Executive Compensation

Social and Ethical Issues

Many observers see the size and form of executive compensation as a pressing social and ethical issue. These concerns have become particularly poignant in recent years as the public has become aware of the absolute magnitude and generosity of some pay packages. Furthermore, public attention has focused on numerous instances in which executives were rewarded very handsomely even as the firms they were supposed to be leading had floundered. Public indignation has arisen at the picture of very handsomely rewarded executives coupled with a firm that is experiencing financial losses, closure of facilities, and employee dislocations in the form of cuts in pay and benefits and enforced layoffs.

One of the most emotional aspects of the executive compensation issue is the absolute magnitude of executive compensations. For large firms in the United States, compensation for top executives can run into many millions of dollars per year. Some celebrated situations have arisen in which compensation for a single year can push toward $100 million, particularly if stock options are granted in that year. To some observers, the very size of this compensation seems totally inappropriate and even obscene.

Criticism of executive compensation has focused most intensely on practices in the United States, and critics of the present executive compensation practices often point to both domestic and international comparisons with the present level and structure of executive compensation that prevails in U.S. firms. Within the United States, critics of executive compensation point to trends in executive compensation relative to the total pay packages received by rank-and-file employees in the same firm. Most studies suggest that the ratio of executive compensation to that of ordinary workers has increased dramatically in the past few decades. In other words, executive pay seems to be rising much more rapidly than worker pay, and these critics present these data as evidence of a system gone wrong.

Two types of international comparisons play a prominent role in the executive compensation debate. First, executive compensation in U.S. firms appears to be more generous than in comparable non-U.S. firms. Studies have examined the absolute magnitude of compensation internationally as well as the ratio of executive compensation to ordinary worker compensation across countries. In general, studies have found that top executives in U.S.-based companies receive a higher level of absolute compensation (i.e., the actual dollar worth of the entire pay package) than similarly placed executives in non-U.S. firms. As a second type of international comparison, researchers examine the ratio of executive compensation to the pay of ordinary workers in U.S. firms versus the same ratio in non-U.S. firms. Most studies find a large difference in this ratio, with the executives of U.S. firms receiving a much higher wage relative to that of ordinary workers than is the case in comparable non-U.S. firms. Again, critics take this disparity as evidence of a flaw in the system in the United States.

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