"The greatness and the genuine trait of your thought and writings lie on the fact that you positively and interestingly make use of philosophical thoughts and thoughtfulness in order to deeply and concretely cogitate about America's social issues. . . . This does not mean that your thought is reducible to your era: your thought, being inspired by issues characterizing your era . . . , overcomes your era and will still likely be up to date even after your era, for future generations." Bruno Valentin

Tuesday, August 8, 2017

Problems in American Executive Compensation: The Ethical Dimension

According to The New York Post, 66% of the income growth in the United States between 2001 and 2007 went to the top 1% of all Americans. In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1. By the year 2000, that ratio had exploded to between 300 to 500 to one. Because American executives tend to be paid more in total compensation than do their European colleagues, the ratios are lower in in the E.U. Hence one might ask what is behind the trajectory in the United States. 

Does a shift from manufacturing to knowledge-based industries occasion a widening economic gulf? Even as late as 2010, the United States still had the largest manufacturing sector in the world. I suspect that the change is not so much tied to the number or even proportion of factory workers as it is to changes in executive compensation. Specifically, in the 1990s stock options took off as a part of such compensation because boards wanted to tie executives' compensation to long term firm performance. Even if the alignment of incentives was strengthened, a side effect was an explosion in the overall level of a given executive's compensation. In other words, if an executive's company did well, so too did his or her total compensation package. This byproduct in turn raised the ethical issue of fairness.  Specifically, is a CEO's work really worth tens of millions in a given year to a firm or to society at large?  Is a CEO's effort really so much more than that of a mid-level manager or an employee in operations?  

To obviate any ethical violations of fairness, which human beings seem able to detect innately, boards could reduce the overall compensation packages of executive managers even as the proportion in stock options is increased.  Lest it be argued that the market demands the higher amounts, it could be argued that that market is an oligarchy rather than being competitive. If so, there might be a legitimate role for the U.S. Government as an umpire establishing and protecting competitive markets. Otherwise, an oligarchy can become a self-perpetuating club that functions primarily in the interest of its members, which occasions the ethical objection of fairness.

Source:

"So Long, Middle Class," New York Post, August 1, 2010.