Portfolio of

Pamela S. Kirby

Kirby Page 1

Professional Portfolio

by

Pamela S. Kirby

An Electronic, Web, and Paper Version

Submitted to Dr. Mary White

Jackson State University

In Partial Fulfillment of the Requirements

for the Course BPD 790

April 12, 2013

Major Subject: Teaching Methods in Business

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Table of Contents:

I. Autobiography with Photo………………………………………………….............3

II. Curriculum Vitae…………………………………………………………………...4

III. References…………………………………………………………………………..6

IV. Resume……………………………………………………………………………...7

V. Philosophy of Teaching, Code of Ethics, and Personal Statement……………...8

VI. Certificates and Awards…………………………………………………………..9

VII. Letter of Conference Acceptance (paper version only)

VIII. Proceeding # 1: UNDERSTANDING CHINA AND INDIA: Markets at the

Bottom of the Pyramid……………………………………………………………10

IX. Proceeding # 2: CEO PAY: Trends & Implications……………………………21

X. Current Transcript (paper version only)

XI. Course Evaluation form (paper version only)

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Autobiography for

Pamela S. Kirby

Pamela S. Kirby was born January 16, 1981 to the (late) Billy B.

and Stella D. Kirby in Athens, Alabama. She has one older sister

Bellany K. Harris, a brother-in-law E. Tyrone Harris, and one

niece Aniya J. Harris. Ms. Kirby attended Athens City Schools

for her K-12 education. Ms. Kirby was named the first African

American Valedictorian at Athens High School in 1999.

Upon graduation, she decided to continue to college and

to study engineering due to having a desire to design roller

coasters for theme parks. Ms. Kirby decided to attend the

Georgia Institute of Technology in Atlanta, GA for her

undergraduate studies. She worked as a server and as an assistant

instructor for an after school program to help finance her education. She experienced tragedy in

2007 when her dad Billy B. Kirby passed. Even though she encountered some difficulties along

the way, she adjusted, adapted, and preserved, and she graduated from the Georgia Institute of

Technology with a BS in Civil Engineering in December 2008.

She moved back to the state of Alabama upon graduation. She desired to obtain business

knowledge so she could possibly open her own learning center for children at some time in the

future. She attended the University of North Alabama in Florence, AL and graduated December

2011 with a Master of Business Administration degree. She then decided to pursue a doctoral

degree. With this degree, she can make teaching, serving, assisting, and learning part of a

lifetime process.

She is currently attending Jackson State University in Jackson, MS. She is working on a

Doctor of Philosophy degree in Business with an emphasis in Management. She is currently

employed at the University as a graduate assistant. She desires to teach at the collegiate level

upon graduation. She also has a strong desire to help children overcome learning challenges by

providing tutorial services in her off duty time. She also desires to make contributions to her

scholarly field by researching issues related to managing those in jobs at the bottom of the wealth

pyramid.

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Pamela S. Kirby

CURRICULUM VITAE- April 2013

Name: Pamela S. Kirby

Address, Telephone & Email: 2625 Belvedere Drive Apartment # 124

Jackson, MS 39212

(404) 213-9889

J00685204@students.jsums.edu

Rank/ Title: PHD student/ Graduate Assistant

Date Of First Appointment at Jackson State University: Admitted 08/12

Education:

Master of Business Administration, University of North Alabama, December 2011

Bachelor of Science in Civil Engineering, Georgia Institute of Technology, December 2008

Professional Certification/ Professional Development Credentials: Not applicable

Primary Courses Taught at JSU Over Past Five Years: Not applicable

Teaching and Other Professional Experience:

3rd

Grade Supply Teacher, Brumby Elementary School, 2009

Intellectual Contributions:

Referred Proceedings

Pamela Kirby & Santanu Borah. (2011). CEO Pay: “Trends & Implications. Paper

presented at the 23rd

International Conference in Newport Beach, California (November

17-19, 2011) and organized by the Association for Global Business.

Santanu Borah & Pamela Kirby. (2011). Understanding China & India: Markets at

the Bottom of the Pyramid .Paper Presented at the 23rd

International Conference in

Newport Beach, California (November 17-19, 2011) and organized by the Association for

Global Business.

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Academic And Other Professional Service Activities:

Academy of Management, member, 2013

Honors And Awards:

4.0 Scholar

Memberships In Academic And Professional Organizations:

Phi Eta Sigma Honor Society

National Society of Collegiate Scholars

Golden Key Honor Society

Chi Epsilon Civil Engineering Honor Society

Delta Mu Delta Business Administration Honor Society

Phi Kappa Phi Honor Society

Alpha Epsilon Lambda National Honor Society

AACSB Qualifications Designation: Other (MBA with 18 hours in Management)

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Pamela S. Kirby

REFERENCES- April 2013

Dr. Douglas McWilliams

Assistant Professor, Department of Management and Marketing

P.O. Box 18230

Jackson, MS 39217

(601) 979-2978

douglas.l.mcwilliams@jsums.edu

Dr. Alisa Mosley

Associate Professor, Department of Management and Marketing

P.O. Box 18230

Jackson, MS 39217

(601) 979- 2982

alisa.mosley@jsums.edu

Dr. Joann White

Assistant Professor, Department of Management and Marketing

P.O. Box 18230

Jackson, MS 39217

(601)979-2981

joann.white@jsums.edu

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Pamela Shae Kirby 2625 Belvedere Drive Apartment # 124

Jackson, MS 39212

(404) 213-9889 (mobile)

J00685204@students.jsums.edu

605 Plato Jones Street

Athens, AL 35611

(256) 614-2773 (home)

happykite7@yahoo.com

Objective:

Seeking a faculty position with growth and advancement potential

Education: Jackson State University, Jackson, Mississippi

Doctor of Philosophy in Business, expected May 2016

University of North Alabama, Florence, Alabama

Master of Business Administration, December 2011

Georgia Institute of Technology, Atlanta, Georgia

Bachelor of Science in Civil Engineering, December 2008

Experience:

Jackson State University, College of Business, Jackson, MS

Graduate Assistant, 8/12-present

Help assigned faculty members with various tasks

Demonstrate professional, pleasant demeanor to faculty, staff, and

students

Exhibit exemplary classroom performance

University of North Alabama, College of Business, Florence, AL

Graduate Advisor, 08/09-12/11

Advise current Master of Business Administration students

Receive and respond to official correspondence

Utilize Microsoft Office programs to complete assigned tasks

Access Banner system to retrieve student records

Serve on University of North Alabama Graduate Council

Cobb County School District, Brumby Elementary School, Marietta, GA

Early Intervention Supply Teacher, 03/09-05/09

Serve in the capacity of classroom teacher

Reinforce math, reading, and grammar skills

Provide preparation for grade level standardized testing

Conduct small group instruction and access student performance

Professional

Organizations:

Phi Eta Sigma Honor Society, member, (2000);

National Society of Collegiate Scholars, member, (2000);

Golden Key Honor Society, member, (2001);

Chi Epsilon Civil Engineering Honor Society, member, (2002);

Delta Mu Delta Business Administration Honor Society, member, (2011);

Phi Kappa Phi Honor Society, member, (2011);

Alpha Epsilon Lambda National Honor Society, member, (2013);

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Teaching Philosophy

I plan to develop a classroom environment that will facilitate learning for all students

(including myself). I will accomplish this task by providing a class space that is comfortable. I

will create an environment that is safe for students to express their ideas. I will encourage

questions and individual thought. I will challenge the students to get beyond the limits of

convention and really push themselves to get to a new height of knowledge. Additionally, I plan

to teach the students life skills in conjunction with the standard academic curriculum. The

climate will be one of mutual respect. The goal is to ensure that all students are able to grow,

thrive, and flourish in the educational arena and beyond!

