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Appropriateness of Corporate CEO Salaries

Info: 1961 words (8 pages) Essay
Published: 29th Jul 2021 in Business

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Abstract

Historically, CEOs have been compensated with the largest salaries, as their work was vital to the maintenance and expansion of the company. Today, however, many have realized that CEOs are grossly overpaid in comparison to average workers. At the same time, a small, but vocal, minority arose, arguing that CEOs are paid fairly. This paper sets out to affirm the beliefs of the majority and convince the minority that CEOs’s wages are disproportionate to the company’s spending. ­­­­­­By systemically addressing the arguments of the opposition, then countering them through cross-examination and conflicting sourcing, it can be concluded that CEOs are drastically overpaid.

Keywords: CEO, Income Inequality, Communism, Equity

CEO: Chief Earning Officer

Facebook has Mark Zuckerberg, Apple has Tim Cook, and Amazon has Jeff Bozos. Today, CEOs have risen in popularity, becoming household names, and, thus, have seen a similar rise in their compensation. In a ten year span, from 1991 to 2001, the pay packages of CEOs increased by nearly 300 percent, whereas worker’s paychecks only increased by a mere 30 percent (Byrne 2002). Clearly, there is a huge disparity in the income of the highest and lowest members in a company; in order to solve the issue, one must examine the rational that underlies the huge sums of money that CEOs receive. Regardless of political affiliation, everyone ought to be shocked at this widening divide; liberals can view this as a class issue, with the widening pay gap between bourgeoisie and proletarian, and conservatives should be equally concerned as to what warrants a single person to be given sums totaling up to millions of dollars per year.

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Simply put, this dilemma has elements of philosophy, morals, and logic, which falls directly into the domain of Lincoln-Douglass (LD) Debate. In LD, two key elements are value and criterion; value is what one considers as their ultimate goal or encompassing idea, whereas a criterion is a means to gauge the success or failure of said value. Throughout this debate, the value to be obtained is clearly justice: what is deserved is given. The criterion, in accordance with the value, is alignment of one’s contribution to the company to the compensation they receive for said contribution. If this paper can prove, within a reasonable doubt, that the contributions CEOs make to the company are overshadowed by the pay they receive, then it can be concluded that justice is not being achieved.

There are three predominant arguments that are held by those who insist that CEO pay is fair; buyers and sellers agree upon the price that CEOs are worth to both parties, CEOs are entitled to the pay that they are perceived to be worth by others, and CEO compensation is a marginal price to pay for the skills that they can provide. Regardless of the argument presented, this paper seeks to dissect the reasoning behind them and provide opposing contentions and sources that would nullify the prior statements.

In a hypothetical sense, the beauty of the free market would allow buyers and sellers to come together and have transparent negotiations to define how much a service or good is worth to both parties involved. However, from an empirical standpoint, this does not work out in reality, with practices such as price-gouging and market manipulation taking place in “free” markets. This also occurs in the compromise for CEO pay. The core idea is that the buyers, which would the shareholders, would present an offer to the CEO regarding their pay, based upon the perceived value of their worth in relation to their portfolios (Moriarty 2005). Yet, the buyers are clearly at a disadvantage; due to large number and lack of unity, it becomes difficult to deliberate what a fair pay is. For that reason, many companies consult with the board of directors in lieu of contacting every single investor. This would surely help ensure fair pay, if it were not for “84% of S&P 500 companies [having] … such a [CEO] post on their boards” (Pozen 2006). Naturally, if one were to decide their own pay, they would be incentivized to be more generous with the companies’s money. Thus, it has been disproved that a free market can produce an unbiased and fair pay for CEOs. Instead, an independent chair ought to be appointed as many other countries have demonstrated (Pozen 2006).

In a similar vein, the second argument states the CEOs are compensated in accordance with the value that they are worth to the company (Bryne 2002). For instance, if the firm does better than previous years under their leadership, the CEO should be paid to match the increase in performance, and vice versa in years where they underperform. Issues that arise from this belief manifest themselves in two forms: the quota for performance and how to adapt that quota. For instance, how should the firm gauge the importance of the CEO to the firm? If the firm has a strong or weak quarter, it cannot be conclusively attributed to the CEO and the CEO alone (Moriarty 2005). Therefore, the health of the company should not be used as the measure of compensation. Furthermore, the second issue come as a result of the first; how can the company quantify performance to accurately compensate the CEO for the subsequent increase or decrease in the strength of the firm? While it may seem like common sense to reward the CEO for the work he contributes, this pay scale does not hold, as it is too unpredictable to attach value to work.

