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The role of ethics in executive compensation: Toward a contractarian interpretation of the neoclassical theory of managerial renumeration

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Abstract

The topic of Chief Executive Officer (CEO) compensation has been a focus of interest for many years. The purpose of this article is to explore the ethical dimensions of various generally accepted theories of CEO renumeration. We argue that a contractarian approach, based on the Kantian ethical framework, can be used to augment the existing contingent pay models.

While the neoclassical economic model of the firm views the maximization of the shareholders' wealth as the sole responsibility of top management, a contractarian approach regards the balancing of various stakeholders' interests as the primary task of top management. Ethical problems emerge when there are divergent, yet equally justifiable interests which compete in order to channel organizational resources to meet their own needs. In this situation, given the inherent ambiguities and ever present possibilities of multiple perspectives, it may not always be feasible to provide a categorical answer to the question of whether the CEO's decisions are ethical. We suggest that a broad interpretation of the neoclassical theory of the firm, one that is grounded in Kantian and contractarian ethics, can serve as a basis for a reconciliation of different theories of executive compensation.

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Authors and Affiliations

  1. Economics Department, Western Kentucky University, 42101, Bowling Green, KY, USA

    Linda L. Carr & Moosa Valinezhad

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  1. Linda L. Carr
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  2. Moosa Valinezhad
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Linda L. Carr, a certified public accountant, has held positions as an auditor in public accounting and as a controller in industry. Her thesis examines the determinants of executive compensation in large and small firms.

Moosa Valinezhad is assistant professor of economics in Western Kentucky University, where he teaches international economics, microeconomics, and statistics. Dr. Valinezhad has a deep interest in the interdisciplinary aspects of economics. His recent article in theJournal of Economic Issues explores the importance of sociopolitical forces for the monetary approach to the balance of payment.

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Carr, L.L., Valinezhad, M. The role of ethics in executive compensation: Toward a contractarian interpretation of the neoclassical theory of managerial renumeration. J Bus Ethics 13, 81–93 (1994). https://doi.org/10.1007/BF00881576

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