Code of Ethics

I will be responsible to fulfill the duties of the job assigned. I commit myself to doing my

very best at teaching, researching, and serving in various capacities as required by a future

faculty position. I will be accountable to myself and others. I will not make excuses but instead

work to find solutions when problems inevitably surface. I will commit myself to keeping my

word to coworkers and students. I will attempt to help and assist others as needed to the extent

that I am able. I will choose to see the best in others. I commit myself to maintaining a good

attitude so that my surrounding environment will be filled with pleasant energy. I strive to make

a positive difference in the lives of students that will extend beyond the four walls of a building.

I commit to demonstrating the characteristics of successful management and leadership in the

classroom as well as in my personal endeavors.

Personal Statement

I seek to make a positive difference in the world. I plan to help others learn so that they

may be equipped to take charge of their own lives. I hope to bring awareness to human rights

issues and contribute research that offers solutions to the growing problems arising from

inequality in the United States and abroad. I will emphasize that love works and attempt to show

love to those I meet. I am an idealist who does plan to change the world but as a realist I know

the feat can only be accomplished one person at a time.

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Certificates and Awards

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Proceeding #1:

UNDERSTANDING CHINA AND INDIA: MARKETS AT THE BOTTOM

OF THE PYRAMID

Santanu Borah

Pamela S. Kirby

University of North Alabama

Abstract

The concept of serving the markets at the bottom of the pyramid is getting increasing

importance because of the enormous potential associated with serving a market of more than 4

billion people. However, serving this market needs a somewhat radical approach than those that

are being currently used to serve customers who are at the top of the pyramid. A fine-tuning of

contemporary business approaches will be needed to make it relevant to the emerging markets.

This paper will also demonstrate that large firms in the wealthy western countries can profitably

serve these patrons in developing countries.

Introduction The goal of business is to provide a good or service to a customer. The purpose of

management is to ensure that the business maintains profitability in order to create value for its

shareholders. The developed markets are becoming increasingly saturated as a result of the

growing competitive nature of these markets. Walmart, for example, recently reported that for

the ninth consecutive quarter revenues at its Walmart stores in the U.S. open at least a year

declined compared with the quarter a year before (D’Innocenzio, 2011). The same report also

identified that Walmart’s second quarter profit rose 5.7 %, due to international sales growth and

cost cutting. Walmart’s predicament is a reflection of the challenges faced by multinational

companies in the developed economies. The following graph1 reflects the realities of the

developed economies: the average growth rate is a dismal 1.3% compared to the 9.7% growth of

1 http://www.tradingeconomics.com/gdp-growth-rates-list-by-country

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China and 7.7 % growth rate of India. For companies such as Walmart there is a need for

expansion into untapped areas to gain access to new customer bases. These new customer bases

are at the “bottom of the pyramid” (BOP). In a report prepared by Pricewaterhouse and

Coopers2, the long-term GDP projections reflect the fact that emerging markets such as China

and India are going to be much more of a challenge. This highlights the necessity of global

companies being fully engaged in markets such as China and India as early as possible. When

the economic scenario is going to be turned upside down it will be too late for companies from

the developed world to even find a foothold in those markets.

The Economist magazine3 identified that “disruptive innovations”, a term invented by Dr.

Clayton Christensen, is already being felt by the developed economies. Companies from the

emerging economies such as China and India are attempting to radically alter the rules of the

2 http://www.pwc.com/en_GX/gx/world-2050/pdf/world-in-2050-jan-2011.pdf

3 http://www.economist.com/node/15879393

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2010 2015 2020 2025 2030 2035 2040 2045 2050

Years

Long-Term GDP Projections

US

China

India

Japan

Russia

Brazil

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game. This is evident in many new products whose prices are slashed and with absolutely new

processes. The report also mentions that these will make a bigger difference to life in the West

than lean production, the previous great disruptive management innovation from the East:

Carlos Ghosn of Renault has praised India’s frugal innovation; Jeff Immelt of GE has backed the

idea that his company should disrupt itself with cheap products from India and China; Arun

Sarin as the boss of Vodafone sent his top executives to India to learn about its low-cost business

model. Perhaps, this is the time when “frugal innovation” will find acceptance in the developed

world where economies are in tatters and will become the new norm of how things are done in

the world of business.

Historically, firms have not been as willing to serve the citizens of less developed

countries. Company leaders did not view these individuals as a viable customer base due to the

lower income levels when compared to people residing in developed countries. Typically, firms

only showed interest in less developed countries as a source of cheap labor. The firms would use

these laborers and pay a lower wage rate as a means to improve the company profit margin by

lowering their expenses. When the labor arbitrage opportunities are exhausted, the companies

would the move to another developing country and repeat the process. This can be potentially

damaging and create a tremendous backlash towards globalization.

The media has begun focusing specifically on the plight of the poor around the world.

Reporters are now able through various media to show viewers the deplorable living conditions

of impoverished people around the world. Because people in developed countries now have

exposure and knowledge to what fellow neighbors must be enduring, there is a growing

movement being sparked by citizens for what is termed as social justice.

This idea of social justice is causing people to begin to demand increased levels of ethics

and corporate responsibility from firms (Berger, Choi, & Kim, 2011). Given the recent turmoil in

the Middle-East and Africa, the pressure for responsible leadership is more than ever before.

Global companies are perceived to wield extraordinary influence, both positive and negative, on

a society's well-being and infamous cases such as Nestlé's infant-formula sales in Africa since

the 1980s, Union Carbide's Bhopal gas tragedy in 1984, the Exxon Valdez spill in 1989, the

outcry over Shell's plan to sink its Brent Spar oil rig and the protests at its Nigerian facilities in

1995 tend to put these companies in a negative light (Holt, Quelch, &Taylor, 2004). Global

brands are often associated with companies that have deep pockets and society expects these

companies to tackle social issues in a proactive manner.

Companies and governmental agencies in the developed economies have the knowledge

and the expertise to put in place mechanisms to contribute towards the growth of healthy and

stable economies across the globe, especially in the BOP countries where the need is the acutest

(Hahn, 2009; Pless & Marak., 2009). S. Sivakumar in the ITC e-Choupal update states, “In a

similar manner, capitalist markets, with the self interest of the entrepreneur as the foundation,

were never thought of as a means to achieve social equity…Much later, when our experience at

ITC had demonstrated that markets do deliver social equity when you co-create them together

with empowered communities…” (pg.339). It is possible to reconcile the conflicting goals of

doing good and doing business (Prahalad, 2010). In this paper, we will first identify the customer

at the BOP and then examine some of the strategies that could be employed to serve these

markets profitably.

