Chief executive officers (CEOs) are typically paid great amounts of money in wages and bonuses by commercial companies. This is sometimes defended with an argument from peer comparison; roughly that “our” CEO has to be paid in accordance with what other CEOs at comparable companies get. At first glance this seems like a poor excuse for morally outrageous pay schemes and, consequently, the argument has been ignored in the previous philosophical literature. In contrast, however, this article provides a partial defence (...) of the argument from peer comparison. Moreover, it is demonstrated how a serious consideration of this argument sheds further light on both incentive- and desert-based theories of just pay. (shrink)

Prior research has examined several ethical questions related to executive compensation. The issues that have received most attention are whether executives' pay is fair and justified by performance. Since more recent studies show that stock options grants constitute the single largest component in executive compensation, we examine the relations of these grants to economic determinants and corporate governance for firms in the stagnant stage of their lifecycle. We find that, on average, stock options grants comprise a significant portion of annual (...) CEO compensation (26.4%) for stagnant firms. We also find that economic (corporate governance) factors explain less (or more) of the cross-sectional variation in stock options grants for stagnant firms than for growth firms. Furthermore, we document lower pay-performance sensitivity (i.e., weaker incentive alignment) and no improvement in future firm performance from past stock options grants to CEOs of stagnant firms. In particular, our study provides empirical evidence on some inefficiencies associated with stock options grants to CEOs of low potential (stagnant) firms, a long-standing concern of business ethics researchers (Moriarty, 2005; Nichols and Subramaniam, 2001; Perel, 2003). Our results also provide support for the corporate governance reforms discussed in Matsumura and Shin (2005), especially those proposed provisions that curtail the power of CEOs in the governance of firms. (shrink)

To be and to remain ethical requires struggle from organizations. Struggling is necessary due to the pressures and temptations management and employees encounter in and around organizations. As the relevance of struggle for business ethics has not yet been analyzed systematically in the scientific literature, this paper develops a theory of struggle that elaborates on the meaning and dimensions of struggle in organizations, why and when it is needed, and what its antecedents and consequences are. An important conclusion is that (...) the greater the ethics gap and opposing forces, the greater the struggle required. Viewing business ethics as struggle has several implications for theory and practice. (shrink)

We examine the association between societal trust and the levels of CEO compensation and the proportion of equity-based compensation of 897 firm-years from 18 countries over the 2007–2013 period. We find both the levels of CEO compensation as well as the proportion of equity-based compensation to be lower in countries with higher levels of societal trust. This suggests that costly regulations on CEO compensation may not be as necessary in jurisdictions with higher levels of societal trust. We also examine the (...) association between pay disparity and societal trust. Consistent with our finding of lower pay at the CEO rank, we find pay disparities are lower in countries with higher levels of societal trust. (shrink)

This paper examines the ethics of contemporary managerial compensation in the context of executive stock options. Economic considerations would dictate that executive stock options should be adjusted to eliminate the effect of overall stock market movements which are beyond the control of the executive. However, in practice, most executive stock options are not adjusted to control for these outside factors. Agency considerations are the most likely culprit. Adjusting for the influence of outside factors, such as a generally rising stock market, (...) from executive stock options sets a higher bar for managers to reach. Furthermore, traditional accounting standards permitted firms that did not adjust options to avoid reporting options as expenses. This presents CEOs and boards of directors with a major ethical dilemma. On the one hand, their duty to their shareholders and stakeholders dictates that executive stock options should be adjusted to eliminate outside noise from unrelated movements in the overall stock market. However, financial statements are presented in the language of accounting. If the overwhelming majority of the users of a language define a particular item in one way, then to deviate from the norm implies that the recipient of such a deviant statement may not properly interpret the statement. Likewise, if the standard practice is for firms to use unadjusted options and thus under-report expenses, to deviate from this industry norm risks that users of financial statements would not properly interpret the financial statements, with perhaps negative consequences for the shareholders. In short, if "everyone else does it," then it could be wrong for an individual firm to deviate from the norm as that would harm the shareholders. (shrink)

This paper divides firms in the Standard and Poor’s 500 (S&P 500) into two groups based on inclusion in or exclusion from the Domini Social Index (DSI). Inclusion in the DSI is interpreted as a positive indicator of ethical status. Using data for the 1992–2003 period, I provide evidence that chief executive officer (CEO) compensation, other executive compensation, and director compensation tend to be lower in DSI firms than in other firms in the S&P 500. This applies to the unconditional (...) group averages (and medians) and is particularly striking given that DSI firms as a group had better financial performance than the other firms. This finding is also true in a regression framework that controls for other influences on compensation, including firm size and financial performance. In a regression context, the estimated discount for CEOs of DSI firms is approximately 12% for both current compensation (salary and bonuses) and total compensation (including the value of options). These results are consistent with the expectation that some senior executives require a “compensating differential” to accept positions in firms with less attractive ethical status. It is also consistent with the expectation that some firms with positive ethical status might use more restraint in setting executive compensation. (shrink)

