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The Debate Over Ceo Compensation Essay

1779 words - 7 pages

This paper will discuss the reasons why CEOs are not being overpaid. It will apply the utilitarian ethical principle to many a few aspects to CEO compensation and whether or not it is justifiable for such pay. The paper will look at whether or not their performance is justifiable for the pay because they play such a big role in the livelihood of the company along with the principle agency theory and how it is being addressed for the benefit of the shareholders and others involved with the company, the supply and demand of the CEOs, and the paper will describe the comparison of other professions to help link the idea of CEOs being fairly compensated.

CEO compensation has been a heated debate for many years recently, and it can be argued that they are either overpaid or that there payment is justified by the amount of work they do and their performance. To answer the question about whether CEO compensation is justified it must be looked at by the utilitarian viewpoint where the good of many outweighs the good of one. It is true that many CEO’s are paid an exorbitant amount of money; however, their payment is justified by the amount of money that they bring back to the company and the shareholders. There are many factors that impact the pay that the CEO receives according to Shah et.al CEO compensation relies on more than just the performance of the CEO, there are a number of factors that play a rule in the compensation of the CEO including the fellow people who help govern the corporation (Board of Directors, Audit Committee), the size of the company, and the performance that the CEO accomplishes (2009). In this paper the focus will be on the performace aspect of the CEO.

There are some CEOs where this is not the case and therefore it is unethical for their pay, due to the lack of return they make for the shareholders such cases as “Gregg Engles, founder and CEO of Dean Foods, earned $8.5 million in 2011, a 52 percent increase from the year before in spite of the fact that his company lost $1.6 billion” (Kavoussi, 2012). In Gregg’s case his performance did not achieve the greater good of his company, nor did it provide return for the company shareholders. Likewise, “John Chambers, CEO of Cisco Systems, was paid $18.87 million in 2010, even as his company’s stock price plunged 31.4 percent” (Kavoussi, 2012). However, not all cases with CEOs are the same and many do provide a positive return for shareholders according to Bonnie Kavousi “CEOs were paid 0.6 percent more on average for every extra 1 percent in shareholder return in 2011” (2012). This recent study has shown that CEOs are providing an increase in shareholder return which the CEOs job and therefore their performance is justified even though not all CEO compensations are.

Many of these issues arise due to poor compensation packages, and the Principal Agent problem. The Principal Agent problem is when the interest of the top management (Agents) conflicts with the interest of the...

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