Guest Post 1 “Can CEO Pay Be Unjustifiably High?” by Frances Roorda

This month I am happy to announce that I will be publishing a series of guest posts from my former students. I asked these students if I could publish their essays because I think they represent excellent examples of philosophical reasoning on important or contemporary topics. Some I agree with and some I do not… but they all make me think. – Keith

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Since 1978, CEO compensation on average has grown almost 1000%, twice as fast as the rate of growth of the stock market and ninety times as fast as the rate of growth of a typical employee’s pay. Because of this, the gap between the lowest-paid and highest-paid members of a given company has widened greatly, to the point that the average CEO will make 300 times more than the typical worker in a given year. Though the rationale for high executive compensation is widely accepted in corporations as well as in society, there is a growing debate over whether this compensation is truly representative of executive contribution to their companies.

I argue that it is possible for CEO compensation to be too high, and that this can be seen in many companies today. The CEO is the figurehead of the company, but they seem to have very little to do with the day-to-day functions that define a company. The quality of the CEO may have very little to do with the quality of service provided by the company because of how disconnected they are from its most basic levels. Because of this, the CEO should not be rewarded more than lower-level employees for the success of a company.

In addition, many companies seem to have incredibly wealthy CEOs but employ many workers at a wage that does not allow them to live by remotely the same standards as the CEO or executives. Though John Boatright, a professor at Loyola University, argues that this should be seen as a more nuanced societal problem than CEO compensation in itself, I believe that the two should be considered in conjunction with one another. It would not be justified to consider CEO compensation separately from employee compensation because, though employee compensation is more heavily influenced by societal climates, it is undeniable that many companies have the means to pay above minimum wage without loss.

Furthermore, CEOs should not be compensated with stock options because the near-constant growth of the stock market has been a major contributing factor in the meteoric rise of CEO pay, regardless of the fact that the general rise of the stock market has very little to do with the work of any individual executive. For those who argue that high CEO pay is deceptive because much of it is represented in stock options instead of explicit salary from the company, I disagree. Though much of the CEO’s pay comes from stock options, the money that they receive exists in some transferrable form because he or she is the recipient of it.

The argument that a compensation committee determines CEO pay without their say should not be valid because it should be the moral duty of a CEO not to accept an inordinate amount of compensation with the knowledge that none of his or her other employees will benefit from it. John Rawls, an American political philosopher, argues that, “social and economic inequalities are to be arranged so that they are both (a) reasonably expected to be to everyone’s advantage, and (b) attached to positions and offices open to all.” This implies that the level of CEO compensation should be ideally justified by its benefit to all stakeholders in the company. It is morally impermissible for one member of a company to receive unrealistically huge sums of money while others live on minimum wage or below.

According to Michael Bognanno, a professor at Temple University, CEO pay is determined by the market, and is a reflection of the demand for rare executive capability. Therefore, if a company’s stock is doing well then the CEO’s pay will be proportionally higher as a result. This implies that the CEO is being appropriately compensated for their effect on the company’s performance. But it is not just for the market to determine CEO pay simply because it determines the value of the CEO’s stock options. More than the CEO’s performance helping the company, its reputation and popularity as well as the services that it provides are truly what determines a company’s well-being in the stock market. Furthermore, if the market were the predominant determinant for CEO pay, there would be much less evidence of executive compensation being manipulated to benefit the CEO even when the company’s performance is low. If the market determines the price of a company’s stock, then there is no reason for the CEO to be rewarded.

On another note, some argue that the position of CEO is very demanding, and there are very few people qualified to hold it. In addition, they must be prepared to take the fall for any mistakes made by others in the company, making it a high-risk occupation. Because of this, it is said that CEO compensation fits the demand and risk of the position. But, although there is some correlation between arduousness of position, mitigation of risk, and high CEO pay, there are many other factors that have been shown to have an effect on compensation, including CEO notoriety and personal relationship with the compensation committee. In addition, it is far from unheard of for CEOs to attend their own compensation hearings. Furthermore, the position of CEO is seldom held by someone who earned the position fairly and through ability alone. Many CEOs come from privileged backgrounds and have been tapped through personal connections, making it seem that perhaps the small pool of eligible candidates may not be so limited. Finally, though CEOs often must take the fall for a company doing poorly or making major mistakes, they are seldom harshly punished unless they were truly responsible for the company’s downfall. Golden parachutes, the huge sums of money promised to high-level executives upon termination, undoubtedly mitigate the negative effects normally associated with being let go from a company. The amount that CEOs are paid is not justified by the supposed risk that they are taking or their specific qualifications.

Furthermore, some argue that, though it may seem that CEOs receive a higher-than-normal salary, it seems not to be so when compared to the value of their company. For instance, the CEO of a large corporation may make ten million dollars, but if the corporation itself is worth over 700 billion, it seems to be that the CEO is paid a very small fraction of the company’s net value in actuality. It would seem that comparing a CEO’s pay to the value of the company does show that the executive is not being paid a large fraction of that value, but the same logic applies to comparing a CEO’s pay to the pay of a lower level worker who facilitates the service that the company provides. Furthermore, a comparison between the real value that a CEO takes home in a year to the hypothetical net worth of a company is a thin defense, as the two are very different ideas in execution. One should consider CEO pay in comparison to payment of other employees, and realize that it is often unjustifiably high.

So, is executive compensation too high in the U.S.? America is the wealthiest country in the world, but our income gap and wealth gap are ever-widening in recent years. U.S. income inequality is the highest that it has been since 1928. According to Pew Research, where the upper fifth of families earn 59.1% of the country’s income, the upper fifth of families in measure of wealth (as opposed to income) possess 88.9% of the country’s wealth. We clearly have a lot to work on to uphold the standard of equality that we so proudly boast, and rationalizing unjustifiably high executive compensation is detrimental to this effort. CEOs, though they hold an objectively important role in companies, need not be rewarded extravagantly for factors that they do not affect, especially when their lowest-paid employees are earning minimum wage. Furthermore, it is unethical to continue the practice of allowing executives to have influence over those who determine their compensation, and there is no excuse for those in power not to intervene in this practice. Though the rationale for high executive compensation is widely accepted in corporations as well as in society, the standard for executive pay in the U.S. is far too high, and now is the time to break that standard for good.

Bibliography

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  • DeSilver, Drew. “5 Facts about Economic Inequality.” Pew Research Center. N.p., 07 Jan. 2014. Web.
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  • “GINI Index (World Bank Estimate).” GINI Index (World Bank Estimate) Data. N.p., n.d. Web.
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