We examine the influences of social capital, source credibility, and fairness perceptions on the judgments of experienced compensation committee members who are considering a proposal to reduce management’s performance targets in the middle of a compensation cycle due to difficult circumstances. Eighty-nine U.S. public company CC members participated in a 2 × 2 experiment with social capital and source credibility each manipulated as low or high, and outcome fairness to management, process fairness to shareholders, and outcome fairness to shareholders included (...) as measured variables. While social capital and source credibility are not significant, we find that outcome fairness to the CEO and outcome fairness to shareholders are significantly related to CC members’ support for reducing performance targets during a compensation cycle. In addition, we find that more experienced CC members are less supportive of changing the performance targets. The significant interactions include one between outcome fairness to shareholders and process fairness to shareholders, which suggests that CC member support for the proposal relies on both process and outcome fairness being present. Finally, the participants’ qualitative responses reflect arguments both for and against adjusting performance targets. Overall, the results highlight the important roles of fairness and director experience in boardroom decisions and provide important insights into factors affecting CC judgments. (shrink)

How is the (il)legitimacy of manager compensation constructed in social interaction? This study investigated discursive processes through which heavily contested executive pay schemes of the Finnish energy giant Fortum were constructed as (il)legitimate in public during 2005–2009. The critical discursive analysis of media texts identified five legitimation strategies through which politicians, journalists, and other social actors contested these schemes and, at the same time, constructed subject positions for managers, politicians, and citizens. The comparison of two debate periods surrounding the 2007–2008 (...) financial crisis revealed significant differences in the discursive strategies and the corresponding moral struggles linked to legitimation of executive compensation. The analysis highlights a change in moral reasoning by social actors as they adapt their justifications to a changing social context. This study has important implications for our understanding of the ethical aspects and socio-political embeddedness of manager compensation. In particular, it adds to our knowledge of organizational legitimacy by showing how discursive strategies and the corresponding morality constructions used to (de)legitimate business activities can shift quickly as a result of a change in the social and political climate surrounding the legitimation struggle. (shrink)

Abstract:In 2003, CEOs of the 365 largest U.S. corporations were paid on average $8 million, 301 times as much as factory workers. This paper asks whether CEOs get paid too much. Appealing to widely recognized moral values, I distinguish three views of justice in wages: the agreement view, the desert view, and the utility view. I argue that, no matter which view is correct, CEOs get paid too much. I conclude by offering two ways CEO pay might be reduced.

Golden parachutes are often viewed as a form of excessive compensation because they provide senior management with substantial payouts following an acquisition while other stakeholders are subjected to layoffs, disrupted business relationships and other negative externalities. Using a sample of S&P 500 firms, an economic and ethical justification for this type of contract is given. Golden parachutes ensure effective corporate governance that, in turn, preserve the firm's value for all stakeholders. Boards of directors enter into parachute agreements to protect recently (...) hired CEOs' human capital during periods of financial uncertainty and, thus, potential takeover activity. From an ethics viewpoint, golden parachutes are valuable to all stakeholders because they encourage merger or acquisition in lieu of bankruptcy. (shrink)

This paper investigates how the features of CEO equity-based compensation are associated with the agency costs of monitoring in an Australia setting. We find that audit fees significantly increase when firms award large equity grants to CEOs, which is consistent with the notion that auditors perceive higher risk associated with large equity incentives. However, by empirically testing auditors’ responses to the adoption of performance-vesting provisions, we document evidence that it is the use of accounting-based hurdles that potentially encourages unethical reporting (...) issues. We report that audit fees are negatively associated with the use of market-based hurdles, while accounting-based hurdles lead to significantly higher audit fees but combination hurdles lower audit fees. To reduce the possible undesirable properties of accounting-based hurdles, firms adopt longer vesting periods to provide more balanced future-oriented incentives. Practical implications include the remuneration committee being aware of the hidden costs of poorly designed CEO compensation packages and avoiding undesirable ethical implications, particularly, where the CEO has significant power over the corporation. (shrink)

We examine how UK listed companies set executive pay, reviewing the implications of following best practice in corporate governance and examining how this can conflict with what shareholders and other stakeholders might perceive as good behaviour. We do this by considering current governance regulation in the light of interviews with protagonists in the debate, setting out the dilemmas faced by remuneration-setters, and showing how the processes they follow can lead to ethical conflicts. Current 'best' practice governing executive pay includes the (...) use of market benchmarks to determine salary and bonus levels, significant levels of performance-related pay, the desire for executives to hold equity in their companies, the disclosure of total shareholder return compared to an index, and a perceived need for conformity, in order to grant legitimacy to policies. Whilst each of these may in some circumstances lead to good practice, each has the potential to cause dysfunctional behaviour in executives. Overall, we conclude that although best practice might drive good executive behaviour that coincides with the company's and key stakeholders' objectives, there are many reasons why it should not. (shrink)

