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SNHU Benefits Costs and Auditing Executive Compensation Discussion

SNHU Benefits Costs and Auditing Executive Compensation Discussion


discussion responses for the following two posts.  need to separate responses:

1. Target Corporation is the business that I choose to focus on. Brian Cornell, who functions as Chairman and CEO, Michael Fiddelke, who is Executive Vice President and Chief Financial Officer, John Mulligan, who is Executive Vice President and Chief Operating Officer, Michael McNamara, who is Executive Vice President and Chief Information Officer, and Don Liu, who serves in multiple capacities including Executive Vice President, Chief Legal Officer, Chief Compliance Officer, and Corporate Secretary, are some of the most prominent figures in its leadership.  Brian Cornell’s yearly pay is $17.6 million, Michael Fiddelke’s is $1.9 million, and John Mulligan’s is $7.3 million.

The median wage at Target Corporation is currently set at $24,535. According to statistics provided by AFL-CIO (2022), Target has a pay ratio of 805:1, which indicates that CEOs make an amount that is 805 times greater than that of the ordinary employee. Despite the fact that such pay differences, which are more than 800 times the median, are excessive, I maintain the notion that executives should receive a greater compensation owing to the top-tier performance they deliver.

Stock options are the primary contributor, in most cases, to the significant salary received by senior executives. Executives have the opportunity to purchase business shares at a price that has been already established thanks to these options. Executives might be motivated to boost stock value through the use of stock options since their earnings are positively correlated with stock price. In addition, if a firm gives out stock options, it must account for such options as a kind of compensation expenditure, despite the fact that exercising those options often requires very little in the way of real cash outlay. This frees up the company’s capital resources, which may then be invested in other areas of the business, such as acquisitions. It is important to keep in mind that exercising stock options may result in a reduction in the total number of shares that are currently in circulation. The total number of shares in circulation grows whenever executives make use of their stock options, which has the potential to have a negative effect on earnings per share provided that earnings stay the same.

However, there are several disadvantages associated with stock options. Knowing that their stock options stand to benefit, executives may resort to unethical acts in order to artificially boost the price of the company’s shares. In most companies, the Board of Directors is the body responsible for making decisions about executive compensation. When it comes to combating fraud and abuse, having particular audit processes in place is quite necessary. One such process is the examination of employment and pay contracts with executive officers, for instance. One more entails looking at the proxy statement, which is necessary given that the Board of Directors is open to vote by proxy. Auditors should also engage with the pay board to acquire a full understanding of executive remuneration and discover any possible fraud in the system. With this information at their disposal, the auditing team will be able to set up internal controls that will reduce the likelihood of fraudulent activity. 

2. I used Executive Pay Watch to research Applied Materials, Inc. (AMAT), and the company’s CEO, Gary Dickerson.  During 2022, Mr. Dickerson brought home $20,399,972, which amounts to be 201x the median employee’s pay (AFL-CIO, n.d.).  As someone who has been very satisfied with the performance of AMAT stock over the past year or so, I can’t say he’s not worth it!  Semiconductors are an essential good used in the creation of so many devices, so it makes sense to me that a leader in the semiconductor space would be compensated so highly.  A high percentage of his total compensation comes from the value of stock awards, which I will discuss the benefits and costs of below.  Also, when you boil the numbers down, the median employee of AMAT brings home just over $100,000 per year, which is certainly a livable wage.

Compensating executives with stock awards and stock options is common practice amongst companies and “Aligns the interests of employees and shareholders – both want to see the company prosper and the share price rise” (Vipond, 2019).  Theoretically, compensating executives with stock makes them want the company to perform as best as possible, and when the stock price rises the executives holding stock or options can reap the benefits of their work.  Furthermore, these compensation packages can incentivize executives to stay with the company, because the shares and/or options must be forfeited if the person quits during the vesting period.  Lastly, stock options provide companies with a cheap method of providing potentially lucrative benefits to some of their key talent.  Little cash is required, which “makes stock options particularly attractive to companies that want to invest as much of their cash as possible into capital improvements, acquisitions and other things that grow the company” (Hummel, 2017).  Compensating executives in this manner incentivizes high performance and allows for capital expenditures in other areas that can benefit the company further.

However, compensation with stock and stock options do have some costs that need to be considered.  The main issue to consider is dilution.  The number of outstanding shares increases, which drives the stock price down, and in some cases could offset any increases in stock price driven by the motivated executives.  Dilution and decreasing stock prices can parlay itself into an additional risk to consider; if stock prices are falling, executives may no longer feel compelled to stay with the company during their vesting periods (Vipond, 2019).  There is an additional risk to consider with stock options.  Executives holding stock options have been found to take more “extravagant risks” in pursuit of raising stock prices (Hummel, 2017).  If the risks work, it’s great for the option holders, but if the risks don’t work, the company suffers, and the options do not have to be exercised.  Overall, the risks of stock and stock option compensation must be considered, but the popularity of these compensation packages make me think the benefits outweigh the costs in many cases.

According to Auditing Standard No. 12(10A), “the auditor should perform procedures to obtain an understanding of the company’s financial relationships and transactions with its executive officers” to identify risk of material misstatement in a company’s financial statements.  I would think that a major focus in auditing executive compensation would be to ensure that compensation is pre-defined for a year, and not tied to the performance of the company.  This would involve the examination of the company’s minutes, which holds record of decisions made by the company’s board at least annually.

I would say this is a really interesting topic overall and hopefully we’ll all be taking home CEO compensation some day!

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