Who is the Customer?

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According to Prahalad (2010: 6) there are approximately 4-5 billion poor who are

unserved or underserved by the large organized private sector. This mass of people can be

divided further based upon their income and education levels. According to the article,

“Segmenting the Base of the Pyramid”, these people can be divided into three segments based

upon living standards. The text indicates, “Low income. The adults among the roughly 1.4

billion people who live on 3-5 dollars a day typically have a couple of years of secondary

education and the skills needs to enter the job market…Subsistence. The bulk of the roughly 1.6

billion people who live on 1-3 dollars a day are poorly educated and low skilled… Extreme

poverty. The bottom 1 billion lack basic necessities: sufficient food, clean water, and adequate

shelter…” (Chu, Petkoski, and Rangan, 2011: 114). A graphical representation of the various

market segments in Peng’s 2011 textbook helps us to get a clear picture of the pyramid:

Some researchers use the term “base of the pyramid” and others use the term “bottom of the

pyramid” interchangeably.

The needs of the customers are also different. According to Singh, Ang, and Sy-Changco

(2009), Filipino smokers prefer to buy cigarettes by the stick and not by the pack; about 68% of

Procter and Gamble’s shampoo business in the Philippines is generated by sachet sales; In India,

shampoo sachets contribute to more than 95% of industry sales in units (Hammond & Prahalad,

2004). The idiosyncrasies of customers at the bottom of the pyramid are highlighted by the fact

that shampoo sachets are being sold in India for 2-4 cents and they make up about 70% of the

entire shampoo market in India4. The whole notion of trying to sell anything at 2-4 cents is

anathema to companies from the developed world. But such are the adjustments that will have to

be made to in order to sell in the BOP.

4

http://www.accenture.com/SiteCollectionDocuments/PDF/WinninginEmergingMarkets_Final.pd

f

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It is quite evident that the BOP market is significant. Even within this segment there are

variations. There are more than 50 countries in Africa with average income levels of around

$1,000 (Berger, Choi, & Kim, 2011). In sub-Saharan Africa, there were only three mobile phone

per one hundred people and now there are eight per one hundred (Peng, 2011). This is in a

region where land lines are non-existent. For customers in this region, a cellphone costing more

than $50 is simply beyond their reach. The question is, what do you sell to customers who make

less than $2 a day, how do you sell to these customers where physical infrastructure is highly

inadequate, and more importantly can you make money by selling to these customers. The

profile of these customers is much different than that of people residing in developed countries

where income are higher and credit is more accessible.

A New Generic Approach?

In the western markets, firms have typically used a differentiation approach. The products

are designed to have better attributes and performance and are sold at higher prices. For example,

cell phone features have greatly increased over time. In addition to call functions, mobile devices

now have cameras, text messaging capabilities, and internet and cable satellite access. Patrons

who want a product that only makes and receive calls will have trouble finding such a simple

contraption in America and Europe. However, the patrons in these poor countries cannot afford

all the additional bells and whistles. These people need a product that is designed to meet their

needs that is within their price range. There are a large number of customers in this market so the

firms could use a cost leadership approach. Using this model, the firms could sell the products at

a low price and still achieve profitability through the volume of sales. However, competing with

two different generic strategies can cause failure to maximize the return on investment according

to Porter. In the article “The Last Frontier”, the authors provide ways to minimize negative

effects of “getting stuck in the middle” in a passage that reads, “The primary solution offered to

solve this problem is to keep the two business models (and their underlying value chains)

physically separate in two distinct organizations” (Anderson, Markides, Kupp, 2010:17).

Because there would be a fundamental shift in the generic strategy used in these markets, the

companies would have to use creativity and ingenuity to make this model feasible. According to

Adrian Woolridge in an interview concerning trends in emerging markets, “They are reinventing

systems of production and distribution, and they are experimenting with entirely new business

models. All of the elements of modern business, from supply-chain management to recruitment

and retention, are being rejigged or reinvented in one emerging market or another.”

Prahalad gives some specific suggestions for ways companies can innovate to be

successful in these markets. According to S Manikutty in the article “C K Prahalad and His

Work: An Assessment”, the author states, “CKP emphasized the need for combining these

resources and stretching them to new areas and new lengths; combined with an ambitious

strategic intent, a firm could do its tasks in a markedly distinct way from its competitors. The

trick was to find what a firm could do in a distinct and superior way as compared to other firms

across different activities or products” (Manikutty, 2010: 3).

Develop a Strategy

Traditional business models use a 4P approach to marketing strategy with components

Price, Product, Place, and Promotion. For emerging markets a similar framework was established

called the 4As framework. In the article “The Last Frontier”, the authors write, “In an earlier

study, we identified four critical elements for success in serving low-income customers in

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developing markets- what we defined as the 4As framework: Affordability, Availability,

Awareness, and Acceptability”, and the article later states regarding some of the unique

challenges facing these markets, “ … there are a number of common challenges that are present

across all of these new market spaces: lack of legal frameworks, absence of key infrastructure,

and a shortage of skilled people…” (Anderson, Markides, and Kupp, 2010:4,8). The four

parameters within the 4As framework correlate directly to the existing model because

affordability coincides with price, availability matches with place, awareness reflects promotion,

and acceptability relates to the product itself. Using this framework, Prahalad in his book

provides some examples of firms that successfully infiltrated these markets and explains how

these companies were able to achieve success in spite the odds by manipulating these four

variables. Because these customers have much less disposable income, the first barrier to

overcome was price. The firms had to devise ways to reduce costs in order to reduce the final

selling price and maintain profitability.

Price Affordability

Even though the poor have less money, these individuals still participate in the market

place. Unfortunately, in many instances the poor are exploited, and these buyers welcome more

affordable product offerings creating many opportunities for firms. According to the book, “In

the shanty town of Dharavi, outside Mumbai, India, the poor pay a premium for everything from

rice to credit… The poverty penalty can be as high as 5 to 25 times what the rich pay for the

same services… Large-scale private sector businesses can “unlock this poverty penalty”

(Prahalad, 2010: 35). The cell phone is an example of a product successfully introduced into

these areas at a low price and with great customer acceptance levels. On page 9 Prahalad writes,

“The market capitalization of three of the top five (two were not listed) leading players in

wireless in India is approximately $57 billion as of June 2008… The cell phone revolution has

demonstrated beyond doubt that there is a market for world class goods and services if they can

be made available at affordable prices. For example, a “cell phone minute” costs less than $0.01

in India, probably the lowest rate per minute anywhere. The industry had to create its own

ecosystem of mini entrepreneurs who sold prepaid cards and also charged the cell phones.” This

example shows that companies can be very profitable even at extremely low price. Additionally,

this example gives insight into how the company was able to offer these low prices. One reason

for affordability related to the distribution network and using local residents to sale, promote, and

service the products. This channel approach was much cheaper and more effective than the

traditional western model requiring a significant investment in building a facility and using paid

hourly employees to assist cellular customers.

