Markkula Center of Applied Ethics

Executive Compensation: Are Outsize Pay Packages Contributing to Corporate Malfeasance?

The Challenge

In addition to the equity issues raised by big pay gaps between executives and line workers, enormous compensation packages for executives, especially when they include large option grants, may create incentives for bad behavior.

What's at Stake

The gap between paychecks for average employees and the compensation of executives has long been an issue of ethical concern, and the gap is growing. Federal Reserve Chairman Alan Greenspan called this "a very disturbing trend." Recent research also indicates that outsized executive pay may present problems that go beyond questions of equity. Several studies presented at this year's Academy of Management meeting show that huge executive pay packages, especially those with big option grants, seem
to encourage cheating. A study by Moody's found that companies with the highest-paid executives were far more likely to default on debt or to suffer major cuts in bond ratings. Some CEOs may fudge the numbers in order
to increase the price of their stocks and the strength of their own portfolios, or to keep their wealth intact when company performance falters.

Critical Questions

  • Is there anything inherently wrong with the average CEO earning 431 times what workers averaged, as was the case last year? How do we measure the value of an individual's contribution to the company?
  • What does the disparity in income do to public trust in America's CEOs? Does it undermine the perception of fairness in the entire economic system?
  • What features of current CEO pay structure contribute to fraudulent behavior, and what can be done to change them? What is the role of corporate boards in addressing this issue?
  • Some legislative proposals cap the amount of executive pay businesses can deduct from their taxes. Is legislation the best way to solve the problem?

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