Case Study 04

Analyzing Managerial Decisions – CEO Pay in Public and PrivateFirms

Kajli Agrawal

University of the Potomac

BUS502-Managerial Economics

October 24, 2022

Professor Geraldine Cameron

Abstract

A company’s size, its structure, performance and ownership play

an important role in identifying compensation of CEO of that firm

(“Private Vs. Public CEOs: Putting Some Skin In The Game.”,

n.d.). The following case study raises questions related to CEO

pay in public and private firm. The analysis provided here, gives

an overview of why CEO from private firm earns more than the CEO

of public firm.

It is the general practice that we see in the market where

in the CEO’s of private companies are paid huge sums of money as

compensation in comparison to what they would have been paid if

the company had been a public owned company (“Private Vs. Public

CEOs: Putting Some Skin In The Game.”, n.d.). Companies seem to

pay their CEO’s and top executives huge amount of money or other

compensation in order to attract talent to their companies in the

hope of excelling their company to new heights. CEO’s are also

given stock options as the CEO’s stand to profit when the company

stocks do well (“Trends in Executive Compensation: Public Company

versus Private.”, n.d.).

Private companies approach the compensation very directly from

publicly traded companies. The philosophies for compensation

however are different. There is usually a huge difference in the

compensation for private owned companies compared to public

companies. Private Companies often desire for the best possible

talent to manage their assets. Some private companies raid public

companies and attract their executive management to join their

company by offering huge compensation packages (“Private Vs.

Public CEOs: Putting Some Skin In The Game.”, n.d.)

. Public companies however are more conservative. They provide

attractive compensation but not as attractive as the private

companies. The CEO’s also get stock options which motivates them

to excel, as the company grows they benefit too. But the

difference is huge compared to big private companies. One more

important difference is the CEO and the company need to answer

the public shareholders and justify the compensation given to the

CEO which is not the case in Private companies(“The Growing

Executive Compensation Advantage of Private Versus Public

Companies.“, n.d.)

.

Hertz, Bausch & Lomb, HCA, J. Crew etc. are a few companies that

have exited the capital market by going private transactions

(Brickley, Smith, & Zimmerman, 2009). Private equity firms with

huge capital backing identify potential companies which have huge

market presence and prospect of growth. They then with the help

of their financial backing, investors and also the banks buy out

the company from the market. Now being private owners of the once

public company, these firms either bring in their own staff and

managers or retain the existing ones. Now, in order to grow the

company they tend to invest in talent and the only way to attract

talent is by offering attractive compensation packages and

incentives. These companies usually raid the rosters of public

owned companies and hijack experienced CEO’s by offering mind

blowing compensation offers (Brickley, Smith, & Zimmerman, 2009).

This is the general trend in the recent years where in CEO

compensation has hit sky rocket difference between public

companies and such private owned companies.

1. Explain why executives might be paid to run private companies

more than the same company would pay the CEO when they were

public.

Executives are paid more than what the company would have paid

them if they were public. In my opinion, there are quite a few

reasons affecting this. If the company were to be public, there

are various factors affecting the compensation package a CEO

would be offered. A public owned company is held responsible to

disclose information on everything to the shareholders. Every

decision the company takes, it has to keep in mind the

shareholders as at the end of the day, the company is owned by

the public. If they were to offer a more than usual compensation

package to a CEO, regardless of the talent and experience him or

she would carry, the company has to provide reasoning behind this

decision to the shareholders. Justifying the shareholders on the

compensations to the executives is not something the company

would prefer. Secondly a public traded company is always set on

targets. They are to deliver positive numbers every quarter or

annually. That is how they satisfy the investors and the market.

Their business market standing depends on these deliverables of

theirs. Now huge compensations to their executives are a cist

these companies would always want to avoid and work with the

talent they can afford to attain profitability every quarter.

That being said, for a private owned company it is a totally

different story. They do have often the financial backing and

their primary focus is to invest in the company every way

possible and mint profit. They are the masters of their decision

and it’s just their Board’s approval that stands in their way of

any such decision. They do not have the burden of justifying

their compensation package to the public which would have been

the case if they were a public company. For a success seeking

company, a strong leader is always desired. These private

companies tend to attract already existing and proven talent in

the market with their financial strength. They usually invade the

Public sector market and attract the executives with huge

compensation packages to come work for them. The CEO’s too tend

to jump ships being attracted to the huge compensation. If not

for the compensation being so huge, the executives would not be

tempted to jump ship and these private companies need such proven

talent to help sail their business. These are the reasons I

believe why private owned companies tend to pay way more

compensation to CEO’s which they wouldn’t if they were a public

owned company.

2. What might these employment packages have to say about the

argument that public company executives are overpaid?