Another example of pricing advantages related to reducing the amount of overhead is

shown in the case of eye surgeries. The author writes on page 53, “Consider a cataract operation.

It can cost as much as $2500 to $3000 in the United States… Doctors at Aravind perform more

than 200,000 state-of-the art cataract surgeries per year. Their price is $50 to $300 per surgery,

including the hospital stay and any complications in surgery…With only 40% of paying patients

at such seemingly low prices, Aravind is nevertheless very profitable…” These two examples

show that the income barrier can be removed with feasible pricing and unleash a great amount of

profit potential provided the product does meet and exceed customer expectations which is the

next area of interest to explore.

Using their Chinese counterparts, GE was able to invent an ultrasound machine for

$15,000 only. A comparable machine sold in US and Japan for at least $100,000. For rural

India, GE pioneered a handheld cardiogram machine for $1,000. This brings down the cost by

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margin of 60%-80%. This makes healthcare accessible to millions of patients who otherwise

would not have access to quality healthcare. These are perfect examples (Peng, 2011) of what

Prahalad (2010) calls doing good and doing business in a profitable manner.

Product Acceptability

Prahalad in this book gives examples of both products and services that have been

significant in improving the quality of life for the poor. The author also discusses how these

products are typically modified from the western equivalents due to account for differences in

both income levels and lifestyle patterns. For example on page 41, he writes, “The rich use cash

to inventory convenience. They can afford, for example, to buy a large bottle of shampoo to

avoid multiple trips to the store. The poor have unpredictable income streams… They tend to

make purchases only when they have cash and buy only what they need for that day…Single-

serve packaging-be it shampoo, ketchup, tea and coffee, or aspirin-is well suited to this

population. A single-serve revolution is sweeping through the BOP markets…” There are some

environmental concerns with this type of packaging since there is much waste created. These

issues ideally will be resolved as the shape of the pyramid changes reflecting the changing

income distribution among citizens. Prahalad writes on page 136, “The economic pyramid is a

measure of income inequalities. If the inequalities are changing, then the pyramid must morph

into a diamond. A diamond assumes the bulk of the population is middle class…, and he

continues on page 138, “…as the BOP morphs from a pyramid into a diamond the distinction

between the BOP consumer and the top-of-the-pyramid consumer disappears. There is only one

consumer group…” In this case, there would not be as much demand for individual packaging

since the income levels of these patrons would have increased over time.

In contrast to the example above, there are some products where the innovations for the

BOP customers are actually more sustainable than items available in the developed markets. For

example, Prahalad gives the case entitled energy for everyone that discusses the efforts of some

firms to make electricity more available to these customers. He writes on page 360, “Rural

customers around the world are estimated to spend between $8 and$12 dollars per month for

lighting services, including candles, kerosene, dry cells, or battery charging… The paradox is

that the poor are spending a disproportionate share of their income on a product that richer

people get cheaper and of higher quality… The global renewable resource base is considered

large but is currently being utilized far below its potential…A main advantage of renewable

energy technologies is that the majority of the cost is up front, while the “fuel” costs are for the

most part free”. This example shows that better products can be created at lower prices when

inefficiencies are eliminated. As gasoline prices continue to rise and dependency grows on oil

from unstable countries in the Middle East, the developed countries will eventually have to seek

other sources of energy. In the developing countries, this transition is already taking place out of

necessity. However, the use of solar, wind, biomass, geothermal, and hydroelectric energy

sources will become more valuable in the future as the amount of fossil fuel stored in the earth

diminishes.

Another product offering that has been made available better at a lower price is by

Juniper. Prahalad writes on page 59, “ The design considerations isolated by the design team of

Juniper Foot were uniquely oriented to BOP problems (for example, in India, Afghanistan,

Bangledesh, Pakistan, Cambodia, Congo, and Vietnam) in fitting prosthetics and are not the

problems that designers would contend with in the United States… Contrary to popular

assumptions, this set of design parameters increased the required functionality of prosthetics

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compared to what is in the United States and Europe….They cannot afford the typical $7000 to

$8000 per foot cost of prosthetics…” Later in the case study beginning on page 275, the author

provides the specifics of how the task was accomplished as well as provides the price for the

final product in writing, “The Juniper Foot is tailored specifically to the lifestyles of the poor and

costs only about $30 dollars- affordable to all, and it is often given away free to many of the

handicapped poor who have lost a limb”. This example is significant because in this case the

company was able to create a better product at a lower price which defies the existing ideology

in western culture which dictates a higher quality product is provided at a higher price. With the

crisis currently facing the health care system in the United States, officials should pay some

attention to the approach used by this company to see techniques and practices that may be

candidates for emulation. The current American price escalation model is currently unsustainable

since every year the costs of health care keep rising causing higher insurance premiums to the

point where a growing number of citizens can no longer afford health insurance coverage.

Finally, perhaps the most valuable product these people received according to the case

studies provided was intangible. Technology has provided these citizens with the power of

information. In describing how access to information has benefited the mandi, the author writes,

“ They also became sophisticated at tracking prices, not just at the local mandi or ITC prices, but

also for futures at the Chicago Board of Trade…They established a clear link between global

prices movements and the prices in remote villages of northern India. Just three months earlier,

they were “hostages” to the vagaries of the local merchants in the mandi.” (pg.128). Once people

begin to gain knowledge, they have the ability to make choices to improve their individual

situation like demanding a fair price for their crops. The additional income now available to

these farmers helps to facilitate savings which provides money for more access to things like

sanitation and education. Once the price has been set and the product designed, then the firms

must determine how to best distribute and promote the products with limited infrastructure.

Place for Availability and Promoting Awareness

Place refers to the distribution method, and promotion refers to product awareness. Since

the firms did not have incentive to build large factories due to incomplete legal frameworks and

did not have the ability to transport the items over long distances due to few if any transportation

networks, the successful companies decided to use the local citizens to distribute and promote

the products. The benefits were twofold because the use of everyday people instead of marketing

agencies to promote the products and hands and feet of citizens instead of intricate distribution

channels to place the items in the hand of patrons lowered the company expenses as well as

provided additional income for the residents. In many cases the people were self employed

entrepreneurs who basically had their own miniature business in a type of pyramid or

commission based arrangement. This use of local residents was particularly liberating for women

who typically did not have the ability to work outside the home. One example provided in the is

that of the company Juniper Rugs (Prahalad, 2010). This business model is particularly

interesting because the owner found a way to connect wealthy people wanting elaborate rugs

made by hand with poor people who had the expertise and skill to make these intricate items.

Both parties benefited from the exchange since the poor women received some additional

income to help support her family and the elite customer got the item desired at a lower price.

Prahalad writes describing this company, “Thousands of independent workers are organized to

produce consistently a very high quality product, on a complex decentralized basis through a

system of organization that is unique. The company not only uses traditional weavers but also

Kirby Page 18

teaches, in a remarkably short time, the craft to people who do not have a tradition of

weaving…”(page 175).

