CEO Salaries and Justice

A recent study about CEO pay in Canada has been getting a fair bit of attention lately. This is unsurprising, both because executive compensation has become one of the hot topics of the day (or rather, of the post-Occupy era) and because the study highlights the fact that if you look at the top 100 Canadian CEOs (in terms of salary), the average top-100 CEO earns as much in four hours as the average Canadian makes in an entire year (i.e., about $46k).

So Canadian (and American) CEOs are highly-paid, for sure. Whether they are too highly-paid is another question. I’ve pointed out before that, well, the issue is complicated. Just about everyone recognizes that CEO pay is at least sometimes out of whack. But is the pattern problematic? From a moral point of view, the pattern of CEO pay raises two key questions: first, are shareholders (and others who benefit from competent corporate leadership) getting their money’s worth? And second, do current patterns of CEO compensation contribute to an overall social distribution of wealth that is unjust?

It’s useful to remember that a CEO’s salary (or, more accurately, his or her total compensation) is just the price of his or her services. And part of the problem is that there’s no “real” or “natural” price for CEO labour (or for anything else), nothing to serve as a comparison point to figure out if such labour is being sold at the “right” price. So one common alternative is to compare it to the price of the “average” person’s labour, or in some cases, to the price of the labour of the lowest-paid person in the organization. The latter is truly a case of comparing apples and oranges. Unskilled labour is like air. It’s plentiful, relative to demand, and so no one needs to pay very much to get it.

Another option is to compare CEO compensation to the value they bring to the organization. That’s hard to do, for a number of reasons. Not all value is directly reflected in financial impact, and a company’s financials can go up or down with the market (or to reflect external factors such as new competition) in ways that simply do not reflect the quality of leadership. But a recent study by the Clarkson Centre at the University of Toronto suggested that CEO pay in Canada is more closely aligned with performance than people generally think.

The social question — about the social distribution of income — is easier to answer, but harder to solve. Yes, mega-salaries for CEOs are contributing to income disparities. That’s a mathematical fact. And even those of us who believe fervently in the value of free markets can see that it’s not a good thing that a CEO can afford to build a $50-million home while others living in the same country can’t afford a roof over their head at all. It is unjust by almost any measure, socially divisive, and potentially socially disruptive. But such critique does not immediately imply a solution. It doesn’t imply that any particular CEO isn’t worth the money, and it doesn’t imply that any particular Board is obligated to do the impossible, namely to “fix” the big problem of social inequity by paying its own CEO less.

If you need further evidence of the complexity of this issue, consider this. One Canadian business professor recently suggested that CEOs would be welcome to keep their high salaries, on condition that those they stopped outsourcing jobs. That way, working-class Canadian could at least keep their humble jobs. But consider: if you’re really interested in social justice, you might well insist that Canadian CEOs continue outsourcing to foreign countries, where workers surely need the jobs (on average) much more than (most) Canadians do. After all, the average Canadian salary is as lavish from the point of view of someone living in the Congo or in Liberia as a Canadian CEO’s salary is from the point of view of the average Canadian.

5 comments so far

  1. Marvin Edwards on

    A CEO is a manager, whose actual value is in the management skills, dedication and talents she brings to the job. What they do is not magic. And when they spend x hours doing it, they, like everyone else who spends x hours applying themselves to their work, have earned “a living”.

    And that is all they have actually “earned”. And that is all that they are actually “worth”, in objective terms.

    To encourage people to take on complex responsibilities, and to invest in their own education, training, and skill development, society is willing to pay more and allow them a higher standard of living than others who are not willing to make the personal investments required.

    Now that’s the moral background.

    But executive salaries have far exceeded what can be morally justified.

    For many it has become a measure of self-worth to have the highest possible salary. By sharing membership on different companies Boards, they can boost each other’s salaries.

    Because large corporations compete with each other, they may look to the CEO position for an edge. And since it is only one salary, supported by millions of product sales, an exorbitant single salary may have but a small impact upon the total operating budget.

    So CEO salaries have long ago left moral judgment in the dust and are controlled instead by other factors.

    I think it is in Japan where the CEO salary is actually limited to a fixed multiple of the workman’s salary. If we want to reign in obscene salaries, we may need to take a similar approach.

    • Chris MacDonald on

      Thanks for your comment. But economics long ago gave up on the notion of objective, “natural” prices. All there is is supply and demand. People (boards) are willing to pay multi-million dollar salaries. Sometimes that’s probably foolish, sometimes not. But that’s little different than saying a $10-million house is unjustifiable. If someone were willing to pay me that much for my house, I would sell it to them. There’s no natural price for a thing, and that includes labour.

      • Marvin Edwards on

        Almost. But the economist is not a moralist. The economist makes certain assumptions about the motives of the general population, painting it as a single, self-centered individual making decisions solely in his own monetary interest.

        The moralists, on the other hand, create the laws that provide the “rules of the game” for the economy.

        The moralists currently set a minimum wage, to assure a reasonable minimum price for labor.

        It is not about “nature”, since nature would just as well swallow us in an earthquake or drown us in a flood.

        It is rather a minimum value that we choose to put upon each other and upon the value of working.

        It is a shared, moral judgment call that a person who dedicatedly works 40 hours a week should be able to support him/herself by their own labor. The minimum wage supports both the value of the person and the work ethic.

        As to the maximum wage, currently that’s open ended, except perhaps in Japan. There’s an article in Business Insider about the Japanese CEO culture and how it differs from ours:

  2. danielmullin81 on

    I appreciate your nuanced take on this issue. However, I think one important distinction needs to be made. You say:

    “And even those of us who believe fervently in the value of free markets can see that it’s not a good thing that a CEO can afford to build a $50-million home while others living in the same country can’t afford a roof over their head at all.”

    The problem here is poverty, not wage disparity per se. Does justice require income equality? For example, let’s imagine that a society has eliminated poverty; nobody makes less than 46K a year, but some CEOs still make that in a day or a few hours. Is such a society unjust? What would be the argument for affirming that? I’m not convinced that our intuitions about ‘fairness’ take us very far toward answering this question.

    It seems, then, that income equality functions as a red herring in this debate (and debates about wealth and poverty generally). In combating poverty, achieving income mobility is more practical than achieving income equality, and mobility is something free market societies facilitate better than others. But this means not arbitrarily capping an individual’s earning potential, including arguably overpaid CEOs. I think we’re probably in agreement on this point.

    It’s a complicated issue, and even if one is convinced by the critique you mention in the above passage, I agree that the critique itself doesn’t imply any obvious solution. A thought-provoking post, as always.

  3. Kostyantyn Dzyuzhynskyy on

    I don’t believe that salary of CEO is big issue. And if somebody can build house worth of 50 mUSD it means that somebody can earn those money. Workers will have their salary paid and so on. Moreover in India for example some people earn 50 USD per month, if compare theirs salary to salary of average worker in USA difference will be dramatic and more important (vital) than salary of CEO in prosperous country.

    Usually questions about CEO salaries are raised not by CEO… is it ethical?

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