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Executive Compensation: Are Outsize Pay Packages Contributing to Corporate Malfeasance?
The ChallengeIn 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 StakeThe 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.