The promotion methods like the distribution methods had to be modified in these areas

since many of the people do not have televisions or computers. Also, many of the people are

illiterate and do not have the ability to read print advertisements in magazines or newspapers. As

a result, the firms decided to use a direct selling approach where the local residents through word

of mouth promote and advertise the products. This promotion method is less expensive than

traditional methods and is more effective due to increased credibility from a direct contact. The

book provides especially noteworthy example of promotion related to Lifebuoy soap. The author

writes, “The paradox of diarrheal disease is that the solution is known and inexpensive, but it is

difficult to reach and educate the poor about the need to wash their hands with soap… In the fall

of 2002,…HLL learned of a public-private partnership being developed between the World

Bank, the Water and Sanitation Program, the London School of Hygiene and Tropical Medicine,

UNICEF, USAID, and the Environmental Project…” (pages 249-252). This example is

exemplary because children are used as the main source to communicate the message of the

importance of hand washing through an initiative sponsored through the local school systems.

Another important benefit from this example is that the population through knowledge now has

fewer incidences of diarrhea which was a huge pandemic that was extremely expensive to treat.

This example again demonstrates the mutually beneficial relationship since the company is able

to make money from selling soap, and the citizens get clean hands and an overall healthier life

for a fraction of the cost that would be incurred in the event of sickness or disease.

In order to make their products available in hard-to-reach corners of the world,

companies have to engage in practices that they normally would not have to worry about.

Companies need a healthy ecosystem in order to survive. However, in many of these BOP

markets ecosystems are at a nascent stage. One has to extremely creative to circumvent these

barriers. In India, Coca-Cola has manual distribution centers (MDCs) run by local entrepreneurs

to reach those places where infrastructure is poor and volume is relatively low (Karamchandani

et al, 2011). Without these MDCs, Coke products would not be available to a significant set of

customers in BOP. By engaging in such practices, Coke is hoping that the advantages associated

with being the “first” will enable to reap huge dividends in the near future.

Conclusion The potential to serve billions of customers is enormous but it has its own set of

challenges that companies have to overcome before they can profitably serve these customers.

The profile of customers at the BOP is radically different from customers in the developed

world. To successfully connect with them also requires a different mindset. Established

companies in the developed world will have to develop a different game plan in order to be

successful: concept of profit margin; price affordability, product acceptability, place for

availability, and promoting awareness requires a significant departure from the established norms

of doing business. Failure to do so would result in upstarts upending the established competitors.

Corporations have the opportunity to reconcile profitability with humanity. These firms

can help alleviate human suffering and help people “trade up” and more income becomes

available. This effort will also help the western world foster good will among citizens of

developing nations since currently there is a growing hatred due to the increasing income gap

between people of the world. Also, as the citizens of these countries attain more wealth, they can

begin to pay taxes to the government. The governments will then have enough revenue to fund

Kirby Page 19

infrastructure projects for items like schools, hospitals, roads, and other public goods that

markets are not as efficient at providing.

The cases discussed in this research also demonstrate that in many instances these

products were made better while meeting the needs of the customer in a better way, and had

better value since the purchase price was much lower. The ability to create a better, cheaper

product implies that in developed countries there may be many activities that are involved in the

processes of production that have little value creation. The demand for value is increasing among

all customers as the markets become more competitive and patrons as a result gain more

bargaining power.

Finally, customers in the developed world may begin to “trade down” as credit and

lending measures tighten. Companies like GE have demonstrated the need for frugal innovation.

Western customers and governments have been on a debt-fuelled spending spree for many years.

Governments are having to put their fiscal houses in order and consumers are cutting back on

their spending, worried about unemployment and shrinking wealth. All of these trends suggest

that not only is there a movement toward globalization and expanding product offerings to

people in less developed parts of the world, vis-à-vis the BOP but there is also a bigger push for

all businesses to rethink their business practices and place additional focus on the customers in

all markets. That is the only path to survival.

References

Anderson, J., & Makides ,C., & Kupp, M. (2010). The Last Frontier: Market Creation in Conflict

Zones, Deep Rural Areas, and Urban Slums. California Management Review, 6-28.

Berger, R., Choi, C. J., & Kim, J. B. (2011). Responsible Leadership for Multinational

Enterprises in Bottom of the Pyramid Countries: The Knowledge of Local Managers.

Journal of Business Ethics, 101; 553-561.

D’Innocenzio, A. 2011. Walmart profit rises but US sales still weak. USA Today. Retrieved

on Septermber 2, 2011 from http://www.usatoday.com/money/companies/earnings/2011-

08-16-walmart_n.htm

Hahn, R. 2009. The Ethical Rational of Business for the Poor – Integrating the Concepts

Bottom of the Pyramid, Sustainable Development and Corporate Citizenship. Journal of

Business Ethics, 84, 313-324

Hammond, Allen and Prahalad, C.K., (2004) “Selling to the Poor”, Foreign Policy, May-

June

Holt, D. B., Quelch, J. A., Taylor, E. L., 2004 (September). How Global Brands Compete.

Harvard Business Review, 82, 9 68-75.

Karamchandani, A., Kubzansky, M., & Lalwani, N. 2011 (March). Is the Bottom of the

Pyramid Really for You? Harvard Business Review, 107-111

Manikutty. S. (2010). C K Prahalad and His Work: An Assessment. Vikalpa, 1-7.

Peng, M. W. 2011. Global Business (2nd

Edition). South-Western Cengage Learning; Mason:

OH.

Pless, N. M., & Maak, T. 2009. Responsible Leaders as Agents of World Benefit: Learning

from Project Ulysses. Journal of Business Ethics, 85, 59-71.

Prahalad, C.K. (2010). The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through

Profits. Pearson Education Inc.

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The World in 2050: The Accelerating Shift of Global Economic Power: Challenges and

Opportunities. Retrieved from http://www.pwc.com/en_GX/gx/world-2050/pdf/world-

in-2050-jan-2011.pdf

Rangan, V., & Chu, M. & Petkoski, D. (June, 2011). Segmenting the Base of the Pyramid.

Harvard Business Review, 113-117.

Special Report: The Power to Disrupt. Economist. Retrieved from

http://www.economist.com/node/15879393

Singh, Ramendra, Rodolfo P. Ang and Joseph A. Sy-Changco (2009), “Buying Less, More

Often: An Evaluation of Sachet Marketing Strategy in an Emerging Market,” The

Marketing Review, 9(1), 3-17.

Woolridge, A. (2010, April 15). The world turned upside down. Retrieved from

http://www.economist.com/node/15879369 .

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Proceeding # 2:

CEO PAY: Trends & Implications

Pamela S. Kirby

Santanu Borah

University of North Alabama

Abstract

Recent developments in the financial markets and incidents of outright mismanagement

by some firm executives have attracted the attention of stockholders and other agencies. The

government has tried to pass measures to help correct some of these problems. The general

public is demanding greater accountability and emphasizing a renewed interest on ethics. There

is evidence that perhaps CEO pay is an emerging bubble. The main concern is there has been a

failure to recognize that nothing can increase without bound forever and ultimately the bubble

has to burst with disastrous consequences for society as a whole.

