Executive Compensation Is Unfair

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Introduction

Executive compensation has been a controversial topic for many years. The reason is that some people believe CEOs receive wages that are too high. In some cases, the ratio of executive compensation to median employee salary reaches 300 to one. Not only is it not fair in the context of professional capacities, but it is also unjust from a moral point of view. In a world where topics of homelessness and poverty are becoming more relevant, it is inhumane to pay a single person a fortune while depriving the majority of many opportunities. Proponents of the idea that executives should receive millions of dollars while ordinary workers struggle to make a living urge that such salaries are justified. They claim that high wages are a necessity in order to attain top talent and meet organizational objectives in this highly competitive business environment. However, I believe that current CEO compensation is not justified and that executives should receive much less salary.

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Current Statistics

Only several years ago, it would have been impossible to compare and contrast worker salaries with how much CEOs make. The federal regulation that requires publicly traded companies to disclose financial information that relates to executive compensation and how it compares to a median salary at this company opens up a plethora of topics for discussion. For instance, in 2018, executives of the top 500 companies received more than 14 million dollars on average (AFL-CIO: America’s Unions). The ratio of CEO salary to a regular worker salary was 287 to 1 (AFL-CIO: America’s Unions). However, these are average numbers among 500 corporations and should not be perceived as universal. That is because some companies pay way more – the ratio can sometimes reach 1000 to 1 (Mueller, p. 379). This data has been collected by the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) since the federal bill was enacted by the U.S. Securities and

Exchange Commission in 2015 (AFL-CIO: America’s Unions). Such information is critical because it gives an overall picture of company philosophies and how these companies are contributing to the American economy.

AFL-CIO states that much can be learned from how much executives make. Indeed, in companies where CEOs receive a significant part of the profit, a philosophy of uneven distribution may be in place. While some workers work hard so that the company meets its organizational objectives, only the minority receive the majority of the credit, and in turn, much of the money. On the contrary, companies with CEO pay ratios not as drastic as a ratio of 300 to 1 demonstrate that they are contributing to the national economy by creating high-wage jobs. For these and other reasons to be discussed, CEO wages are unfairly high.

Why it is Unfair

Increases Economic Gap

Protests against high CEO Wages
Figure 1. Protests against high CEO Wages

Data disclosed by the companies made it possible to describe how much the wage landscape has changed since the last century. There has been a thousand-fold increase in the average salary of a CEO. This percentage is negligible for an average worker – wages have risen by only 11 percent (AFL-CIO: America’s Unions). These numbers show the trajectory according to which this market economy is driving the country. Rich people become wealthier while others are often deprived of basic necessities. This tendency was met with a number of public protests, as shown in the image. Child homelessness and poverty rates have been rising, but a comprehensive solution is yet to be proposed. At the same time, CEO pays are increasing, and there are people that insist such salaries are justified. However, the fact that such wages increase the economic gap between rich and poor should be enough to render them unfair.

There are many negative implications of an increased economic gap. Our country has put an enormous amount of effort into promoting its image of a free state, but such CEO wages show that freedom is a luxury only for a minority. The reason is that everything in the contemporary world is tied to financial resources. For instance, while there is the freedom to travel, it requires a sufficient amount of money to be able to afford it. Therefore, high CEO wages are undermining the core values that are put into the foundations of our country. Such CEO-to-worker pay ratios show that we have been moving toward oligarchy, not democracy. Besides, freedom, however, there are moral implications of high CEO wages.

Discordance with Morality

It was mentioned that there had been a significant increase in poverty and homelessness rates among both children and adults. The economic burden of these social issues is not drastic when compared to how much the companies are spending on their executives. In the world where such socioeconomic challenges exist, despite spectacular economic and technological advancements, I believe it is not moral to spend millions of dollars on a couple of people. This money could be spent on battling poverty or at least mitigating the consequences of environmental pollution these companies cause to make their revenues. These corporations contaminate our air, degrade our environment, obtain natural resources that belong to all of humanity, and yet fail at providing employees with a fair amount of pay. Company stakeholders that support such a system of compensation, where an executive receives several hundred times more than a regular worker, lack moral qualities and are driven solely by the rules of the market economy.

