance in organizations.
Benefits of the CEO-to-Worker Pay-Ratio Disclosure
The CEO-to-Worker Pay-Ratio Disclosure, proposed by the Securities and Exchange Commission (SEC), has several benefits to company’s corporate governance implementation. Among the notable benefits include the modeling of organizational compensation plan, micromanaging labor and compensation efficiency, and creating or managing the benefit allocation formula. These benefits are discussed below.
Modeling the compensation plan
The proposed program refers to the values of a supportive learning environment, concrete learning processes, and practices leadership that reinforce innovation. This model will offer the motivation to acquire, bond, comprehend, and defend among the employees. The vision of the program will be to create an ideal climate for innovation and communication among the employees (Colley 39).
Micromanaging labor and compensation efficiency
Reflectively, the CEO-to-Worker Pay-Ratio Disclosure will give companies the authority to use a preferred statistical approach towards creating standard compensation modules for employees. Since the variables to be considered include payroll system, line of business, location, and groups of employees, a company might benefit from the CEO-to-Worker Pay-Ratio Disclosure since it is in a position to micromanage the efficiency of the labor force from the statistical data generated. Besides, the CEO-to-Worker Pay-Ratio Disclosure will provide a stable system of creating and managing the compensation measure in a company within a dynamic market. Therefore, the corporate governance system in a company may align the payroll to short and long term objective such as employee development (Monks & Minow 21).
Creating and managing benefits allocation
The third step, which involves calculating of annual compensation, may help the corporate governance function in a company to modify its employee benefits and the scope of the employment contract to minimize incidences of redundancy. For instance, the “SEC clarifies that compensation elements should follow the instructions consistent with the calculation of the PEO’s total annual compensation” (Deloitte Development LLC par. 7). Therefore, a company will be in a position to create the employee compensation structure without having to depend on the traditional methods that are silent on market dynamics.
The CEO-to-Worker Pay-Ratio Disclosure and Corporate Governance
Since the pay ratio rule will be part of the proposed CEO-to-Worker Pay-Ratio Disclosure, the corporate governance structure of companies will have system for promoting the elements such as culture, structure, systems, leadership, and strategic alignment. Therefore, the CEO and the corporate governance board may be in a position to create a risk management and mitigation policies. Besides, the board is in a position to ensure that a company is compliant with different regulatory obligations on compensation. The board may allocate different teams the responsibility of full material disclosure, governance, and direct engagement in creating and managing the compensation system through the proposed CEO-to-Worker Pay-Ratio Disclosure. Companies will be committed to compliance and adoption of standard business practices since the benefits outweighs the cost implications (Solomon 28).
The proposed CEO-to-Worker Pay-Ratio Disclosure Proposed by SEC will assist the corporate governance board of a company in making transactions and business processes more efficiently and improving accounting functions in employee compensation system. Reflectively, an efficient and systematic compensation accounting system acts as a shield against misappropriation. Thus, the management may find this information vital in improving monitoring systems, investor’s confidence, and inclusive structuring as the market may demand (Monks & Minow 17).
Recommendations
Putting into consideration of the external and internal dynamics, the corporate governance strategy for companies implementing the CEO-to-Worker Pay-Ratio Disclosure should create a flexible, self regulating, and consistent monitoring structure in order to reduce loses, as a result of inconsistency in financial compensation plan for the CEO and other employees (Solomon 25). If well merged with appropriate management mix, the strategy will secure a continuous quantitative increase of market by market share as employees will internalize moral suasion and respect the evaluation structure (Pearce & Robinson 26).
In order to enhance optimal performance, the corporate governance structure of companies implementing the CEO-to-Worker Pay-Ratio Disclosure needs to introduce different internal control policies which will attract various types of control management, thus creating consistency and fear among the CEO who might be tempted to compromise it. Consequently, the structure will be required to maintain the monitoring and success of the evaluation procedures of such companies, since the compensation plan will be a ratio of the CEO pay.
