Ethical considerations of Executive compensation

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Many outsiders view the size and form of the salaries that executives take home as a vital critical ethical issue. These considerations have resurfaced in the recent years as observers have become aware of the absolute magnitude and generosity of some pay packages. More so, observers have raised an outcry on the many instances whereby executives have been handsomely rewarded even as the companies they are suppose to steer have floundered.

Public dissatisfaction has been aroused at the high pay package accorded to the senior executives when the company in question is experiencing financial difficulties, facilities closures, and workers dissatisfaction due to salary cuts and forced leaves (Matsumura & Shin, 2005; Rodgers & Gago, 2003).

The United States has been the center of focus of the executive compensation debate. The criticisms focuses on the practices of the firms in the country to compensate their senior executives highly exceeding the rates offered by other international firms.

Many evaluations have indicated that the ratio of executive pay package to that of non-executive employees has been on the rise in the past few years (Bohlander & Snell, 2009, p.468). This means that executive compensation has been on the rise at a faster rate than the employee’s compensation. This is an evidence of a system that is at fault in its practices.

Is the huge pay package taken home by executives justified? Some individuals have argued that the top executives always have the last say in making vital investment decisions and that their decisions would either dwarf or make improvements to the firm. According to this school of thought, it seems justified to pay $100 million yearly to a senior executive whose decision can make a firm’s returns to be $100 billion (Kolb, 2006, p. 5).

Certainly, such people are not easy to find. The refutation of this argument is in the fact that there are executives who rarely express such unique traits. It is easy to spot very highly paid executives who show no concern in making wrong choices and destroying the integrity of the firm. It is unethical for anyone to deserve such enumeration regardless of his or her brilliance at making decisions. It is not right for one person to have so much to himself or herself, regardless of how much benefits the person can give to others.

An argument has it that an executive, like any other worker, wants the best terms of employment as much as possible, and that the company looks for the best-qualified leaders, based on its own ability to meet their remuneration demands. Therefore, both sides of the bargain, firm and manager, use their freedom in a free market to reach a consensus.

Hence, the process is justified and leads to an enumeration package that is also justified. This line of argument is not realistic as the model of two independent agents striking an arm’s-length deal is not candid enough to express this situation, so the argument on freedom is misplaced.

The remuneration of executives is most of the times set by the compensation committee, which comprises of the company’s board of directors. Nevertheless, the chief executive of the company grants membership to most of the boards directly or indirectly. As a result, the very argument that the compensation of executives is due to interplay of factors in a free market is unethical.

The hefty executive compensation is often related to the increase in the stock price of a company due to their exceptional managerial decisions.

In as much as leadership ability is important to the success of a company, it is worth noting that many different internal and external factors affect the company and its value of stocks. Internal factors (for example workers), or external factors (for example inflation) can have more weight in increasing a firm’s value of stocks than the leadership offered. However, many executives overseeing companies get hefty allowances.

While executives are paying attention on the rise in stock prices, the input of other stakeholders are swept under the carpet (Clementi & Cooley, 2009; Bolton et al., 2006). The remuneration of the senior executives is calculated based on the performance of the firm. Nevertheless, recent studies have shown there is weak association between the high remuneration of an executive and the performance of the firm.

These reflections point out that this critical issue must be re-examined in a deeper level to come to terms with the ethical aspects of executives pay package. What good does the society get when a system exists in which some individuals receive so much while others so little?

References

Bohlander, W. & Snell, A., 2009. Managing Human Resources. South. 15th ed. Natorp Boulevard: Western Publishing.

Bolton et al., 2006. Pay for short-term performance: Executive compensation in speculative markets. Web.

Clementi, G. & Cooley, F., 2009. Executive Compensation Facts. Web.

Kolb, W., 2006. The ethics of executive compensation. Carlton: Blackwell Publishing Ltd.

Lee, D.,2009. ‘Monsanto CEO gets 2009 Compensation valued at $12.7 million.’ Los Angeles Times. Web.

Matsumura, M. & Shin, J., 2005. Corporate Governance Reform and CEO Compensation: Intended and Unintended Consequences. Journal of Business Ethics, (62) 2. pp. 32-45.

Rodgers, W. & Gago, S., 2003. A model capturing ethics and executive compensation. Journal of Business Ethics, (48) 2. pp.120-123.

Troise, J., 2009. ‘Becton Dickinson CEO gets 2009 compensation boost.’ Associated Press. Web.

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Ethical considerations of Executive compensation

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