Executive Compensation

The question of executive compensation is one of the more recent moral issues attract the attention of business ethicists. Here's the basic issue: "Are there moral constraints on how much corporate executives are paid?" The salient moral principles are utility, liberty, and justice.

Utilitarians argue that executive pay ought to be subject to the "greatest happiness principle:" or "the greatest happiness to the greatest number." Thus, there are consequences for both over-paying and under-paying executives. If the CEO is a utilitarian, then he would be inclined to

Stockholder Theory says that the CEOs primary moral/legal obligations are toward the owners of the company, the stockholders. Compensation of any given "executive" would be based on how much he contributes to the value of the company's stock. If that executive is (in fact) largely responsible for increased stock value, other companies might seek to hire that executive, and offer more salary, thus contributing to a bidding war. Thus, it's up to stockholders to determine "how to pay executives" and how much to pay executives." It is widely accepted among stockholder theorists that the interests of the stockholders and the executive must be aligned. So if any given executive (or CEO) earn more for the stockholders, the ought to pay him more. If not, they ought to pay him less. In the end, if valuable executives are under-paid, then they'll exercise the Liberty Principle and move to another company, when their contract has expired. If stockholders over-pay executives, there will be less money available to pay other employees, less money for advertising, less money for research and development etc. In the end, the Liberty Principle rules supreme, no governmental bans or mandates are necessary. The free market determines fairness.   

Stakeholder Theory says that there is a social cost for overly-generous executive compensation. The more you pay executives, the less money you have left to pay other employees, financiers, and suppliers. Therefore, the CEO must take into account there other stakeholders. Some stakeholder theorists even defend the concept of a maximum wage, an objective limit on how executives are paid, and how much they are paid. Sometimes maximum wage might be set as a percentage of how much the lowest-paid workers are paid; maybe no more than 500% (5X)  of the minimum wage. Others might argue, that all "raises" must be across the board, and that if an executive gets a 10% raise, so should everyone else. Of course, most stakeholder theorists would argue that there must be laws governing both minimum and maximum wages.

 Today, executive compensation is often determined on the basis of cronyism; that is, the executives and the chairmen of the boards (stockholders) choose to reward one another, regardless of merit. Then, they disguise their mutual rewards behind a smokescreen legalese and/or verbal contracts behind closed doors. Stockholders, therefore, must insist on transparency, in order to minimize cronyism. The media often plays a role in exposing overly-generous compensation for both executives and board members.