Reference no: EM13807541

Corporate Executive Compensation

The issue of executive compensation has been the subject of scrutiny and ethical discussions especially after the 2008 market crash in Wall Street. Critics at the time felt that the huge salaries that CEOs drew at the time was in stark contrast to the market performance of their companies' shares (Perel, 2003). There has always been a feeling that salaries of chief executives and other top company officials should be subject to regulation by an independent authority. However, this is difficult to implement because each company has its unique culture and approach to compensation. This paper will explore contentious issues in employee compensation from an ethical point of view. The two main theories to be explored are the deontological ethics theory and the utilitarian view of ethics.

Deontological and Utilitarian

Deontological ethics sees an action as good as long as it follows the laws and regulations governing the person or institution. For instance, actions of students at schools are ethical as long as they do not violate the laid out rules or break generally accepted norms within the school. Similarly, the actions of a business or its owner will be judged on the basis of whether they have broken any laws governing businesses in that jurisdiction. In that case, an action is what is used to judge morality as opposed to the consequences of such an action. The utilitarian theory on the other hand examines the results of an action in determining morality (Harris, 2005). The theory is based on an assumption that people are continually seeking good or to avoid bad things from happening to them or those around them. Therefore, an action is ethical if its consequences are good.

The Salary Amounts

The first issue lies in the amounts that executives of large corporations draw every year. Critics argue that the amounts are too large and are not justifiable by the work that they are supposed to handle. From a deontological point of view, payment of such salaries is not unethical because there are no laws that limit the amount of money a company pays its CEOs. However, it is important that such an amount is agreed upon by directors and shareholders made aware of the same. From a utilitarian view however, the salaries may be seen as preposterous.

The large salaries may be meant to motivate CEOs to dedicate all their time and energies in serving the companies. However, there is little research that shows a correlation between CEO pay and company performance. In fact, the consequences may be negative because the rest of the employees may feel less important at the company yet they put a lot of man-hours at the office. Considering the possible negative effects, the payment of large salaries may be described as unethical (Harris, 2005).

Structure of Bonus Schemes

Critics have also pointed that bonus schemes, which CEOs earn at the end of each year are structured in a manner likely to cause unethical behavior. Most bonus schemes are performance-based and as such could trigger CEOs to pursue profitability at the expense of long-term stability of the company. In other cases, the CEO may order the application of accounting procedures that inflate the amount of profit the company is making. This is unethical from both the deontological and utilitarian points of view (Bender & Moir, 2006). In so doing, the CEO will be going against what is required of a person in his position-to put the interests of the company and its shareholders ahead of his own.

His position requires the exercise of a certain level of skill and he will also have failed in this regard. In fact , the CEO may be liable for breach of duty under the law. Finally, the fact that the action jeopardizes the future of the company makes it unethical under the utilitarian view.

Power to Fix Remuneration

The finale ethical issue to consider lies in the fact that some companies allow CEOs to fix and adjust their own reputation. Such CEOs can award themselves bonuses with little consultation or even scrutiny from other organizational members. Critics argue that this can easily put the company in a precarious financial position and is an easy loophole for siphoning funds from the company. The vulnerability created by this situation makes it unethical under the utilitarian view. However, as long as no rule have been broken yet, allowing CEOs to fix their remuneration is totally ethical under deontological thinking (Bender & Moir, 2006).

In another perspective, allowing people to fix their own salaries is totally imprudent for any company. Normally, it is impossible for people to carry out an oversight role on themselves and the company is simply exposing itself to unnecessary risk. It is improper to expose shareholders' wealth to possible unlimited spending by another party. A board of directors is best suited to fix remuneration for CEOs based on market trends as well as the performance of the CEO (Perel, 2003).

Conclusion

There are many issues surrounding the fixing and payment of salaries and bonuses to CEOs today. Shareholders, especially, are concerned that CEOs have not done enough to avert crises such as the 2008 financial meltdown. Other critics feel that the salaries may have been part of the cause in the first place. There is therefore a genuine need to find a plausible solution to these ethical dilemmas to avoid conflict between the various organizational stakeholders.