The CEO-to-Worker Pay-Ratio Disclosure needs to be integrated into the achievement of various organizational goals through the distribution processes to ensure that all the employees perform optimally without incompetence. This may be achieved through adopting of a secure sampling system of creating the median pay within the recommended average multiplier range (Madsen and Vance, 2009).
It is important to have an effective board committee to review the compensation plan in the CEO-to-Worker Pay-Ratio Disclosure system on a quarterly basis. Further, the board of directors may engage external bodies such as government regulators to review activities of remuneration of all employees and the quality of their work. In addition, the corporate governance board of a company may be attuned to events and appreciate the essence of analyzing forecasted turbulent turns and twists within the organization, in terms of financial performance against pay to CEO and other workers. Generally, the CEO-to-Worker Pay-Ratio Disclosure is intrinsic of ambiguity, subtlety, and manipulation since the median pay is predetermined (Flamholtz &Randle 22).
The corporate governance strategy for companies should take up the role of ensuring that it offers assistance through creation a system unit that addresses the loop holes responsible for misrepresentation among the employees, in terms of pay ratio. The speed at which such changes take place should be continuous since the CEO-to-Worker Pay-Ratio Disclosure provides a sustainable implementation formula within the scope of each organization. One way to effectively monitor the success of the CEO-to-Worker Pay-Ratio Disclosure is managing the magnitude of internal system change in the parameters of employee motivation and optimal performance, as an element of the ratio of compensation for piecemeal work (Colley 24).
As an alternative, management often distributes the pay rise based on performance of the employees. This ensures equitable distribution of the pay rise. However, this has never been effective. As a litigation to improve the corporate governance functionality, there are steps that organizations need to follow to achieve equitable pay distribution as enshrined in the CEO-to-Worker Pay-Ratio Disclosure. Training and development form part of organizational strategy mostly because organizations are characterized by numerous expansions (Solomon 18).
There is a need to merge organizational skills, knowledge, and culture with the new challenges and demands of the CEO-to-Worker Pay-Ratio Disclosure. Organizations need to use CEO-to-Worker Pay-Ratio Disclosure largely because it operates in a highly competitive labor market. The CEO-to-Worker Pay-Ratio Disclosure ensures that the company remains ahead of the competition. Thus, the corporate governance structure in any organization implementing the CEO-to-Worker Pay-Ratio Disclosure should realize that there is no better way to achieve this, rather than through the use of an appropriate sampling technique within the flexible disclosure requirements. Further, an organization should evaluate effectiveness of CEO-to-Worker Pay-Ratio Disclosure in realizing the goals and objectives of the company (Colley 16).
Conclusion
The CEO-to-Worker Pay-Ratio Disclosure proposed by SEC is a statistical method of estimating the pay of employees as a fraction of the CEO pay. Apparently the system is meant to balance the pay variance for the worker as a ratio of the pay of the CEO. The system promises benefits such as employee motivation, equality in pay distribution, and distributing pay against performance. When successfully implemented, the organizational corporate governance functionality will have systems for promoting the elements such as culture, structure, systems, leadership, and strategic alignment.
Works Cited
Colley, John. Corporate governance, London, UK: McGraw-Hill, 2009. Print.
Deloitte Development LLC 2013, CEO pay ratio disclosure: what would it take to implement the SEC proposal. Web.
Flamholtz, Eric, & Y. Randle. Corporate culture: the ultimate strategic asset, Stanford, UK: Stanford business Books, 2011. Print.
Monks, Roberts, & N. Minow. Corporate governance, New York, NY: John Wiley & Sons, 2012. Print.
Pearce, John, & K. Robinson. Strategic management: Formulation, implementation, and control, New York, NY: McGraw-Hill, 2009. Print.
Solomon, Jill. Corporate governance and accountability, London, UK: John Wiley & Sons, 2011. Print.
Tricker, Bob, & R. Tricker. Corporate governance: principles, policies and practices, London, UK: Oxford University Press, 2012. Print.