Introduction

CEO pay has slowly increased over time. Part of the reason for this increase is the

practice of creating stock options as part of the total compensation package. In many cases, the

majority of the pay for a given year is actually from the sale and transfer of stock not from the

base salary. This practice of using stocks as incentive pay has created much controversy since the

collapse of companies like Enron. In these instances, executives artificially inflated the stock

price temporarily and enjoyed large gains at the expense of both the shareholders and the

company employees.

The reason the stock issuance is used as part of the compensation package is to encourage

these top managers to make investments that will increase the value of the business. Many of

these ventures since the 1990s and 2000s have been in foreign direct investment activities. Due

to globalization, these executives have found both large areas of untapped resources and gained

access to a huge unskilled labor market. These individuals are much cheaper to employ than

American workers because the wage per hour is much lower, and these workers are not provided

fringe benefits like health insurance and paid vacations.

Companies are seeking the lowest wage rates possible to reduce operating expenses. As

a result of this, the job options in America for typical workers are also shrinking. Workers must

pay money to attend college to qualify for high paying skilled jobs or opt for jobs that pay

minimum wage or rates very close to it. Consequently, there is also a growing disparity of wealth

among citizens in this country because the middle income jobs have been phased out, and these

jobs have been sent overseas to poorer countries.

The disparity in pay between the CEO and the lowest paid worker is an issue of concern

that needs to be addressed. CEOs have been under additional scrutiny since the recent financial

market collapse of 2008 stemming from excess speculation and greed about the rising prices of

real estate and the sale of mortgage backed securities. Many bank CEOs invested heavily in these

mortgage backed securities causing these institutions to reach the brink of financial ruin. It was

the tax payer dollars of American workers that preserved the financial market. Now the public is

demanding more transparency and accountability from firm executives who currently receive

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millions of dollars in total compensation. Since there is growing debate about the proper level of

pay for CEOs, this paper will explore CEO pay, the say-on-pay initiatives, ethical considerations,

and implications for firm long term sustainability. The paper will conclude with some

recommendations concerning CEO pay escalation. The suggestions will perhaps prevent another

market bubble from forming and bursting at the expense of its citizens.

CEO Pay

According to the presentation titled Reflections on Executive Compensation executive

pay can be categorized as follows: base pay, short term incentives, long term incentives, and

executive benefits and perks. Authors Core and Guay provide a more detailed explanation of

CEO pay packages and write, “These concerns are related in the sense that executive pay reflects

a risk premium for the incentive borne by the executive…A CEO’s job is extremely complex.

The CEO is ultimately responsible for the firm’s strategic investments, operating activities,

human resources management, financing decisions, and overall firm performance….The

discussion above suggests that a CEO’s pay can be thought of as the sum of four components: (a)

compensation for the CEOs ability, (b) a payment that increases the level of effort required of the

CEO, (c) a premium risk stemming from performance based incentive risk, and (d) any excess

pay”(J. Core and W. Guay, 2010).

The dismal state of the economy is a stark contrast to the fact that CEOs of the 500

largest US firms made an average of little more than $9 million in 2010. Another factor often

highlighted by AFL-CIO is that a typical CEO makes more than 340 times the typical pay of an

American worker. In a special report compiled by Forbes, identified top 5 CEOs who made the

most amount of money in 20105:

Name Company Total Pay

Stephen J. Hemsley United Health Group $102 million

Edward A. Mueller Qwest Communications $66 million

Robert A. Iger Walt Disney $53 million

George Paz Express Scripts $52 million

Lew Frankfort Coach $50 million

Additionally, the Forbes report highlights the following:

●Average annual salary and bonuses are at the highest level since 2007

●Managed to secure a collective pay raise of 12%

●More than half of the CEOs saw an increase in combined salary and bonus

●five CEOs saw more than a 400% increase in combined salary and bonus

●earnings were up 72%

●27% return to shareholders in the past year

This provides an interesting viewpoint and that is CEO salaries are up, profits are up while

worker salaries have declined or stagnated and unemployment levels are atrociously high. There

is something inherently wrong with this picture. How will corporate America and policy makers

respond to this situation?

5 http://www.forbes.com/2011/04/12/compensation-chief-executive-salary-leadership-ceo-

compensation-11-intro.html

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The following is a historical chart of CEO over the past twenty years or so. Incidentally, the

chart highlights that in the year 2007 CEOs made the most amount of money. The following

year the financial bubble burst: Merrill Lynch and Lehman Brothers were wiped out on

September 14, 2008. It behooves us to ask the question: Were compensation systems designed

in such a way that it encouraged CEOs to take more risk than usual? The risk/reward payoff

deserves a closes examination.

6

A Wall Street Journal/Hay Group 2010 CEO Compensation Study7 highlights the

following issues regarding CEO pay:

●Strong company performance will carry the day in dictating pay levels

●Increased emphasis on per performance-oriented long-term incentive programs, and

continued to eliminate some of the “extras” like executive perquisites

●Performance awards made up 41% of the long-term incentive value provided to CEOs

in 2010, up from 37% in 2009

●Time-vested restricted stock was essentially flat moving to 25% (from 24%) of long-

term incentive value

6 http://www.forbes.com/lists/2011/12/ceo-pay-20-year-historical-chart.html 7 http://www.haygroup.com/ww/services/index.aspx?ID=2589

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●Stock options declined from 39% in 2009 to 34%

●Better alignment of total long term investment value with specific longer-term company

outcomes

There are many factors that affect the CEO pay rate, but the goal is to properly align the

interest of the top manager with the interest of shareholders. In the article “Corporate

Governance and Executive Remuneration: A contingency Framework”, the authors explain CEO

compensation using a life cycle analysis. They explain that there are times in the cycle where

CEOs may actually begin to take advantage of the system and write, “Some studies, however,

claim that executives, and particularly CEOs, enjoy positions of power in relation to the design

of pay packages and are able to insulate themselves from constraints applied by regulators and

shareholders. Self-interested executives may now extract rents by manipulating board structures

in their own favor, subject mainly to an “outrage” constraint applied by media. The CEO’s pay

arrangements, therefore, have less to do with incentive alignment and more to do with CEO’s

self-enrichment or “skimming”. The article continues by indicating that when the firm is in the

mature phase is when CEOs are most likely to abuse power and continues, “When the firm has

exhausted its growth opportunities in the focal industry and perhaps overdiversified into related

and unrelated industries, the governance system becomes less transparent. Misalignment of

incentives leads to a managerial drive for ever-increasing expansion and diversification,

producing performance deterioration and loss in shareholder value. At this stage executives, and

particularly CEOs, arguably enjoy positions of power in relation to the design of pay packages”.

Finally, the article indicates, “However, after 2008, during which many companies were bailed

out or received substantial state support, the general sentiment with regard to executive

compensation has changed. Bounded rationality of the executives resulted in a failure to

recognize changes in the informal (but powerful) norms concerning what was fair, thus attracting

criticism from the media and new president” (I. Filatotchev and D. Allcock, 2010). In response

to the tax payer bailout, congress began implementing new laws to increase monitoring of CEO

pay.