The argument of the public company executives being overpaid can

be viewed in quite a few ways. If you view the compensations

offered by public companies in comparison to the compensation

offered to the executives in big private owned companies, then

no, the executives in public companies are not overpaid. But,

some public companies do high compensations for their executives

in comparison to other public owned companies. Many do have an

opinion that public company CEO’s are systematically overpaid

(“How Skimping on CEO Pay Company Underperformance Can Drive

Public.”, n.d.). Some public company does pay CEO’s more than

what private companies pay. This does seem unmerited especially

in the eyes of the shareholders sometimes. But these companies

are forced to do so to avoid the CEO from jumping ship to more

attractive offers in the private sector. Based on data from the

4,000 largest publicly traded companies, the average (median) CEO

received total compensation of $1.6 million in fiscal year 2008

(“Trends in Executive Compensation: Public Company versus

Private.”, n.d.). This figure includes salary, bonus, the fair

value of equity-related grants, and other benefits and income.

This does not seem like an unconscionable level of compensation

for an around-the-clock job with tremendous responsibility. This

in my opinion is still a reasonable number. It is only when it

exceeds the usual market trend for CEO compensation by a huge

margin; it is justified to seem that CEO’s are overpaid for a

public company.

Conclusion

In sum, companies pay their CEO’s and top executives’ huge amount

of money or other compensation in order to attract talent to

their companies in the hope of excelling their company to new

heights. They are also given attractive stock options so that

they will be engaged on focusing on profit when the company

stocks do well. This will motivate them to view the picture of

their own profit in terms of company’s profit. The pay of CEO in

private and public firm can be analyzed in various ways and in

general, CEO of Private Company earns more than the CEO if public

company.

References

Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2009). Managerial economics and organizational architecture. Chicago: Irwin.

How Skimping on CEO Pay Can Drive Public Company Underperformance. (n.d.). Risk Compliance RSS. Retrieved October 16,2014, from http://blogs.wsj.com/riskandcompliance/2014/07/24/how-skimping-on-ceo-pay-can-drive-public-company-underperformance/

Private Vs. Public CEOs: Putting Some Skin In The Game. (n.d.). - Page: 1. Retrieved October 17, 2014, from http://www.crn.com/news/channel-programs/240006964/private-vs-public-ceos-putting-some-skin-in-the-game.htm

The Growing Executive Compensation Advantage of Private Versus Public Companies. (n.d.). by Marc Hodak. Retrieved October 19, 2014, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2422147

The Widening Gap Between Public and Private Company Chief Executive Pay | ChiefExecutive.net | Chief Executive magazine. (n.d.). ChiefExecutivenet Chief Executive magazine. Retrieved October 18, 2014, from http://chiefexecutive.net/widening-gap-public-private-company-ceo-pay

Trends in Executive Compensation: Public Company versus Private. (n.d.). ExeQfind. Retrieved October 19, 2014, from http://www.exeqfind.com/trends-in-executive-compensation-public-company-versus-private/

RUBRIC FOR WRITING EVALUATION

SCORE

PURPOSE AND AUDIENCE

Weight: 25%

ORGANIZATION DEVELOPMENT LANGUAGE

Weight: 25% Weight: 25% Weight: 25%

A

100 Points

Weight = 25

Addresses purpose effectively,uses assignment to explore topic’s intrinsic interest, shows full understanding of issues,engages audience, establishes credibility,uses headings, format and citation inAPA style (where relevant) effectively

Focuses consistently onclearly expresses central idea, uses paragraph structure and transition guide reader effectively

Explores ideasvigorously, supports points fully using a balance of subjectivity and objective evidence, reasons effectively making useful distinctions.

Employs words with fluency, develops concise standard English sentences, balances a variety of sentence structures effectively

B

75 Points

Weight = 19

Adheres to purpose, Fulfills assignment, shows adequate understanding of key issues, style is appropriate to intended audience, presentationis readable,

Central idea isclear, paragraph structure is adequate, some problems with consistency, logic or transitions

Supports most ideas with effective examples and details, findssuitable balance between references to personal and external evidence, makes key distinctions.

Word forms are correct,sentence structure iseffective, applies standard English grammar and mechanics

format is correct.

C

50 Points

Weight = 13

Waivers in purpose, incompletelyaddresses assigned topics or directions, shows more need to examine issues, style varies, and visual presentationis ragged.

Loose focus on central idea, contains some repetition and digression, structure needswork

Presents ideasin general terms support for ideas is inconsistent or unsuitably personal or distant, some distinctions need clarifications, reasoning unclear.

Word forms and sentencestructures are adequateto convey basic meaning, errors causenoticeable distraction

D

25 Points

Weight = 6

Purpose unclear, failure to address topic or directions, weak group of issues, inappropriate style, careless or messy visualpresentation

Does not focus on central idea, contains many repetitions anddigression, very weak structure.