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Stakeholders state that CEO wages do not come from cutting regular employees’ salaries (Zitelmann). They urge that the money would have been spent elsewhere for a company’s needs if it had not been spent on executive compensation (Zitelmann). I partially agree with this statement – there are many other ways of spending millions of dollars. I am a strong proponent of the idea that corporations should pay for damaging the environment. Therefore, it is not moral to spend large amounts of money to compensate for a single person, while nature is left with significant deterioration.

Popular Counterarguments

Free Market

Among the primary arguments proponents of high CEO wages make is that the market economy decides everything. Most of the advocates claim that wages are fair because they are ruled by the laws of supply and demand (Zitelmann). In other words, a software engineer receives a median of 79 thousand dollars, and a CEO makes millions of dollars simply because it is the way how the market is structured. However, when talking about values that regular workers and CEOs contribute to companies, there is no definite answer. That is because of issues with measuring performance and comparing how the performance of an ordinary employee relates to the display of a CEO. Some individuals claim that the contributions of CEOs are much more significant because executives often have skills that are unique and rare.

Stakeholders often complain that it is challenging to find a suitable chief executive officer and that paying enormous amounts of money is the only way of ensuring that they stay (Zitelmann). They urge that in order for a business to survive in the contemporary market, the executive must possess a wide array of skills, including the knowledge of financial markets (Zitelmann). Also, expertise in information technology is essential because all companies, in some way or another, have to leverage the possibilities provided by the recent developments in computer hardware and software. However, these advocates forget that the majority of CEOs possess the knowledge of IT on a level of a second-year college student. Furthermore, the majority of decisions pertaining to technology are not usually made by the CEO, but by an individual with a degree and experience in IT. In summary, the argument that CEOs are paid because of their extensive list of skills is not sound.

Ideas are not Cheap

Applied knowledge is less important than great ideas that have the capacity to bring about a revolution (Zitelmann). This argument is constantly made by the advocates of high CEO wages. They forget, however, that not all CEOs are like Steve Jobs, and their only objective, frequently, is increasing revenue and return on investment. Furthermore, CEOs do not spend their days thinking of the next revolutionary product. Such ideas often come from regular employees that have the necessary industrial knowledge about what may be created and how it may be implemented. However, CEOs tend to receive credit for these ideas – it cannot be determined whose idea it was to make Microsoft’s flagship development framework open-source, but Satya Nadella is often credited for this decision.

It is unlikely that stakeholders assess the creative potential of candidates for an executive position. Disney’s CEO is a microbiologist while the company creates and distributes media products that require creativity and a sufficient understanding of arts and digital animation. What I want to say is that many of the CEOs contribute nothing to the products that generate the most revenue for companies. Disney CEO is not involved in the production of movies. Nor does he have the capacity to set the direction for further development – only a person with industry knowledge has the vision to decide what movies should be made, how they should be shot, what technologies should be used, and how much it will cost. Therefore, many of the revolutionary ideas that change industries and generate spectacular income for companies come from regular employees that have the necessary skills.

Conclusion

Current executive compensation strategies are not justified and should be altered. It is not fair that one person receives hundreds of times more than a regular worker. Advocates of high CEO wages claim that it requires talent and skills to be a successful CEO. It is partially true, but not enough to justify such salaries. In some cases, a company creates a revolutionary product because of the efforts and ideas of regular employees, and not because the CEO made an invention. CEOs should not take credit for all of the companies’ achievements, and their wages should be cut significantly.

Works Cited

  1. AFL-CIO: America’s Unions. The American Federation of Labor and Congress of Industrial Organizations, 2020.
  2. “No CEO Should Earn 1000 Times More Than a Regular Employee.” The Guardian, 2018.
  3. Mueller, Holger M., Paige P. Ouimet, and Elena Simintzi. “Wage Inequality and Firm Growth.” American Economic Review, vol. 107, no. 5, 2017, pp. 379-383.
  4. Zitelmann, Rainer. “Why Do So Many People Think That CEOs Earn Too Much?Forbes, 2019. Web.

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BusinessEssay. 2022. "Executive Compensation Is Unfair." January 10, 2022. https://business-essay.com/executive-compensation-is-unfair/.

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