Concerns surrounding the current levels of compensation awarded to CEOs of U.S. corporations continue to pervade the dialogue in many professional circles, the media, and the overall national and global economy. Three prevailing questions regarding CEO compensation need answering:
1. Is such grandiose individual worth that CEOs enjoy possible in a just economic system?
2. Should CEOs receive compensation despite company performance?
3. Is CEO compensation just too much?
Through a utilitarian paradigm the above questions are more easily understood.
For many, it is hard to believe that any one individual could be worth so much in a just economic system. According to Aristotle a just economic system would be one that engages in activities in accord with the ideals of distributive justice; the economic system functions in the interest of the fair distribution of resources amongst everyone in society. The classical economist Adam Smith through his notion of the invisible hand provides the morally justified foundation of the U.S. capitalist economy. The idea is such that the inherent agendas and influences of the market are induced through economic forces (i.e., an invisible hand) promoting a collective good of sorts via the self-seeking individual. The market system is driven by voluntary trades being made through the loss of one resource in exchange for other more desirable resources in the interest of profit or the advancement of one's well-being.
Given the above, CEOs receive only what is voluntarily offered up by the board of directors of U.S. corporations in exchange for the perceived value of the CEO skill set. Both parties are unknowingly, through exchange or quid quo pro, responding to Adam Smith's invisible hand. According to Adam Smith the current economic system is just and CEO's are only acting in accord with self-interest. CEO compensation is derived only from those willing to offer recourses of such grand magnitude and controversy.
Corporations whom perform poorly, of late, yet continue to reward their CEOs are seemingly acting in direct contrast with common sense and classical utilitarianism. Classical utilitarianism states: An action is right if and only if it produces the greatest balance of pleasure over pain for everyone.
The above utilitarian maxim provides a logical basis to remove a CEO from their position or deny compensation when the organization they are responsible for fails causing huge profit declines and job losses. Note, applying the utilitarian philosophy is not a black and white task. Four principles uphold the classical utilitarian maxim:
1. Consequentialism; rightness of action is determined by consequences.
2. Hedonism; pleasure and only pleasure is good.
3. Universalism; the consequences considered are those of everyone.
4. Maximalism; right action is one that provides the greatest amount of good when bad consequences are taken into account.
The latter of the four principles, maximalism, is the most relevant when considering punishment and reward for a CEO. Maximalism forces the decision maker to contemplate the micro and macro effects of their actions. Will removing the CEO from their position benefit the organization and investors in the short and long run? Will withholding CEO compensation send a message to future talent that CEO positions are not stable and rewarding thereby diluting the talent pool of future management leaders? John R. Boatright, author of Ethics and the Conduct of Business, states clearly that no matter what decision is made. The interests of some people will be harmed. For example, when job losses occur. The minority, those individuals who have lost their jobs, suffer but the whole of the organization is bettered in its continuing to flourish and provide quality products to demanding consumers at low prices.
Given the above utilitarian and classical economic perspective, CEO compensation is a result not of greed, evil or an unjust distribution of wealth but rather the fruit of Pareto optimality. The level of compensation awarded CEOs by their employing corporate shareholders is established through a Pareto improvement; at least one member of the trading party is made better off while the other is not made worse off.
Both the CEO and the board of directors expect to be made better off through the arrangement made in placing the new CEO at the helm of a publicly traded organization. In exchange a relatively high compensation is granted the CEO. Having more resources as a successful business to obtain the best leaders to generate profit for shareholders than the competition is a desired situation. Unfortunately some CEOs place the organization at risk post hiring, in which case a Pareto improvement did not take place and the resources used to compensate the CEO would be better off in the hands of someone or a situation in which the resources were more efficiently used. Adam Smith's invisible hand, as mentioned above, functions as the force to redirect the corporation to make a decision in the interest of short and long term goals while also serving the self interests of all of the stakeholders involved. The time it takes for the shift in resources is unknown and may be longer than desired but change will eventually take place.
The onus in responsibility regarding the exacerbated levels of CEO compensation rests in the hands of corporate stakeholders; shareholders, board of directors, and ultimately the consumer. Rather than restricting the rights to property, liberty, and compensation for one's work or capping CEO pay the stakeholders of corporations should take better care in their decisions of who the talent and applicable skills are, and reward/ punish according to CEO results.
In the end, the consumer is the driving force of corporation's existence; continuing to demand and purchase corporate products which supply the profit levels that attract shareholders whom it intern finance CEO's wealth. The U.S. economy will cast a vote regarding CEO pay through the use of the dollar. Eventually, shareholders will realize the phenomenon of diminishing marginal utility; the amount of utility received from each dollar spent on the CEO decreases the more compensation levels climb for CEOs.