Say on Pay Initiatives

There is growing concern that CEO pay is not really tied to performance as evidenced by

the recent financial market crisis where CEOs made extremely poor investment decisions, but

they were still paid millions of dollars. As a result of public outcry and shareholder discontent,

the government has recently passed measures to provide shareholders more input in the pay scale

of CEOs. According to the article, “Implementing Say-on-Pay in 2011”, there are three basic

requirements to ensure more accountability from CEOs and reads, ““Say-on-Pay”, as adopted in

the Dodd-Frank Act of 2010, is actually composed of three separate votes. First is a requirement

that public companies solicit an advisory vote on executive compensation. Second is an advisory

vote on the frequency of say-on-pay votes. Third, in the event of a merger or other extraordinary

transaction, an advisory vote on certain “golden parachute” payments is required” (D. Lynn,

2011). Even though this measure attempts to create more transparency, there are some opponents

who argue that the law will achieve the desired outcome of politicians. In an article “After Much

Hoopla, Investor ‘Say on Pay’ Is a Bust”, the author writes, “Yet through June 14, shareholders

by a majority vote objected to executive comp at just 32 of 1,998 companies that have convened

annual meetings this year. “Say-on-pay is at best a diversion and at worst a deception… You

only have the appearance of reform, and it’s a cruel hoax” (J. Helyar, 2011).Even though there

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has been much controversy about the trend of increasing CEO pay, it appears overall

shareholders are satisfied with the performance of the chief executive officers of the firms.

Implications for Firm Performance

One of the main concerns with CEO pay relates to the work force. Since the people

actually doing the jobs necessary to keep the business operational are being paid significantly

less than the person at the top of the pyramid. There is belief that this large income gap will

affect worker productivity and morale. In the article “How can we address excessive CEO pay?,”

the author discusses CEO pay and how the compensation affects cohesiveness in the business

and writes, “Back in 1977, Peter Drucker wrote that CEO pay should be no more than 25 times

average worker pay. In 1984, he updated to say that no more than 20 times average worker pay

was appropriate. “Widen the gap much beyond that, Drucker asserted, and it makes it difficult to

foster the kind of teamwork that most businesses require to succeed”, and continued, “what

drives loyalty or lack thereof? Nearly 80% of the 1,412 employees surveyed for MetLife report

rank salary and wages as “extremely” important to their loyalty to the company” (E. Bloxham,

2011). In Jennifer Liberto’s article she discusses the current comparison of CEO to average

worker pay and writes, “In 2010, chief executives at some of the nation’s largest companies

earned an average of $11.4 million in total pay—343 times more than the typical American

worker…, and continues, “AFL-CIO used Bureau of Labor Statistics wage data to define typical

worker pay, which was $33,190 for all occupations in 2009” (J. Liberto, 2011). In the 2011

Executive Pay Watch report, there was more compelling evidence that CEOs are not being paid

on the basis of investment activities and job creation and reads, “But they are not investing to

expand their companies, grow the real economy or create middle-class jobs. Corporate CEOs are

literally hoarding their companies cash- except when it comes to their own paychecks… Based

on 299 companies’ most recent pay data for 2010, their combined total CEO pay of $3.4 billion

dollars could support 102,325 median workers’ jobs”.

There are some opponents to these arguments that believe that CEO pay should not be

evaluated in relation to the wages of the average worker. Steven Kaplan in his article dismisses

the concerns of equity and fairness among employees and writes, “While the issues of income

inequality and fairness are serious ones, they are not relevant to the questions I addressed, I

addressed the question of why we have seen the increases in income for CEOs and other groups,

not whether the increases are fair. In my opinion, more appropriate venues for discussing income

inequality and fairness are in the areas of taxation and education policy, not corporate

governance” (S. Kaplan, 2008). Another article “Is CEO Pay Too High and Are Incentives Too

Low? A Wealth-Based Contracting Framework” also minimizes the relationship between CEO

stock incentives and the current recession and reads, “In particular, the best available evidence

suggests that the more questioned forms of incentive compensation did not affect financial

institutions’ performance during the financial crisis, and therefore it is improbable that they were

key contributing factors to the global credit crisis” (J. Core and W. Guay, 2010). Thus, while no

doubt there have been occasions when CEOs have manipulated earnings to profit from stock

sales, there does not appear to be evidence that this practice is widespread.” This argument is

interesting because the practice was widespread enough to create the need for a taxpayer bailout.

Ethical Considerations

Many individuals have criticized CEO behavior, but their actions tend to be driven by the

shareholders. The economic premise is that there is an agency conflict between the management

Kirby Page 26

and shareholders so investors provide incentives help reduce this conflict. Effectively,

shareholders are using bribery to manipulate CEOs to make decisions that benefit the firm. The

problem is for people to consistently do the right things and make the right choices, there needs

to be some motivating force larger than money. Because economist did not consider how ethics

and other values relate to the decision making process, the actual outcome is very different than

those predicted.

In the article “Stock-Based Compensation and CEO (DIS) Incentives”, the authors

address this how the real results differ from classical models and writes, “Although a large

theoretical literature views the stock-based compensation as a solution to an agency problem

between shareholders and managers, a growing body of empirical evidence shows that it may

also lead to earnings management, misreporting, and outright fraudulent behavior.” Part of the

problem relates to the fact that a CEO position is temporary and not permanent. The CEO keeps

his job as long as the growth prospects are positive. The article continues, “That is, a pure form

of stock-based compensation effectively implies that shareholders severely punish the manager

for revealing bad news about the growth prospects of the firm.” Because the CEO cannot easily

find another position with the current level of pay and benefits, some CEOs instead of using

moral convictions and telling the truth instead begin using game theory logic to decide between a

reveal or conceal strategy. The article explains, “If the CEO decides to conceal the truth, he or

she must design an investment strategy that enables the firm to continue paying the high growth

dividend stream. Intuitively, such a strategy cannot be held forever, as it will require more cash

than the firm produces. We denote T** the tine at which the firm experiences a cash shortfall and

must disclose the truth to investors. Because the firm's stock price will decline at that time, and

the manger will lose his or her job, it is intuitive that the best strategy for the CEO is to design an

investment strategy that maximizes T**… in order to maximize the time of cash shortfall T**,

the manger must invest all of its existing capital in the suboptimal investment strategy” (E.

Benmelech, E. Kandel, and P. Veronesi, 2010).

