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Essay Example: Ethics in Employee Compensation

2021-08-02 19:25:55
4 pages
926 words
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University of California, Santa Barbara
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Essay
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Over the recent years, worker compensation and that of CEOs has received a lot of scrutiny in both the US and countries outside. Davis & Mishel (2014) indicate that the average CEO to worker compensation increased from 20:1 in 1965 to 295.9:1 in 2013. Despite the climate of public discontent, the executive rate continues to rise due to a myriad of factors that will be discussed in the paper. Nevertheless, the public outcry has not caused the CEO compensation to be abated. The paper examines ethics in employee compensation regarding a CEO and an average workers salary.

Based on the text of the question, the average salary of a CEO is over 380 times that of an employee. As Rue & Byars (2010) avow, ethics is concerned with moral duties relating to what is right and wrong. Beyond doubt, the disparity in compensation between a CEO and the average worker is unethical. The reason is that such payment is excessive compared to the provision of services. Primarily, the colossal gap comes down to the topic of income inequality. The average worker works so many hours in a day compared to a CEO who sometimes has time for breaks and vacations. During compensation, CEOs should receive pay in both long and short-term best interests of shareholders. However, the compensation schemes are unethical because CEOs accept pay which does not align with the fiduciary duty accorded to shareholders.

The level of disparity that would be ethical for a CEO and a worker would be a ratio of 60:40. Indeed, CEOs have a much higher status in the company compared to workers. But, an ethical difference would be a 60 to 40 ratio. Justly, CEOs receive exorbitant sums of money that do not align with their performance compared to average employees who receive pay that still keep them below the poverty level. If a CEO could earn about 20 times what an average worker earns, then the question of morality would not be brought up by the public. Both CEOs and the average worker would receive satisfactory pay if the level of disparity would be made logical.

Several factors justify the average rate of pay for a CEO. First is the incentive for performance. Thangavelu (2015) articulates that companies believe that they have to pay big to attract the right candidates. The second factor is the superstar theory, which the author affirms that companies believe CEOs are indispensable. The third factor is broad influence from company directors who are part of the compensation committee because they enjoy the benefits as well. Furthermore, factors that make the average rate of pay of a CEO unethical are leapfrogging and ineffective regulatory tools. Balnaves-James (2015) articulates that regarding leapfrogging, most CEOs get pay that has little to do with their performance. As well, regarding ineffective regulatory tools, the author states that there have been no regulatory reforms regarding compensation since the Great Depression.

It is apparent that the disparity in pay between the CEO and the average worker is unethical. Therefore, the following recommendations would make pay more ethical

Corporate companies should rethink the pay of their CEOs by looking at the best interests of shareholders.

Corporate firms should consider the compensation of CEOs and average workers according to the market rates.

Corporate companies should use a cost-benefit approach to ensure that the benefits do not outweigh the company costs.

Corporate companies should use a utilitarianism approach to help them to analyze every aspect of compensation decisions.

Businesses that hire CEOs should create a code of ethics, which would help them to form compensation decisions.

The disparity compares to that of a CEO and workers in countries outside the US. According to the Forbes Leadership Forum (2013), CEOs in America are paid twice as much as those working in countries outside the US. However, the article puts forward that the disparity is so because US firms operate differently from other firms regarding corporate governance. Additionally, the article adds that US companies lean towards higher institutional ownership and more independent boards. More so, the author affirms that in the US, ownership is dispersed among shareholders and institutional investors compared to international CEOs who have direct ownership as family members. In essence, the author of the article infers that companies in the US require more incentive compared to their counterparts outside the country.

In summary, it is evident that the gap between CEOs and the average worker is outrageous. At the workplace, income inequality is a moral problem that needs urgent consideration. From a personal perspective, company directors should set compensation rates according to the market rates. Countries have to make efforts to curb CEO pay because it might result in a financial crisis in the future. Reasonably, better pay for the average worker would lead to job satisfaction and would ultimately lead to engagement. Overall, the government should intervene in the issue of compensation to avoid a national crisis and prevent America from going down an ethical slippery slope.

References

Balnaves-James, A. (2015). The Ethics of Executive Compensation: A Matter of Duty. Seven

Pillars Institute. Retrieved from https://sevenpillarsinstitute.org/the-ethics-of-executive-compensation-a-matter-of-duty/

Davis, A., & Mishel, L. CEO Pay Continues to Rise as Typical Workers Are Paid Less.

Economic Policy Institute. Retrieved from http://www.epi.org/publication/ceo-pay-continues-to-rise/

Forbes Leadership Forum. (2013). Do CEOs Make Much More In The U.S. Than Elsewhere?

Forbes. Retrieved from https://www.forbes.com/sites/forbesleadershipforum/2013/03/13/do-ceos-make-much-more-in-the-u-s-than-elsewhere-no/#2a53649dbe2c

Rue, L. W., & Byars, L. L. (2010). Supervision: Key Links to Productivity. 10th Edition. New

York, NY: McGraw Hill.

Thangavelu, P. (2015). Justifications For High CEO Pay (AAPL, GE). Investopedia. Retrieved

from https://www.investopedia.com/articles/personal-finance/073015/justifications-high-ceo-pay.asp

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