Executive Compensation

Case Summary

In 1993, Michael D. Eisner of Walt Disney fame received $203 million as executive compensation. Although this award was inflated by Eisner's exercise of stock options, many examples of compensation in millions and tens of millions raise questions on how CEOs should be paid. Critics dispute that CEOs are deserving of their pay. CEOs downsize companies or perform badly, yet continue to draw a substantial salary. Unlike low level managers, it seems there is no formula for executive compensation. The disparity between the executive pay in US and that of in other industrialized nations is great, furthering the belief that there is no rational (?) basis for compensation. Among sports and entertainment figures, there exists a feedback mechanism for pay - bad performance leads to reduced earnings. Graef Crystal (c.f Boatright, 2007) argues that executives do not face pay discrimination because directors are bad negotiators [what is the linkage between the directors being poor negotiators and the CEOs not being paid what they are worth? Even if you are writing an abstract - the sentences must convey some meaning.]. It has also been argued that monetary motivation alone will not attract the crиme-de-la-crиme into corporate management; other occupations demonstrate the provision of stronger intrinsic motivation. In conclusion, the case against high executive compensation is simply because, without establishing pay standards for CEOs, many firms do not punish bad performers nor duly reward good performers.

Ethical Issues Involved

Are US executives fairly paid? Do they deserve the pay they are receiving? Is executive compensation distributed in a just way? How should executive compensation be distributed so that it is just? This report seeks to determine if US executives are deserving of their pay, and if not how should executive compensation be distributed in a just way.

Stakeholder Analysis

The 5 entities central to the case of executive compensation (i.e. in any given company) identified by our group are: the CEO , the employees, the shareholders, the board of directors, and the public.

CEO

CEOs expect just compensation for taking on a job that involves high responsibility and effort . They would want to maximize their pay. Too low a compensation might lead to them switching to another firm or even leaving for a more lucrative industry.

Employees

Low to mid-level employees have the least autonomy and bear the heaviest burden under company bureaucracy. In prosperous times, they have a limited share of the bonus in comparison to what a CEO could get. In perilous times, they may face retrenchment. Since their fate is largely decided by the CEO, resentment is likely to arise if the CEO rewards himself while ordering their lay-offs. Employees, as such, could consider the CEO an ingrate. Employees would most likely feel that since they are in such a vulnerable position, the CEO has an ethical duty to consider their interest.

Shareholders

Shareholders want the most talented CEO to helm their company so that they profit from the business. Thus, they would be willing to pay a high price to attract and retain the best executives. However, if CEOs are paid too much, this would reduce the distributable profits to them, and shareholders may risk receiving lowered dividends. Thus a delicate balance has to be reached - and the balance to strike is probably to pay enough to attract and retain the best CEO but not more than that.

Board of Directors

Legally, the Board is to act in the interest of the shareholders as a whole. They have to balance between paying executives enough to attract and retain the best while not paying them too much to the detriment of the shareholders. The Board of Directors, however, may not always act in the interest of the shareholders. If they decide to overpay the CEO unjustly, perhaps for personal benefit, then this would be unethical and unfair to the shareholders, based on some of the ethical theories that we will discuss later in our paper. Because shareholders are often not directly involved in the day to day running of the company, the Board of Directors havea legal and ethical duty to protect their rights. Thus, the Board of directors is the main decision maker in this ethical dilemma.

Public

The public would benefit from a booming American economy with the brightest talents taking the helm of various enterprises. Customers and suppliers would enjoy the stability and continued existence of major companies that they deal with. Thus, having a sufficiently high executive compensation would ensure that talented individuals are attracted to the field of management. However, if the disparity between the pay of the executive and the average employee is too high, this will lead to a serious income gap which could contribute to social problems. Indeed, it has caused public scrutiny into the fairness of executive compensation. The American increase of its Gini coefficient from 0.34 in the early 1960s to 0.47 in 2004 demonstrates this concern (United Nations University, 2007).

Analysis using Ethical Theories

Are US CEOs fairly paid? Do they deserve the pay that they draw?--A combination of perspectives of Libertarianism, Aristotlean Justice, Utilitarianism and Kantian Ethics will be used to analyse these questions.

In reference to Disney's $203 million executive compensation, the author of the case in Boatright (2007) asserts that no one can be worth that much in any just economic system.

According to Aristotle's ideas on distributive justice, the correct distribution is between the two extremes of too much and too little. He calls this correct distribution the golden mean, the position of which is relative to the circumstances involved. Applying this to the matter of executive compensation, it is difficult to identify the exact level of the two extremes. However, we may look to comparable situations for some kind of gauge of the golden mean. The case cites the example that "some American CEOs are paid ten to twelve times their counterparts in Japan and Europe". From this, it would seem that US executive compensation is closer to the extreme of excess, and hence does not appear fair.

However, are executives of different countries really in comparable situations to the American CEO? Firstly, the different standards of living in Japan and Europe make it difficult