The goal of shareholders is to use the CEO for as long as possible to gain as much value

as can be extracted from his expertise and then cast him aside when the ideas are exhausted. The

authors explain that CEOs usually ascend to the top of the pyramid by being extremely

intelligent. The authors show how some executives are able to discover a way to actually turn the

tables to their advantage. Instead of being exploited by the firm shareholders, these executives

actually exploit the firm and create temporary stock price appreciation and enjoy large gains

from resale. When employment ends, it is the CEO and not the firm that is the main beneficiary

from the relationship. In these instances, the CEO leaves the company having made millions of

dollars, and the firm is left facing financial distress. The people most harmed by this arrangement

are the typical workers. The interest of this group has not really been considered in the

continuing debate about CEO pay. The authors discuss how the CEO gains from this conceal

strategy, and the practice of what has been called “pump and dump”. In this case, the stock price

is artificially pumped up, and then the stock dumped into the market place for individual short

term gains. The article does not mention that there are many shareholders who also make large

profits during this time from stock resale and transfer. The system currently has not been

substantially changed because individuals are receiving very high rewards for opportunistic

behavior. According to the authors, “This corollary implies that if the manger’s effort strongly

affects the investment opportunities growth, then shareholders prefer an incentive scheme that

induces a conceal strategy as a side effect. They are willing to tolerate the stock price crash at

T** and recapitalization as a delayed cost to provide incentives for long term growth.” This

Kirby Page 27

reasoning explains why firm shareholders overwhelmingly vote to support the CEO pay

packages. The authors also explain how this scenario will create bubbles and write, “The stock

price, however, at some point exceeds the full information price, as the firm’s cash payouts

increase. The price finally drops at T** when the firm experiences a severe cash shortfall and

needs to recapitalize. The exact sizes of underpinning and price drop depend on parameter

values” (E. Benmelech, E. Kandel, and P. Veronesi, 2010).

Another Bubble? There was much discussion from authors in the research about price determinant in a

market economy. In the article “CEO Pay: No Easy Answer”, the authors writer, “yes, most

CEOs make a ton of money, and sometimes they make too much, but in a market economy

salaries are set by supply and demand. We also live in a market economy where companies that

field the best teams win, and, because of global competition, the best teams tend to be

expensive” (J. and S. Welch, 2008). These authors did not address the fact that there a times

when markets operate inefficiently and fail to price items correctly. These events are called

market failures where the price occasionally continues to escalate upward beyond the appropriate

level before growing extremely large and then finally collapsing. In the article “Trends in CEO

Compensation and Equity Holdings for S&P 1500 Firms: 1994-2007”, the authors comment on

the existence and bursting of price bubbles and write, “ A buoyant stock market meant these

complaints were largely unheeded, but the controversy again came to a boil with the collapse of

the dot.com bubble. The rumblings have grown following the recent disasters in the financial

sector and the accompanying collapse of the stock market… Politicians now commonly blame

recent market failures on managerial pay packages. In a statement, covered by the media,

President Obama stated, “…excessive executive compensation- unmoored from long-term

performance or even reality- rewarded recklessness rather than responsibility” (R. Lord and Y.

Saito, 2010). There have been recent examples failures in other markets and many of the signs

are similar. In the article “How Much is CEO Worth”, the authors write, “In an ideal world,

Crystal and many investors agree, stock performance and CEO pay would be closely aligned.

But no matter how he parsed the numbers, Crystal discovered no relationship between

shareholder returns and CEO compensation” (J. Silver-Greenberg and A. Leondis, 2010). This

statement implies there may be other factors influencing the pay scale.

Conclusion Based upon the research and the current trends, CEO pay does appear to be a bubble.

This bubble is similar to the overpriced tulip market in Holland in the 1600s, the overpriced

stock market in the 1930s, the overpriced internet companies in the 1990s, and the overpriced

real estate market in the 2000s. In this case, the bubble seems to be overpriced CEO services.

The concern now is that the emergence of bubbles is happening more frequently, and the amount

of time for recovery is getting shorter. These events that create bubbles have serious implications

for the continued success of a market economy. There are many aspects of human behavior that

economist failed to consider when deriving pricing mechanisms. The major fault with the supply

and demand model is that it is assumed that individuals act rationally and according to self

interest. These assumptions are not always satisfied causing market prices to sometimes be

skewed causing what is termed a market failure.

In the writing presented most of the authors would not address issues like fairness or

equity. The authors kept discussing market forces as the prevailing wage determinant. Some

Kirby Page 28

writers also rationalized by identifying other professions that are also over paid as a justification

that the wage was appropriate. Based upon the reading, both academic scholars and government

officials are concerned about CEO pay in relation to the creation of shareholder wealth. Few of

the articles addressed the plight of the average worker. In general, there was no real concern

about the fact that one person at the top of the organizational pyramid made so much more than

the people at the bottom who answer the phones in the call centers, carry the trays of food to the

guest tables, and work on the assembly lines putting car parts together. None of the researchers

really expressed concern of the pay structure from this perspective. As long the CEOs generated

value for the firm that improved stock price most debating the issue seemed comfortable with the

pay scale. The glaring issue that should be of concern is the morale and motivation of workers.

These people are integral to the overall company success. The result would not be good if these

employees decided they were undervalued and stopped performing.

Economist and financial analysts also failed to consider the fact that there are only a

finite number of resources. As a result, there are not an infinite number of opportunities. At some

point in time, all of the resources will be tapped, all of the frontiers will be explored, and the

value creation process will deliver its maximum benefit. The key is firms recognizing when this

level has been achieved and being able to be satisfied.

The issue of CEO pay is relevant to the current trends of individuals wanting more and

more because investors are paying these managers higher and higher salaries to ensure the

shareholders get larger and larger gains. None of these people are willing to concede that

eventually the investment opportunities will diminish causing the price of the stock to begin to

stabilize or drop. The key features and elements of the pay program such as pay-for-

performance, setting performance goals, stock options, and perquisites will have to be

continuously evaluated in the context of the current economic scenario. There is no magic

formula as such but activist shareholders groups and watch-dog agencies such as the SEC will

have to continuously press for more transparency and fairness in the way CEO pay packages are

derived.

References

2011 Executive Pay Watch. Retrieved from http://www.aflcio.org/corporatewatch/paywatch/.

Allied Academics 2010 Summer Internet Conference (2010). Reflections on Executive

Compensation.

Benmelech, E., & Kandel, E., & Veronesi, P. (November, 2010). Stock-Based Compensation and

CEO (DIS) Incentives. The Quarterly Journal of Economics, 1769-1820.

Bloxham, E. (2011, April 13). How can we address excessive CEO pay? Retrieved from

http://management.fortune.cnn.com/2011/04/13/how-can-we-address-excessive-ceo-

pay/?iid=EAL .

Core, J. & Guay, W. (February, 2010). Is CEO Pay Too High and Are Incentives Too Low? A

Wealth-Based Contracting Framework. Academy of Management Perspectives, 5-19.

Filatotchev, I. & Allcock, D. (February, 2010). Corporate Governance and Executive

Remuneration: A Contingency Framework. Academy of Management Perspectives, 20-

33.

Helyar, J. (2011). After Much Hoopla, Investor ‘Say on Pay’ Is a Bust. Bloomberg

Businessweek, 23-24.

Kaplan, S. (August, 2011). Are U.S. CEOs Overpaid? A Response to Bogle and Walsh. Academy

of Management Perspectives, 28-34.

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Liberto, J. (2011). CEOs earn 343 times more than typical workers. Retrieved from

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Biographic Sketch

Pamela Kirby has a Civil Engineering degree from Georgia Institute of Technology. She

received a Master of Business Administration at the University of North Alabama.

Santanu Borah is a Professor at the Department of Management & Marketing at the University of

North Alabama.