Opposed to the previous arguments, where the pay was given following performance or negotiations, the last point is actually a preventive measure. Following a huge loss in profit, some companies will actually pay their CEOs what is referred to as a “retention bonus.” They fear that the loss of profit will turn the CEO away, which would lead to an even greater loss of profit. In this idea, they are attaching a certain value to the future value that the CEO would bring to the company. This leads into the reasoning of the action; the copious salary is defended by the “need to attract and retain” capable CEOs (Rogers 2015). However, many other industries have talented and dedicated staff, such as professors, doctors, and military. The reality of the situation is that there is no need to offer “8 million dollars” to entice businessmen and women to become CEOs (Moriarty 2005). Therefore, the huge pay packages that are given to CEOs are unnecessary and extravagant to the wellbeing of the company.

Given the importance of a CEO position, it is reasonable that they are paid the most in the company. What is not reasonable, however, is the aforementioned pay disparity. Referring back to the value-criterion relationship, it has been consistently demonstrated that CEOs are overpaid for the work and contribution that they provide to their respective companies. By extension, then, justice, in wage equity, is not being achieved as workers are not receiving compensation in accordance with their services. Regardless of the nature of the argument, CEOs today are grossly overpaid.

Works Cited

  • Young, Michael N and Ann K Buchholtz. “Firm Performance And CEO Pay: Relational Demography As A Moderator.” Journal of Managerial Issues, vol 14, No 3, 2002, pp 296-313.
  • Pozen, Robert. “Before You Split That CEO/Chair…” Corporate Governance. Harvard Business Review. April 2006, www.shrm.org/resourcesandtools/hr-topics/compensation/pages/retention-compensation-plans.aspx. Accessed 23 April 2017.
  • Moriarty, Jeffrey. “Do CEOs Get Paid Too Much?” Business Ethics Quarterly, vol 15, no 2, 2005, pp 257-281.
  • Rogers, Rob. “Retention Compensation Plans – Please Stay!” Compensation. Society for Human Resource Management. 26 Feb 2015, hbr.org/2006/04/before-you-split-that-ceochair. Accessed 24 April 2017.

Annotated Bibliography

  • Young, Michael N and Ann K Buchholtz. “Firm Performance And CEO Pay: Relational Demography As A Moderator.” Journal of Managerial Issues, vol 14, No 3, 2002, pp 296-313.

 In this article, Young and Buchholtz discuss the demography of executive compensation. By drawing upon previous evidence, they proposed that a demographic dissimilarity would relate to a stronger pay-performance relationship. The results found that dissimilarity in tenure produced a stronger pay-performance relationship.
 I intend to use this source as the basis of the arguments I will present. Specifically, the pay-performance relationship is biased in such a way that it unfairly benefits the CEO at the expense of menial workers. Furthermore, it serves to the highlight how the relations between the CEO and company have become bound to the point where it becomes difficult to give into the demands without facing repercussions, thus leading to an increase in the average salary of CEOs.

 In this article, Pozen discusses how the board of directors responsible for determining pay and CEOs have become so intertwined to the point where it is difficult to delineate them. As a result, he advocates for independent committees who would provide an unbiased opinion on pay scales. He also provides evidence that the splitting of CEO and chairmen had a marginal effect upon stock price or accounting income.

 I will use this article as evidence that CEOs have seized the very means that pay them and, thus, would be able to manipulate it to their wishes. Unsurprisingly, many other countries have independent chairs to define the reasonable wage for their CEOs.

  • Moriarty, Jeffrey. “Do CEOs Get Paid Too Much?” Business Ethics Quarterly, vol 15, no 2, 2005, pp 257-281.

 In this article, Moriarty discusses whether CEOs are overpaid. He explores three views, agreement, desert, and utility, and refutes them one by one as being false.

 I will use this article to counter specific arguments presented by those who believe CEOs are not overpaid. Specifically, Moriarty’s article helps to supplement my arguments by providing evidence or introducing theories and points.

 This article discusses what and why retention bonuses exist in the corporate world. Retention rates are payments provided to a key person in order to secure continued employment. He then highlights some possible results, such like forcing the company to spend wisely and ensure that candidates are adequate to the task they are assigned.

 I will use this evidence to point to the fact that CEOs are overvalued in their field. Providing them with retention bonuses does not necessarily mean that more capable CEOs will be attracted to job openings.

 

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