Framework

Institutional test of executive pay

The question it answers

When a board approves CEO pay many times the median wage, how can it tell whether the gap is fair, judged by the process and institutions that produced it?

Origin
Rawls, 2001; Boatright, 2010; Moriarty, 2009
Diagram type
Process by phase
Level of analysis
Firm
Topics
Ethics & corporate governanceCorporate finance
Clay balance scale with two level glass pans, icon for business ethics

Diagram

Institutional test of executive pay

  1. Four checks
  2. Treat the ratio as evidence to investigateNot a verdict.
  3. Check political libertyDoes concentrated wealth become power over tax, labour and governance rules?
  4. Check fair equality of opportunityDoes access to executive office depend on origin, inherited networks or unequal education?
  5. Test the difference principle with a feasible comparisonStructure A (pay above what is needed to attract, retain and motivate) against structure B (keep necessary incentives, redirect the surplus to the least advantaged). If B is better and feasible, the ratio is unjust.

Pitfalls

Pitfall

Equating the 'average worker' with the 'least advantaged'; claiming a ratio exceeds minimum effective pay without data; treating shareholder profit as a benefit to the least advantaged.

Sources

References

Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.

  1. Boatright, J.R. (2010) ‘Executive compensation: unjust or just right?’, in The Oxford handbook of business ethics. Oxford: Oxford University Press, pp. 161–201.doi:10.1093/oxfordhb/9780195307955.003.0007Source page
  2. Moriarty, J. (2009) ‘How much compensation can CEOs permissibly accept?’, Business Ethics Quarterly, 19(2), pp. 235–250.doi:10.5840/beq200919212Source page
  3. Rawls, J. (2001) Justice as fairness: a restatement. Cambridge, MA: Harvard University Press.doi:10.2307/j.ctv31xf5v0Source page