What’s Wrong with Executive Compensation?

In: Business and Management

Submitted By studyhard12345
Words 6653
Pages 27
Journal of Business Ethics (2009) 85:147–156 DOI 10.1007/s10551-008-9934-6

Ó Springer 2008

What’s Wrong with Executive Compensation?

Jared D. Harris

ABSTRACT. I broadly explore the question by examining several common criticisms of CEO pay through both philosophical and empirical lenses. While some criticisms appear to be unfounded, the analysis shows not only that current compensation practices are problematic both from the standpoint of distributive justice and fairness, but also that incentive pay ultimately exacerbates the very agency problem it is purported to solve. KEY WORDS: executive compensation, distributive justice, pay disparity, incentive alignment

Introduction Few academic theories have been adopted as widely as the application of agency theory (Jensen and Meckling, 1976) to the structure of executive pay in modern corporations. After prominent suggestions that the inherent conflict of interest that exists between stockholders and corporate managers – or ‘agency problem’ – could be mitigated through the structure of managerial incentives (e.g., Jensen and Murphy, 1990a), the prevalence and size of stock option grants to senior executives have expanded increasingly and substantially (Hall and Murphy,
Jared D. Harris, Assistant Professor teaches both Ethics and Strategy courses in Darden’s MBA program, and a doctoral seminar on corporate governance and ethics. His research centers on the interplay between ethics and strategy, with a particular focus on the topics of corporate governance, business ethics, and interorganizational trust. His work on corporate financial misrepresentation won the 2007 Best Dissertation award in one division of the Academy of Management (Social Issues in Management) and qualified him as one of six finalists in another division (Business Policy and Strategy). His work has been published in several top academic…...

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