The present study aimed to explore and map the views of Portuguese laypersons regarding the legitimacy of bonuses for senior executives. Two hundred eight participants, with various levels of training in economics, were presented with a number of concrete scenarios depicting the circumstances in which senior executives have received bonuses of variable amounts, and they were asked to indicate the extent to which such bonuses may be considered as legitimate. The scenarios were created by varying four factors likely to have (...) an impact on people’s views: the extent to which the objectives fixed by the company have been met or not, the global economic context in which the company has performed, the availability of experienced senior executives in the sector under consideration, and the amount of money that has been awarded, in terms of both the euros and multiples of the average worker’s pay. Five qualitatively different personal positions were found. The most common positions were that executive bonuses were either never legitimate or not very legitimate. People without any background in economics were more likely to hold these views than people with a background in economics. The remaining 45 % of the participants supported the awarding of bonus, but their support was conditional, and the main condition was the extent to which the company’s objectives were met. Thus for most participants, the practice of awarding extra pay to senior executives was either never legitimate, or legitimate only when the company’s objectives have been attained, or legitimate only when, even in a time of economic crisis, the company’s objectives have been surpassed. (shrink)

What, if anything, is wrong with high executive compensation? Is the common “lay reaction” of indignation and moral outrage justified? In this paper, my main goal is to articulate in a more systematic and philosophical manner the egalitarian responses to these questions. In order to do so, I suggest that we take some insights from recent debates on two versions of egalitarianism: a distributive one, according to which no one should be worse off than others because of unfair distributions of (...) goods and resources, especially ones based on matters of luck or arbitrary factors, and a relational one, which maintains that egalitarian justice requires members of a society to relate to one another as equals. Drawing on recent attempts to highlight the tricky nature of managerial authority, I argue that high inequalities in pay are not simply a distributional matter but should also be analyzed through a relational lens. I also attempt to show that relational egalitarians are well-equipped to question the now dominant “incentives” view of CEO compensation. (shrink)

I broadly explore the question by examining several common criticisms of CEO pay through both philosophical and empirical lenses. While some criticisms appear to be unfounded, the analysis shows not only that current compensation practices are problematic both from the standpoint of distributive justice and fairness, but also that incentive pay ultimately exacerbates the very agency problem it is purported to solve.

This article recommends the film Inside Job as an effective teaching tool for illustrating the ethical issues that surrounded the global financial crisis of 2008 and the subsequent economic downturn. The study discusses issues such as the revolving door, conflicts of interest, fiduciary duty, executive compensation, and financial regulation. The presentation of each ethical issue comprises suggested questions, background information, and guides to specific sections of the film. An overview of the film is provided as well.

This paper examines the dynamics of hostile takeovers as a form of corporate warfare. There are a number of compelling reasons for believing this to be an accurate approximation to corporate reality and therefore an appropriate analogy. In circumstances where it is all-too easy for either of the protagonists to act unethically, there is an evident need for an appropriate template through which to analyse and evaluate the ethical dilemmas that HT's inevitably raise —whilst also, where possible, employing its prescriptions (...) as a means of corporate conflict resolution. This paper evaluates just war theory as one such template. In seeking a conceptually adaptable framework for analysing, interpreting and articulating antagonistic behaviour during a HT, it became apparent in the course of the research that JWT provided a potentially useful and viable template within which to pursue the above. The research questions centre not necessarily on whether this template could in some way be a substitute for statutory and regulatory constraints on unethical conduct but, rather, whether it might better inform all stakeholders of the importance of ethically informed restraint in the interest of the greater good. (shrink)

The use of remuneration committees to foster corporate accountability concerning executive remuneration decisions has attracted increasing public attention following various corporate scandals and the recent global financial crisis. This study empirically examines the link between RCs and attributions disclosures, i.e. explanation of reasons for executive remuneration decisions. Using a sample of 644 firm-year observations drawn from top 200 Australian Securities Exchange -listed firms from 2007 to 2011, we find that firms with RCs tend to voluntarily disclose attribution, and the extent (...) of disclosures increases with remuneration committee quality. While existence of attribution disclosures is related to pay-performance sensitivity, the extent of disclosures does not show incremental effect on pay-performance sensitivity. The results also show that the presence and quality of RCs are positively associated with internal attribution disclosures regarding executive remuneration decisions during the GFC, suggesting corporate responsiveness to corporate accountability demands at times of economic crisis. (shrink)

Executive compensation has long been a prominent topic in the management literature. A main question that is also given substantial attention in the business ethics literature—even more so in the wake of the recent financial crisis—is whether increasing levels of executive compensation can be justified from an ethical point of view. Also, the relationship of executive compensation to instances of unethical behavior or outcomes has received considerable attention. The purpose of this paper is to explore the social, ecological, and existential (...) costs of economic incentives, by discussing how relying on increasing levels of executive compensation may have an adverse effect on managerial performance in a broad sense. Specifically, we argue that one-dimensional economic incentives may destroy existential, social, and systemic values that influence the manager’s commitment to ensure responsible business conduct, and have negative spillover effects that may reduce the manager’s performance. There are well-documented findings that demonstrate that reliance on sources of extrinsic motivation (such as economic incentives) may displace intrinsic motivation. Our perspective is a holistic one, in the sense that we will explore the influence of sources of extrinsic motivation on the manager’s intrinsic commitment to different types of values. We will in particular investigate how it may influence the manager’s ethical reflection and behavior or lack thereof. (shrink)