Executive compensation involves giving monetary or non-monetary reward to executive employees such as chief executive officers for services they have offered to the organization. This is done for the purpose of aligning executives and stakeholders’ goals. This article looks at the various ethical issues on executive compensation. It is questionable whether executives are offered a comparable amount of compensation to the service they provide in their organizations. There is no clear procedure to come up with the right award to the executives. The dramatic rise in executive compensation has also raised attention to its ethical responsibility. There are multiple unethical issues revolving around executive compensation.
In recent years, the world has seen a dramatic rise in the amount of executive compensation. According to Economic Policy Institute, executive compensation has grown 940% since 1978 in comparison to a 12% rise to a typical worker (Lawrence, 2019). This can be simply attributed to the ability of the executive works to increase the amount of pay they receive. This is inconsiderably unequal to the amount of work or contribution to the institution. These high increments have led to unethical behaviors from executives in pursuit of sustaining a huge short-term financial gain. The executives also find a reason to alter the books of finance if they realize they are on an organization for a short time so that they can safeguard a higher compensation. Restricting executive compensation to a long term performance requirement in a firm would cub the short-term greed. Only the organizational leadership would make a logical change to the rules of executive compensation.
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The performance of a given firm depends on the collective contribution of every employee. The work done by a typical workers is equally as important as that done by the executive workers in a firm. In relation to performance, the compensation of workers should be relative to the amount of work done by either the typical or executive worker. The ratio of compensation of a typical worker to executive worker is incomparable. The ratio of their wages also are also unmatched even though they are relatively important to the same organization (Magnan, 2018). The rules of wages of a usual worker in comparison to those of an executive worker are unethical. The government has the moral authority to control the wage ratio of executive worker to other workers. Putting a capping on the ratio of executive to typical worker would ensure a just and reasonable wage gap in a given firm.
Sarbanes-Oxley Act cannot be sorely relied upon to ensure ethical executive compensation. This is quite evident in the further Acts passed in reference to executive compensation since its enacting in 2000. These Acts include The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Act left various loopholes that influenced the integrity of executive compensation. These include information timing and backdating. According to Collins et al., (2008) the dates were used to compromise the integrity of financial information in documenting financial statements as required by The Sarbanes-Oxley Act. This Act also caused a drastic decrease in market valuation as a result of the cost incurred to comply with the Act. The Act did not consider the direct effect on the financial market. A substantial number of firms do not enact the Sarbanes-Oxley Act because the government does not follow up on it as it is its responsibility.
In conclusion, there are multiple unethical issues revolving around executive compensation. The rules of executive compensation need to be revised regularly as times change. Creating a rule is as important as making sure it is being adhered to. The making Sarbanes-Oxley Act was necessary and so is making sure it is followed.
References
Collins, Daniel & Gong, Guojin & Li, Haidan & Bushman, Robert & Dejong, Doug & Gleason, Cristi & Johnson, Bruce & Lafond, Ryan & Rajgopal, Shivaram. (2008). Corporate Governance and Backdating of Executive Stock Options. SSRN Electronic Journal . 10.2139/ssrn.934881.
Lawrence, M. & Julia, W. (2018). CEO Compensation Surge in 2017. Economic Principles Institute .
Magnan, M., & Martin, D. (2018). Executive Compensation and Employee Remuneration: The Flexible Principles of Justice in Pay. Journal of Business Ethics , 1-17.
