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How Much is Too Much?

How Much is Too Much? A Theoretical Analysis of Executive Compensation from the Standpoint of Distributive Justice Jared Harris February 19, 2005 Markkula Conference, Santa Clara University. How Much is Too Much?. Are CEOs overpaid? Underpaid? 1990 ratio of CEO to a typical worker, 100:1

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How Much is Too Much?

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  1. How Much is Too Much?A Theoretical Analysis ofExecutive Compensation from theStandpoint of Distributive JusticeJared HarrisFebruary 19, 2005Markkula Conference, Santa Clara University

  2. How Much is Too Much? • Are CEOs overpaid? Underpaid? • 1990 ratio of CEO to a typical worker, 100:1 • 2000 ratio 350:1 to 570:1 • Kettering Foundation Survey … May be commonly held that high CEO pay is objectionable based on greed.

  3. How Much is Too Much? “The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.” - John Kenneth Galbraith

  4. Distributive Justice Theory 1. John Rawls: Justice as Fairness 2. Amartya Sen Martha Nussbaum: Capabilities and Freedom 3. Robert Nozick: Libertarian Framework

  5. Distributive Justice and CEO Pay • Theoretical convergence around process Closely related processes of: • Executive employment/selection • Executive compensation setting • Value Proposition • Matching “worth” with appropriate pay

  6. Rawls and CEO Pay • Key part of Rawls’ second principle of justice: “open position” (fair equality of opportunity) • Opportunities must be open • Exec pay-setting processes: justly determined? • If not, likely an indication that selection processes are also unjust or “gamed”

  7. Rawls and CEO Pay

  8. Capabilities Theory and CEO Pay • Key capability: “the right to seek employment on an equal basis with others” • Opportunities must be open • Again, if an unjust process in setting executive pay indicates exclusivity in the selection process . . . • Then high pay is difficult or impossible to justify

  9. Libertarian View of CEO Pay • Two key assumptions for Nozick’s theory: “justice in acquisition” and “justice in transfer” • Assumptions must be met if distributions of wealth or property are to be justified • Otherwise, transfer not defensible

  10. Value Proposition of CEO • CEOs should be paid according to their value proposition for the firm and its stakeholders • Difficult to explicitly determine • Market solves?

  11. Distributive Justice and CEO Pay • To what extend does this theoretical analysis tell us anything useful? • Evidence reinforces validity of theoretical concern • Influence our research agenda

  12. Fairness and CEO Pay What raises CEO pay? • CEO celebrity/notoriety (Hayward, Rindova, & Pollock, 2004; Porac, Wade, & Pollock, 1999) • ‘Bandwagoning’ popular management techniques (Staw & Epstein, 2000) • Luck (Bertrand & Mullainathan 2001) • Friends on compensation committee (Young & Buchholtz 2002; Conyon & Peck, 1998) • Non “rubber-stampers” sanctioned (Westphal & Khanna 2003)

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