Corporate executive compensation is one of the controversial topics that have received wide criticism and support in equal measures, especially from stakeholders and academics. According to the report that was released by the Economic Policy Institute in 2013, the compensation for corporate executives increased by 937% between 1978 and 2013 compared to that of typical employee that only grew by 10.2% in the same period. Supporters of the immense executive compensation argue that corporate CEOs are highly skilled people who manage complex corporate operations, making them to deserve high excessive pay. However, those opposing the argument maintain that the immense compensation work against the interest of shareholders and the success of corporations. In addition, the controversy surrounding executive compensation has raised many ethical issues and concerns (Perel, 2003). The ethical issues and concerns over corporate executive compensations can be explained by deontology theory, utilitarianism theory, and egoist perspective.
The Ethical Issues in Corporate Executive Compensation
There are a number of ethical issues in corporate executive compensation. The primary role of an executive is to manage corporations on behalf of investors or shareholders. However, ethical issues emerge when executive and shareholders have conflicting interests. According to the proponents of Principle-Agent problem, an ethical dilemma comes in when shareholders who are the principals have competing interests with executives who are the agents (Perel, 2003). The ethical issue mainly arises when the executives pay much attention to their own self-interests while ignoring the interests of shareholders, which is to increase the value of the company. Therefore, the conflicting interest between executive and shareholders is the major ethical issue.
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Unethical behaviors that are common among executives are also ethical issues on corporate executive compensation. For instance, high percentage of compensation that is associated with equity levels like restricted and option stock can make executive to manipulate corporate data with the aim of increasing their pay or earnings. Misrepresentation of data in the financial statement and reports is common in many corporations and they designed in such a way that they increase the compensations of top executive members of a company (Perel, 2003). Hence, unethical behavior aimed at achieving the self-interests of executive is an ethical issue in corporate executive compensation.
Another ethical issue is whether the immense executive compensations always translate to high performance. The executives have been receiving lucrative pay even in cases where companies are recording substandard performance. With high compensation, executives are expected to have moral obligation of ensuring that companies are successful in their operations and are earning high profits (Yulianto, 2016). Nevertheless, the executive compensation structure is designed in such a way that they continue to receive immense pay even if the company fails or underperforms. Besides, the role played by executive in running and operating companies is insignificant compared to other employees such as engineers and technical experts, which means that CEOs should not be paid higher salaries than technical experts.
Breaches of Ethical Behavior
Therefore, there are many breaches of ethical behavior in the corporate executive compensation. One of the main breaches of ethical behavior is the decision of the executive to serve their own interest at the expense of that of shareholders or investors in the company. Many CEOs are making decisions that serve their own self-interests while ignoring the interests of shareholders, which is a breach of ethical behavior (Yulianto, 2016). Secondly, corporate executive is expected to reduce their compensation in the case where a company underperforms. However, this is rarely the case, as CEO’s pay always remains constant or unchanged regardless of the performance of the firm.
Ethically, the executive should reduce its compensation or benefits when the corporation performs poorly within a given period. At the same time, the collision between directors and executive in coming up with the compensation structure is a breach of the ethical behavior. In many cases, directors collaborate with the executive to ensure that they continue to earn immense pay at the expense of shareholders. Hence, corporate executive compensation is characterized by many breaches of ethical behavior.
Ethical Theories and Perspective
Deontology is one of the main ethical theories that can be used to explain or examine ethical issues surrounding corporate executive compensation. The theory is mainly based on the moral duty or obligation that every individual should fulfill or adhere to (Aidan, 2015). Proponents of the theory argue that there are acts that we have the moral obligation to perform or avoid performing in order to comply with the expected duty or role. As a result, the management of companies should be pursued within the self-imposed boundaries.
According to the theory, fiduciary principle is a moral principle that corporate executives have the moral obligation to follow or adhere to all the time (Aidan, 2015). The principal-agent relationship, which is crucial in executive compensation, establishes fiduciary duties among CEOs and other top executives to the investors. The principle of fiduciary duty asserts that executives owe a lot of obedience and allegiance to the shareholders of a given company. Therefore, the fiduciary duty of any executive should be to act in the best interest of shareholders and not their own interests. Any decision or action by the executive that does not serve the interests of shareholders, therefore, is unethical and violates the expected ethical behaviors.
