When it comes to compensating corporate executives, when is it not okay to pay in a particular way?

INTRODUCTION:

For those who find themselves at the top of the corporate ladder it has become both accepted and expected to receive salaries based on favorable terms that can bear little resemblance to those offered other employees. Such compensation packages are typically legal agreements between two consenting adult parties. Moreover, they are often regarded as necessary for obtaining, motivating, and retaining the sort of top-notch talent that is necessary to keep a business organziation competitive in today's market.

Despite being voluntary agreements, executive compenstaion packages have been accused of being unjust for a variety of reasons.  Some argue that there is something fundamentally unfair about executive salaries that dwarfs that of those at the bottom of the corporate ladder. This is particularly so in the United States, where the ratio of CEO pay to the lowest employee salary has gone up from about 40-to-1 in the 1970s to as high as 400-to-1 in recent years, while remaining around 20-1 in Europe and 10-1 in Japan. They question whether the relative value of executive contribution truly justifies such dramatically differet levels of compensation.

Others argue that executive compensation packages often ignore the standard metrics that usually go into a fair assessment of the salary one deserves: proven capacities, effort, actual performance, past and present contribution to the company's well-being. To ignore these metrics, they claim, is to arbitrarily and unfairly treat the compensation of executives differently than those of other employees.

And then there are concerns about incentive structures that motivate executives to pursue short-term goals linked to bonuses. Such structures may lead to risky behaivors that could harm the well-being of companies, the profits of shareholders, or the general social welfare. Many have blamed the Great Recession on such practices in the financial industry.  Can incentive structures be immoral because of potential abuse or harmful consequnces?

When is it not ok to pay in a particular way?

INSTRUCTOR PREPARATION:

• Reading of suggested materials below

• General understanding of the major issues in question:
  
  • When, in general, do we find agreements made voluntarily between consenting adults morally problematic?
  • What are the metrics usually considered appropriate for determining fair compensation?
  • By what process are compensation packages  typically detemined?  Does the determination of executive compensation packages follow a different actual process than for other employees? If so, what and why?
  • What, if anything, differentiates executives from other employees in today's market economy?
  • What responsibilities, if any, do companies have to society in general when negotiating compensation packages?
  
  

LIST OF SUGGESTED MATERIALS TO BE READ BEFORE CLASS:

The resources below are intended to give the reader an introduction to the problem that presents them with some of the major issues of the debate without going into much detail about any specific issue.

• What if C.E.O. Pay Is Fair? by Joe Nocera (New York Times, Oct. 13, 2007)

• Current Controversies in Executive Compensation: 'Issues of Justice and Fairness' (Knowledge@Wharton May 02, 2007)

• Debate and Comments on Executive Compensation sponsored by The Economist (The Economist, Oct. 2009)

• US Executive Pensions on the Rise: Report (AFP, Nov. 3, 2009)

• Executive Pay: Regulation vs. Market Competition by Ira T. Kay and Steven Van Putten (The Cato Institute, Sep. 10, 2008)

IN-CLASS ACTIVITIES:

 Watch:

• USC Ed Lawler Interview: Executive Compensation by USC Marshall School of Business (video)
  
  

Do: Ask students to think about and discus the following questions:

• What are some metrics/standards that can be used to determine appropriate compensation in the workplace?  Which of these ways is the most fair?
• What moral limitations, if any, are there to voluntary compensation aggreements in general?
• What moral limitations, if any, are there to voluntary compensation aggreements in the workplace?
• Is there something fundamentally unfair about great pay disparities? If so, are there moral reasons for maintaining such disparities?
• What are the likely moral consequences of maintaining present trends in executive compensation?

* For additional ideas on assignments and lesson plan you might develop with this material, visit our Suggestions for incorporating lessons ethics into your course page.