Executive Compensation

The term “executive compensation” is typically used to refer to the total compensation received by senior corporate executives. Such compensation might typically include salary, bonuses, benefits (such as use of a company car), and grants of stock or stock options.

Two main controversies arise with regard to executive compensation.

The first has to do with the very high levels of compensation often seen at large, and especially American, corporations. The most highly-compensated American CEOs can make upwards of $50 million in a single good year. Many have asked whether any individual can really be “worth” that much. Questions of equity also arise. Is it ethical, some wonder, that the CEO makes tens of millions of dollars when thousands of his front-line employees make the minimum wage (which amounts to about $15,000 per year)? This is what philosophers refer to as a question of distributive justice.

The complexity of compensation is an important detail, in this regard. A CEO who makes $10,000,000 is very unlikely to get that as salary. It is much more likely that he will have made a much more modest salary (say, $500,000) and to have been granted stock in the company (or stock options) the value of which makes up the rest of his income for the year. Those who defend very high levels of compensation point out that the value of stocks and options depends on how successful the company is, which means that money gained that way rewards CEOs for helping make the company stronger. In fact, the need to motivate CEOs properly—and to align their interests with the interests of shareholders—is precisely what inspired many companies to begin offering large grants of stock and options in the last few decades of the 20th Century.

Others argue that efforts to use stocks and stock options to incentivize CEOs and other senior executives has generally failed. They argue that what such attempts really do is encourage executives to do things that will boost stock prices in the short term, rather than to build long-term value.

Another ethical issue related to executive compensation has to do with the process by which levels of executive compensation—and especially CEO compensation—is set. At large, publicly-traded companies, CEO compensation is set by the Board of Directors. But at many companies, the CEO is also the Chair of the Board. And in many cases, the CEO has either chosen or been influential in choosing the members of the Board. Both of those factors may leave Board members feeling overly sympathetic and likely to set higher levels of compensation than are warranted. Many companies today attempt to overcome this problem by establishing Compensation Committees, and by using objective benchmarks (e.g., salaries paid to CEOs at similar companies in similar industries).

See also in CEBE:

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