Supporters of the argument contained in the theory maintain that executive should only accept minimum compensation packages in order to promote productivity and effective performance of the company, which is in the best interests of shareholders (Aidan, 2015). By accepting more than minimum compensation, corporate executive reduces the profitability of the company by increasing the cost of labor. The main argument in the deontology theory, therefore, is that corporate executives have the fiduciary duty to accept compensation packages that do not go against the interests of shareholders. Corporate executive compensation is morally acceptable if it is in line with the interest of shareholders, which is to enhance the value of the firm.
Utilitarianism is the second ethical theory is the second theory that is useful in explaining and analyzing the morality behind corporate executive compensation. According to the utilitarianism theory, an action or decision is only right or ethical when it generates the greatest balance of pleasure and pain to all individual affected (Rodgers & Gago, 2003). It is the theory that is based on the principle of greatest good for the largest number of people. Proponents of the theory evaluate decisions and actions in terms of benefits and harms that they cause.
Therefore, based on the argument by the supporters of the utilitarianism theory, the best corporate executive compensation is the one that benefits the largest number of shareholders. As a result, the excessive executive pay can only be justified if it generates additional returns that benefit the greatest number of shareholders. The compensation should not only benefit a few executives and shareholders, but also the largest number of investors. Any company that underperforms and yet continues to offer immense compensation to the executive is against the utilitarian concept and breaches ethical behaviors (Rodgers & Gago, 2003). Hence, the theory maintains that the excessive executive pay can only be justified if it benefits large number of employees.
In addition, the concept of egoist perspective can be used to explain ethical issues and concerns on corporate executive compensation. According to the egoist perspective, executive compensation package is always determined based on the interest of CEO and directors without much attention to the effect it has on shareholders or other stakeholders (Peery Jr, 2008). Egoist people are mainly motivated to achieve their own short-term interests and goals, with little regard to welfare of other parties. At the same time, the proponents of egoist perspective argue that the immense executive compensation is justified because it gives incentives to CEOs who are motivated to maximize the profits that can benefit shareholders.
However, egoist structure or arrangement can only thrive in a company when the directors lack independence or power to control the executive. Directors always exhibit an agency problem that makes it hard for them to solve agency problem that emerges between shareholders and the executive. In many cases, executives have influential powers, as they play significant role in ensuring that directors are nominated in the board (Peery Jr, 2008). Besides, it is the executive that determines the compensation packages for directors. Therefore, according to egoist perspective, executives continue to receive immense compensation because of influential powers it has over the directors who also have short-term goals and interest.
Conclusion
The ethical controversies and issues on the corporate executive compensation are not likely to end. The statistics show that executives continue to earn excessive pay, even though the salaries and wages of normal employees have stagnated for years without significant growth. However, ethical theories maintain that such immense executive compensation is always unethical because they do not serve the interests of shareholders. Executive should ensure that they balance their interests with those of shareholders.
References
Aidan, B. (2015). The Ethics of Executive Compensation: A Matter of Duty . Retrieved from https://sevenpillarsinstitute.org/the-ethics-of-executive-compensation-a-matter-of- duty/
Peery Jr, N. S. (2008). Corporate social performance: ethics and corporate culture. McGeorge L. Rev. , 39(1) , 813-835.
Perel, M. (2003). An ethical perspective on CEO compensation. Journal of Business Ethics , 48 (4), 381-391.
Rodgers, W., & Gago, S. (2003). A model capturing ethics and executive compensation. Journal of Business Ethics , 48 (2), 189-202.
Yulianto, K. (2016). The Ethical Perspective of Executive Compensation and Firm Performance: Taxpayer Bailout in 2009 Financial Crisis . Retrieved from https://journeyman.live/2016/05/24/the-ethical-perspective-of-executive-compensation- and-firm-performance-taxpayer-bailout-in-2009-financial-crisis/
