Business Issue & Walt Disney Co
Walt Disney Co. is facing anew the controversial issue of its CEO’s compensation package. A significant number of shareholders feel that the salary and benefits given to executives are massive and excessive. In 2004, about 45% of the company’s shareholders gave vote of no confidence to the re-election of Michael Eisner as director of the company. Among the reasons attributed to this turn about was their concern over his pay and the performance of the company.
Eisner signed an employment contract in 1997 which runs through 2006 and stipulated that he will have a base salary of $1 million per year and is eligible for bonuses up to $19 million annually, aside from this, he will also received stock options on $24 million common shares of Disney stocks. The shareholders felt that the company was putting management interests ahead of shareholder interests. In 2005, Disney implemented a new compensation program for its executives. Robert Iger replaced Eisner at the helm of the company.
Under the new compensation package, Iger is entitled to a $2 million salary base per year and his targeted amount for performance-based bonuses is $7. 25 million. Walt Disney Co. is diversified company that has operation worldwide. The company is made up of four segments; the Media Networks, Parks and Resorts, Studio Entertainment and Consumer Products. The entertainment industry is a highly competitive arena and being able to stay on top of the pack is no easy feat. The company had its share of growths and deficits and its CEO had been a great factor in the company’s existence.
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In the entertainment business, other companies given the right combination of pay and benefits can pirate CEO’s. Consequently, Disney had to make sure that they compensate their CEO for the responsibilities that he/she had to carry. Industrial psychology project Page#2 Analysis The issue of excessive executive compensations and benefits can be analyzed using the concepts of compensation and performance-appraisal. It is general rule that people are paid or compensated according to their value. The value of an individual in the company can be measured through his/her work performance, capabilities, tenure and personal values.
Thus, to understand why CEO’s receive sky rocketing compensation, we might ask what is their value to the company. Moreover, if compensation is based on performance, then performance appraisal is needed to determine just how valuable the CEO is to the company. The compensation package of Disney for its executives has three aspects. The annual base salary and performance-based bonuses, which are actually cash-based pays and the equity-based pay, which takes the form of stock options. Cash-based pay is the traditional way of compensating workers for the job that they do, as stipulated in their job description.
Performance-based bonuses are also cash-based but it is an incentive for accomplishing more than what it required of the worker. Equity-based pay is a newer concept and is found on mostly in business organizations that have publicly traded stocks. In Disney, this meant that the CEO would be rewarded when the stocks went up and would feel the brunt if the stocks did badly. CEO’s are given stocks that they have to hold for a determined period before they can actually earn from it. Compensation as motivator had long been challenged, but it is nevertheless a key element to any employee, whether rank and file or executives.
Pay rates reflect the degree of one’s value to the company. A CEO always has superstar status, and based on compensation surveys, CEO’s are all paid more than the average. The reason for this could range from being Industrial psychology project Page#3 underpaid before, compared to other professions, they might be earning lesser. Another reason would be is that CEO’s face greater risks with equity-based pay since if stocks go down, they don’t earn anything. On the other hand, executives could be overcompensated simply because there are very few of them and they can command higher salaries and benefits.
As cited, compensation is closely tied to performance even Disney has a performance-based bonus scheme. Under this scheme, the board will set a goal that needs to be reached by the CEO and the company for him/her to enjoy the bonus. It is however a given that in order to implement this scheme, the company should have a good performance-appraisal program. Evaluating performance has been a core concept in any organization; it is received negatively and feared by most, especially if it is used for administrative decisions.
Often, evaluation results should have positive outcomes, like merit pay and bonuses. A good performance appraisal program should have clear guidelines and be able to adequately measure the level of performance of workers based on predetermined criteria. However, studies with performance appraisal had revolved around improving its psychometric properties rather than defining what performance is. Like in Disney, they will set a goal that the company should attain in a year. This method is akin to setting a bar that the CEO must jump over, and usually it is growth in stocks, revenues, earnings etc.
This kind of criteria actually makes sense for the shareholders, but this does not hold true for the executive. Performance appraisals should also take into account the effectiveness and efficiency of the executive in carrying out his/her duties to bring about success for the company. Industrial psychology project Page#4 Solution Equity-based pay is actually a good concept. It gives the CEO a sense of responsibility over his/her stocks since he/she owns it. CEO’s are more likely to protect his/her share and thus work hard to make sure that the company performs well.
A sense of ownership can be a motivator for the executive who almost have everything and in reality is already very rich. However, equity-based pay can also have its setbacks, like the temptation to monopolize power or even deceive their shareholders like what happened to Enron. Thus, a check and balance mechanism should be integrated in the design of equity-based pay. Forming a board of director that is psychologically independent from the CEO can achieve this. In this way, the board can exercise its duty without the influence of the CEO.
The CEO should also not be allowed to have a hand in choosing compensation consultants and that a compensation committee should be formed with equal representation of the board and shareholders. In this way, shareholders would be involved in designing the compensation package. By designing a performance-appraisal program that adequately defines and identify performance will be the answer to this issue. Oftentimes, shareholders do not understand the responsibilities of the executive and what they only see is the fluctuation of the stock price and how much they made from it.
Thus, a performance-appraisal program that is based on the required job description of the position will help answer the concerns of the shareholders. This would also justify the compensation package given to the CEO. To evaluate the effectiveness of these measures, it is wise to conduct a survey on the general perception of shareholders about the company’s executive compensation scheme. The survey would tell the company how the shareholders view the new scheme and whether there is a need to change or improve the measures.
Lazaroff, L. (2006) Executive pay critics in the picture at Disney ChicagoTribune. com Retrieved March 9, 2006 from http://www. chicagotribune. com/business/chi-0603050332mar05,1,657341. story Robbins, S. (1998) Organizational Behavior 8th ed. New York Prentice-Hall Verrier, R. (2006) Promotion pays off for Iger Disney showers its new chief executive with a raise, bonus and stock grant ChicagoTribune Retrieved March 9, 2006 from http://www. chicagotribune. com/business/orl-disney1206jan12,1,1330237. story? coll=chi- business-hed