Ethics in Executive Compensation (Post 4)- Courtney Short

Most people don’t dispute that top executives of multi-billion dollar companies should be generously compensated for performing a challenging job. While hefty compensation packages are not illegal there is a great debate about the ethical justification for such.

Those not opposed to generous compensation plans mention capitalism as the basis on the laws of supply and demand. Those capable of being CEOs of large publicly held organization should be, compared to the rest of employees at such organizations, uniquely talented individuals with skills in limited supply. If this is the case, CEOs pay should reflect the high demand of their distinctive abilities. Three factors base the argument against the amount of compensation paid to top executives. First, even though many CEO’s are honest and ethical and work for the best interest of their companies, it rattles the perceptions of fairness for a CEO to make million when the company is operating at a loss. Second, as the benefits to regular workers are reduced and real wages stagnate, the gap between executive and average worker salaries is estimated between 180 and 431 percent. Last, when the structure and total amount of a CEO’s pay is undisclosed or difficult to figure out, the organization and the executive appear to have something to hide.

What can a company- it’s board, the CEO, and the shareholders- do to demonstrate its willingness to act ethically in matters of executive compensations?

The board can:

• Keep the compensation committee independent. CEO’s should not serve on the nominating committee or have influence over it members.
• Tie pay to performance. Performance should drive compensation.
• Hire based on character as well as by credentials. Executives that scored high on a personality trait called “agreeableness,” were more likely to advocate equitable salary distributions.

The CEO can:

• Accept pay that is reasonable for the job.
• Remember the job requirements. Put corporate finances, safe goods and services, fair employment policies, and sustainable business practices before personal gains.
• Avoid obscuring the true value of CEO compensation. Be sure to disclose not only salary but stock option and other payouts.

The shareholders can:

• Lobby for advisory votes on compensation. While non-binding, they send a message to the compensation committee that may result in a slower increase in executive compensation.
• Vote with their investments. When investors make investment decisions, they look for organizations that have a clear and credible compensation strategy and quality management over earnings per share.