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Executive Compensation and Distributive Justice

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Handbook of the Philosophical Foundations of Business Ethics

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Abstract

From the 1990s onwards, the rise of executive pay is remarkable and clearly linked to the introduction of the agency model into the analysis of the role of managers. We point out that this need not be the only possible role model for managers and demonstrate that executive pay is not closely linked to performance. This is, from a distributive justice point of view, the main reason for public outrage against executive pay. Several studies indicate that unjust pay can also create havoc in the workplace. Unjust pay is also the feeding ground for political action against unlimited pay packages.

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Notes

  1. 1.

    There were EU recommendations in 2004 (2004/913/EC) and 2005 (2005/162/EC) and again in 2009 (2009) 3177). This last recommendation focused explicitly on the design of executive remuneration, more specifically variable remuneration (e.g., types of variables to be included, deferral of pay-out), share-based remuneration (e.g., vesting period, vesting criteria) and severance payments (i.e., limits on such payments). The financial crisis focused once again attention on executive pay and led to the introduction of new regulation and monitoring systems that specifically targeted the financial sector. For an overview of European soft and hard law initiatives in the EU and most of its member states see ([1], pp. 311–366).

  2. 2.

    Walther Rathenau was a German industrialist (leader of AEG), a minister of foreign affairs after the First World War, a German nationalist and a Jew. It was this last part that cost him his life as he was assassinated in 1922, as a minister of foreign affairs. The brutal murder was for Jewish intellectuals like Stefan Zweig a sign of things to come. The trilogy consisted off: Der Neue Staat, Die Neue Wirtschaft, Der Neue Gesellschaft.

  3. 3.

    The argument whether the ideal executive should be a bureaucrat or rather a risk seeking entrepreneur was recently revived by Englander and Kaufman [10] and Frey and Osterloh [11]. They argue in favour of the bureaucrat because the distant neutrality that characterizes him prevents conflicts between teams inside the organisation. Boatright [4] argues against this team production view.

  4. 4.

    http://archive.aflcio.org/corporatewatch/paywatch/

  5. 5.

    Financial economists almost exclusively concentrate on the agency model. But even in general management journals the agency model is still the dominant way to look upon executive pay. Baeten [1] for instance follows three managerial journals for the period 1980–2010 and looks at publications on executive compensation or CEO compensation. He finds 48 contributions out of which 33 concentrate on the agency problem. As the anomalies around the agency model accumulated (mainly the missing link between performance and pay cfr. infra) other explanatory models, driven by a socio-psychological or a more institutional approach gained ground.

  6. 6.

    It is in principle of course possible to use fixed pay to incentivise managers. However, at least for the American market salary and even bonus pay account for a very small fraction of compensation and their cross sectional variation is very limited, indicating that this is not the preferred instrument to incentivise managers. It is stock and option grants that create the bulk of the compensation and also the variability in the dataset (see among others Clementi and Cooley [5]).

  7. 7.

    For a good overview of the extensive literature in financial economics that tries to capture the Bebchuk and Fried anomalies see Edmans and Gabaix [9].

  8. 8.

    Clementi and Cooley [5] use data from the EXECUCOMP database, maintained by Standard & Poor’s. EXECUCOMP gathers data from 1992 to the present on the compensation of up to nine executives of all US companies whose stocks are traded on an organized exchange. The sources for the database are companies’ filings with the Securities and Exchange Commission. The information about executives’ securities holdings and their compensation packages is contained in the DEF14A forms (or Schedule 14A), filed annually by Corporations pursuant Section 14(a) of the Securities Exchange Act of 1934. Cooley restricts his attention to the years 1992 through 2006, and has a final sample of 31,587 executives, employed by 2,872 companies, for a total of 33,896 company–executive matches and 167,822 executive–year observations.

  9. 9.

    A good overview of distributive justice theories can be found in Miller [21]. Chapters 3 and 4 of the book gives a survey of socio-psychological research on public opinions about distributive justice.

  10. 10.

    General opinion will for instance look upon innate talent as a personal achievement (e.g., the talented footballer) and allow compensation for talent. Rawls and many other philosophers would disagree.

  11. 11.

    Over the past years the field of “organizational justice” has expanded dramatically. It is now used to explain a large number of attitudes and behaviours in the workplace [13, 23].

  12. 12.

    In the case of American Airlines the mistake was strengthened because the company had a strong cooperative culture. In cooperative enterprises the group feeling and thus also group solidarity is supposed to be high. When crisis strikes this solidarity is often invoked to support painful restructurings. However, when it became clear that the compensation arrow pointed in two different directions, depending on your hierarchical position it became painfully clear to employees that management was not very serious about the cooperative nature of the enterprise.

  13. 13.

    See On the Genealogy of Morals; esp §§ 10–11

  14. 14.

    For an overview of alternative explanations see ([1], Chap. 3).

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Authors and Affiliations

  1. University of Antwerp and Center for Economics and Ethics, KU Leuven, Antwerp, Belgium

    Prof. Dr. Luc Van Liedekerke

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  1. Prof. Dr. Luc Van Liedekerke
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Correspondence to Luc Van Liedekerke .

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  1. Peter Löscher-Stiftungslehrstuhl für Wirtschaftsethik, Technische Universität München, München, Germany

    Christoph Luetge

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Van Liedekerke, L. (2013). Executive Compensation and Distributive Justice. In: Luetge, C. (eds) Handbook of the Philosophical Foundations of Business Ethics. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-1494-6_100

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  • DOI: https://doi.org/10.1007/978-94-007-1494-6_100

  • Publisher Name: Springer, Dordrecht

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