Ethical Considerations in Assessing the Fairness of CEO Pay
On April 4 I read a piece in the Daily Ticker that discusses the trends in CEO pay packages. Led by Gilead Sciences' CEO John Martin's nearly $170 million haul, 10 CEOs took in total compensation of over $60 million in 2013, according to USAToday's CEO Compensation Report.
Looking at the other side, Reuters reports a number of major U.S. companies are cutting back on glamorous luxuries like personal jet use, country-club memberships, and luxury rentals." For example, Wynn Resorts stopped paying for Steve Wynn's luxury Las Vegas villa in 2013 after previously shelling out over $450,000 per year to house its Chairman and CEO. At AT&T, CEO Randall Stephenson saw the value of his "other compensation" fall a whopping 35% in 2013, due largely to the company no longer allowing the executive access to its corporate jet for personal use.
Let’s not feel sorry for Wynn whose overall compensation rose in 2013 to $19.6 million from $17.7 million in 2012. As for Stephenson, his 2013 compensation topped $22 million, including over $522,000 in "other compensation"; again that's down 35% from the prior year.
What seems like outrageous pay for CEOs to most people is standard operating procedure for American corporations, according to Henry Blodget, who is editor and CEO of The Business Insider, a business news and analysis site, and a host of Yahoo Daily Ticker, a finance show on Yahoo.
"It's unbelievably piggish and outrageous," Blodget says. "There's no way out other than a CEO saying 'you know what, I don't want to be a pig. I don't want to be paid 700 times my lowest employee.' That's the only thing that will stop it."
That's the only way because executive compensation is set by boards of directors, typically based on recommendations from compensation consultants. Both the consultants and board members -- often CEOs themselves -- have huge incentives to vote for higher pay, leading to a race among companies looking to attract and retain top managers. Rather than have a neutral arbiter determine executive compensation, corporate America stacks the deck with those of their own kind. It’s a classic conflict of interests.
Studies of executive compensation have shown that the average pay gap between the average CEO and average worker is about 300 times. Assume the average pay for workers is $50,000. That means the average CEO makes $15 million. Change it to $100,000 and that means $30 million. This is outrageous especially at a time when corporations are cutting back or cutting out paid health benefits for their employees.
Fifty years ago, when General Motors was the largest employer in America, the typical GM worker got paid $35 an hour in today’s dollars. Today, America’s largest employer is Walmart, and the typical Walmart worker earns $8.80 an hour.
Does this mean the typical GM employee a half-century ago was worth four times what today’s typical Walmart employee is worth? No. Perhaps the strong unions of days long past explain the reason for this disparity.
I like to evaluate business practices using ethical analysis. James O’Toole , a senior analyst for business ethics at the Markkula Center for Applied Ethics at Santa Clara University, points out that Aristotle was the most practical and business-oriented of all philosophers who asked ethical questions. He says we may not think that a person who's been dead for nearly 2,400 years has anything practical to say about modern organizations. But Aristotle remains relevant because he is particularly interested in defining principles in terms of the ethics of leadership.
In his Nicomachean Ethics, Aristotle concludes that the role of the leader is to create the environment in which all members of an organization have the opportunity to realize their own potential. Aristotle believed that the ethical role of the leader is not to enhance his or her own power but to create the conditions under which followers can achieve their potential.
Of course Aristotle never heard of a large business or corporation. Nonetheless, he did raise a set of ethical questions that are directly relevant to corporate leaders who wish to behave in ethical ways.
O’Toole points out that if you translate Aristotle into modern terms, you will see a whole set of questions about the extent to which the organization provides an environment that is conducive to human growth and fulfillment.
He also raises a lot of useful questions about the distribution of rewards in organizations based on the ethical principle of rewarding people proportionate to their contributions.
- Am I taking more than my share of rewards-more than my contribution is worth?
- Does the distribution of goods preserve the happiness of the community?
- Does it have a negative effect on morale? Would everyone enter into the employment contract under the current terms if they truly had different choices?
- Would we come to a different principle of allocation if all the parties concerned were represented at the table?
The only hard and fast principle of distributive justice in ethics is that fairness is likely to arise out of a process of rational and moral deliberation among the participating parties. All Aristotle says is that virtue and wisdom will definitely elude leaders who fail to engage in ethical analysis of their actions. He tells us that the bottom line of ethics depends on asking tough questions.
It is no surprise to me that the richer get rich while the less rich struggle to keep their heads above water. The American dream dissipated long ago as greed, instant gratification, and the pursuit of wealth for wealth’s sake crowded out ethical values such as fairness toward all in the organization, respect for the value and contribution of a worker toward achieving corporate goals, and sharing one’s successes with those who made it happen through hard work, sweat and tears.
Blog posted by Steven Mintz, aka Ethics Sage, on April 16, 2014