Most ideas unsupported, confusion between personal and external evidence, unclear use ofdistinctions or levels of generality

Word use is weak, sentence structures are uneven, errors are very distracting

F

0 Points

Weight = 0

Purpose unclear, does not address topic or directions, does not address

No central idea, no clear logic or focus,many repetitions or digressions, lack of

Ideas are unsupported, confusion between personal and external evidence, no distinctions

Word use is unclear, sentence structures inadequate for clarity,errors seriously

issues, inappropriate style, careless or messy visualpresentation

structure between levelsof generality,

distracting

Total Points

100 100 100 100

1

Case Study 04

Analyzing Managerial Decisions – Stock Market Reactions to 13DFilings

Kajli Agrawal

University of the Potomac

BUS502-Managerial Economics

October 24, 2022

Professor Geraldine Cameron

Abstract

13D is a form which must be submitted to US Securities and

Exchange Commission within 10 days under the specific conditions

(“Schedule 13D Definition | Investopedia.”, n.d.). According to

following case study, stock market’s reaction is in favor when

these announcements occur (Brickley, Smith, & Zimmerman, 2009).

The analysis provides an overview of stock market reaction

towards this type of announcements and also cost and benefits

associated to the same.

13D is a form that must be filed with the SEC when a person

or a group acquires more than 5% of any class of any company’s

shares in the market (“Schedule 13D Definition | Investopedia.”,

n.d.). It is mandatory for one to disclose this within 10 days of

the transaction in the market (“Schedule 13D.”, n.d.). Any person

who has the power to sell this security is also liable to be

disclosed under the form 13D. The 13D filing brings in a good

practice of investors to act promptly in disclosing the purchase

of a sizable stake in any public traded company. Like most

regulations that are introduced have positive effect in the stock

market, the 13 D filing norm was no different. It does provide a

sense of security for the investors which were evident in the

positive market effects and the investor’s reaction to the news.

This also regulates the US public companies to disclose

effectively sets of 5% of their voting shares. Two activist

campaigns carried out by Pershing Square Capital Management

illustrate how a hedge fund can secretly acquire an economic

interest in a target company substantially exceeding 5% without

contravening Section 13(d) disclosure requirements (“Schedule

13D.”, n.d.).

The intent of an investor, who buys a large stake in a

publicly held corporation with the intention to bring the change,

realizes a profit on the investment. This scenario seems quite

broad. The redirections stated in the Schedule 13D purpose

statement include (but are not limited to) seeking seats on the

company’s board, opposing an existing merger or liquidation of

the firm, pursuing strategic alternatives, or replacing the CEO.

We exclude 13D filings that are filed because the investor is

“unwilling to give up the option of affecting the firm (“Schedule

13D.”, n.d.).. A 13D filing is excluded if the investor states an

interest in working with or communicating with management on a

regular basis.

The 13 D filing norm is hence to my belief opens up and

creates transparency in all corridors may it be with the SEC, the

investors and mainly the public companies. Costs are associated

with the filings but the benefits are more to reap and it only

adds more transparency to public traded companies.

1. Provide a brief description of these costs and benefits.

The primary benefit a public traded company is set to endure is

the positive market reaction. An investor who feels more secure

and transparent is bound to be comfortable in broadening his

investment in the company. The 13D filing norm only opens door

for the investors to be clearer on the happening in the company.

With the SEC keeping track of the trades in a public company

worth more than 5% of the company shares only adds security to an

investor ( Brickley, Smith, & Zimmerman, 2009). The 13D filing

norm contributes more to the Transparency, fairness, and equality

of information in our financial markets. There are costs

associated though with the introduction of the 13D norm but the

companies too welcome as it has only contributed to positive

market reactions and stock price reactions to the public owned

companies.

2. Does the evidence on the stock market reactions to 13D filings

suggest that the benefits of outside block ownership are

typically larger than the costs? Explain.

Yes, I do personally believe that outside block ownership and the

benefits it brings in are typically larger than the costs. There

is no denial about the costs. Costs are to be incurred by the

public companies and also the investors as a result of a new norm

being introduced in the system. But the benefits it brings in

especially with the security of the SEC tracking the public

companies and also confidence such norms bring to the market and

the investors are always a welcome sign for both the investors

and the public companies as well.

Conclusion

In my opinion, the primary benefit a public traded company is set

to endure is the positive market reaction. I also believe that

outside block ownership and the benefits it brings in are

typically larger than the costs.

Reference:

Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2009). Managerial economics and organizational architecture. Chicago: Irwin.

Schedule 13D. (n.d.). SEC.gov. Retrieved October 19, 2014, from http://www.sec.gov/answers/sched13.htm

Schedule 13D Definition | Investopedia. (n.d.). Investopedia.Retrieved October 19, 2014, fromhttp://www.investopedia.com/terms/s/schedule13d.asp